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Important Changes to the Taxation for New Employees and Leavers from 6 April 2011

HMRC have announced that with effect from 6 April 2011 employers must withhold tax from payments made to an employee as if the employee is entitled to no allowance (code 0T (zero allowances)) in the following circumstances:

• When a new employee starts work without producing a P45.
  
• When a payment is made to an employee which is not included in their P45 after they have left employment.  This is typically a termination payment.
  
• When an employer starts paying an occupation pension to an existing employee in addition to their salary.

This will mean that employers will be required to withhold income tax at rates of up to 50% as opposed to the current practice of using the BR PAYE Code of 20%, when making post-termination payments to employees.  This will affect cash flow benefit for employees where termination payments are taxed at the basic rate employees only have to account for the higher or additional tax rate (at 40% and 50% respectively) through self assessment some time later.  This change will remove the cash flow advantage that currently may occur.

The changes for employees starting work and receiving pension payments under an occupational pension scheme are designed to mitigate against underpayments in tax to HMRC during the relevant tax year.

HMRC will be issuing further information before 6 April 2011.

To discuss any of the issues raised above please contact Amanda Harvey – Partner and Head of Employment on 020 7880 4281 or Nicola Philp – Partner on 020 7065 1819.