Articles
Employee Tax Changes
The purpose of this note is to highlight some, fairly technical, changes to the PAYE and Benefits-in-Kind rules.
Post-Employment Payments
The PAYE regulations currently provide that payments made to employees after an employment has finished, and the form P45 has been issued, are subject to an immediate withholding of tax at the basic rate of 20% only. It is then the employee’s responsibility to settle the higher rate liability through their Self Assessment Tax Return, on 31 January after the end of the tax year of payment. Common examples of such payments include compensation/termination settlements and gains arising on the exercise of share options.
These regulations are to change with effect from 6 April 2011. For payments made to former employees after that date, employers will be obliged to operate an “0T” code, i.e. one that indicates no personal allowances are available, and all income is subject to basic and higher rates of tax. As a result, the amount of tax deducted up front will in most cases increase, and the cash-flow advantage previously available to higher-rate taxpayers will largely disappear.
50% Tax Rate
Although the 2010/11 tax year was the first for which the new top rate of 50% applied, the PAYE regulations were not altered in time to ensure that the correct tax would have been deducted at source for those earning over £150,000 and with more than one job or pension. As a result, it may be that the Self Assessment tax liabilities for 2010/11 for such individuals will be somewhat higher than usual, which again should be borne in mind when considering any payments on account due for the following year 2011/12.
The PAYE regulations have now been fully updated, such that notices are now being issued by HM Revenue & Customs to those affected, showing a “D1” code. This code will be used to collect a straight 50% tax, most commonly used for a second job or pension.
Car Benefits
Again with effect from 6 April 2011, there will no longer be a maximum value upon which the taxable benefit charged on company car users will be applied. Up until now, a maximum value of £80,000 applied when calculating the relevant benefit charge, up to 35% for the least eco-friendly cars. Whilst this change will clearly only affect a small minority of company car users, it could well result in a significant tax increase for those involved.
It is particularly worth remembering that it is the original list price upon which the car benefit charge is based, and not acquisition cost or market value. It is therefore not too difficult to envisage a situation where the annual tax bill for using a prestige vehicle could come close to equalling its worth!
If any of the above issues are of interest or are likely to affect you, please do get in touch with your usual Saffron contact.
March 2011