The way that termination payments are taxed by employers is about to be changed from 6th April 2011. Any business that makes a termination payment to an employee after he has left and a P45 has already been issued, deducts tax at the Basic Rate which is currently 20 percent. From April 2011 tax will be deducted from termination payments not included on the P45 at the taxpayers marginal rate of tax, using a tax code of 0T. For higher rate taxpayers this will be 40 percent, and for additional rate taxpayers with income over £150,000 will be 50 percent.
The current rules allow the tax to be deducted at 20 percent, which will be reviewed when the taxpayer submits their self assessment tax return. In some cases where more tax should have been deducted, this effectively provides extra cash in the taxpayers pocket until he has to pay what is owed to the taxman.
The new rules could result in some taxpayers who leave employment, especially those that don’t take up further employment, out of pocket until the year end or until they submit their tax return.
Guidance is to be issued by HM Revenue & Customs around February 2011, which doesn’t leave much time for employers to digest the new rules and finer details. For many businesses, a small business accountancy would take care of any termination payments, ensuring that they are taxed correctly. Accountancy firms have access to the amendments in legislation by HMRC and will implement changes in a timely manner.
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