Change to way tax is withheld from post-termination share based earnings
From 6 April 2012 the 0T tax code must be applied to payments arising from employment related securities made after the form P45 has been issued following the termination of employment.
HMRC has recently provided clarification on how this 0T code should be applied.
Currently when a payment, which is derived from employment related securities, which includes shares and options, is made after the P45 has been issued a BR (basic rate) tax code is applied and the payment is taxed at the basic rate of 20%, via PAYE. However, from 6 April 2012 the 0T tax code will apply. An 0T tax code means that an individual’s allowances have been used up or reduced to zero and their income is taxed at the relevant marginal tax rates. This means that any such payment will be taxed via PAYE at 20%, 40% or 50%, as applicable, and the personal allowance will not apply.
An 0T tax code applies on a non-cumulative basis. For employees paid monthly this means that only 1/12th of the 20% and if applicable, 40% bands are available with the remainder of the payment, if any, being taxed at 50%. An 0T tax code should not be used if the employee has been issued with a NT (no tax) tax code.
Effects of the change
From 6 April 2011 the 0T tax code has applied to payments made after the P45 has been issued, other than those arising from employment related securities. Therefore, employers and their payroll operators should be familiar with how the 0T tax code works.
There are however a couple of points to note regarding the application of the 0T tax code to income from employment related securities:
- There is currently a potential cashflow advantage in delaying tax on employment related securities income until after the P45 has been issued. This will cease to be the case from 6 April 2012 and there may be cashflow disadvantages in doing so.
- There may be benefits to taxpayers who will be leaving employment prior to 6 April 2012 in arranging their post-P45 taxable events prior to this date. This is because a payment derived from employment related securities will be taxed at 20%, whereas from 6 April 2012, it is possible that the payment will also be taxed at 40% and 50%.
HMRC have recently responded to queries regarding the change in tax code and they have confirmed that where multiple share based payments are made in the same payment period post-P45, the 0T code should be operated separately on each payment. This applies where the multiple payments are received from a single or multiple sources, (the employer and a share scheme administrator, for example). There is no requirement to aggregate payments. This means that employers may ignore any other share based payments made in the same payment period when applying the 0T code, which should simplify administration for employers.
This change is the result of dialogue between HMRC, employers, share scheme administrators and representative bodies. The change is designed to provide a system which is easy to understand and simple to operate. As a result of these changes all post-P45 income will have the same tax code and this should simplify matters for employees.