Termination Payments

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28 March 2011

The tax position for post-P45 payments to former employees is changing from 6 April.  Under the new rules, it may not be possible to deduct basic rate tax only from payments to former employees.  This will affect some payments made under compromise agreements that are entered into before that date.

The default position has generally been to deduct tax at the basic rate on post-P45 payments over £30,000 and previously some employees negotiating settlements would have found the cash flow advantage attractive. However, new income tax regulations require an employer to use a "OT" code and to withhold income tax on any taxable payments made after the issue of the P45 at the appropriate rate for the employee (20%, 40% or 50%) and as if the employee is entitled to no personal allowances.

Many compromise agreements require payment to be made within 14 days and so employers should check the wording of any compromise agreements used from now on to ensure that the wording allows deduction of tax to be made at the appropriate rate for any taxable payments made on or after 6 April.

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