Employers who are making employees redundant and intending to use compromise agreements should note that from 6 April 2011 the operation of PAYE changes in relation to payments made after an employee has been issued with their P45.
From that date, an employer must withhold tax from a payment made to an ex-employee, after the P45 has been issued, at the basic, higher or additional rate of tax as if the employee has no allowances. The previous rule was that basic rate tax would be deducted and a tax indemnity sought from the employee.
The new rule also affects gains on share option and award schemes that arise after the employee has left employment, the tax on the earnings of new employees who do not produce a P45 and occupational pension payments where a pension is paid in addition to the salary of an employee.
The practical effects of the changes include the requirement for the taxpayer to pursue HM Revenue and Customs for a refund of overpaid tax resulting from the application of the new rules and a reduction in the benefit of paying termination payments after the issue of the P45.