This note concerns a simple change to payments made to an ex-employee after the P45 has been produced. The change will come into force on 6th April 2011. When a payment is made to a departed employee after their P45 has been produced basic rate income tax is deducted. This is to use a ‘BR’ tax code. Companies are used to operating this system and employees are used to taking advantage of it. It means that the employee gets the cash flow benefit of not having to pay higher rate tax until it is due under self-assessment. A company’s payroll company or payroll software should do this automatically. However, HMRC has published new regulations, dated 11th march 2011, to say, amongst other things, that after 6th April 2011 a ‘0T’ tax code should be used. This means that the 20%, 40%, and 50% bands are used as appropriate and not just basic rate.
A small further point on this subject concerns recent compromise agreements entered into recently. These may provide for payments to be made after the 6th April 2011 with basic rate income tax deducted. To do so would be in breach of the new law. We advise, therefore, that any recent compromise (now called ‘settlement’) agreements are reviewed and any employee affected by this change contacted. Clearly, Companies must operate the law notwithstanding any provision to the contrary in any agreement and this should be explained to the employee. We can provide a sample letter if required and would be pleased to review any such agreements if this needed.
This firm has advised on a number of compromise agreements recently which have specifically delayed payment until the new tax year starts. Those agreements also specify that basic rate income tax only should be deducted. We are revisiting those agreements to ensure that the correct tax is deducted. If the wrong tax is deducted penalties and interest may be imposed by HMRC. As such it is important that proper deductions are made.