Question
I’ve heard that the tax treatment for termination payments over £30,000 is changing after 6 April 2011. Is it correct that they can no longer be paid at the basic rate of 20%?
Answer
Yes, the government has published new regulations which mean that for termination payments made after from 6 April 2011, instead of taxing sums over £30,000 at the basic rate (provided that payment is after the P45 has been issued), you will have to tax it at the employee’s rate of tax at that time. Should it transpire that the employee does not work again during the tax year, then he or she shall be able to claim the overpayment back from the HMRC in due course.
If the termination payment is paid to your employee after the issue of the P45 but prior to 6 April 2011, then anything over and above £30,000 is still subject to tax at the basic rate of 20%. It is then up to the employee to account for any higher or additional rate tax in a tax self-assessment.
Care should be taken because if the correct amount of tax is not deducted, then there is a risk that the HMRC may impose financial penalties. You should speak to any employees who are given termination payments around this time, to explain the implications of the new regulations.
If you would like to know more, please contact Reema Jethwa, in confidence and without obligation by emailing Reema or by calling her on 08450 990045, or speak to your usual contact in the Employment Team.
This answer is provided for information only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.
Read some of our previous 'Questions of the week' here.