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Simon Parsons looks at a late tax change for leavers

Shares - Late tax change for leavers

The Income Tax (Pay As You Earn) (Amendment) regulations (S12/11/729) which came into effect on 6 April 2011, removed the deduction of tax at Basic Rate in special circumstances, and now requires employers to assess tax using tax code zero T (0T).

When an employee does not provide their new employer with a P45 or a completed P46, the employer is now obliged to complete and submit a P46 to HMRC and operate tax code zero T (0T) on a non-cumulative basis.

Formerly payments made after the issue of the P45 were taxed at Basic Rate with National Insurance Contributions (NICs) assessable using the normal payment period for regular payments, and one weeks NICs applicable if all payments were irregular. Where mixed payments were paid then all amounts were treated as regular payments.

Shares

An area that has always proved problematical is the handling of shares and any associated income tax and NICs. Share groups often operate withholding of fiscal values on the sale or exercise to ensure appropriate coverage of tax and NICs liabilities. Sometimes the interaction of such value with HMRC via payroll is fraught with difficulty as the withholding of tax and NICs does not match the real time payroll calculation values, and the operation of Tax Year Validation can become difficult.

An income tax charge often arises on payments made in connection with employment related securities. Scheme administrators often sell shares on behalf of the employee, with some of the resulting proceeds used to meet tax liabilities. The operation of Basic Rate brought a level of certainty on the values to be used.

Lobbying by share save groups, brought to the attention of HMRC that the change of operation to 0T tax code could disproportionately result in more shares having to be sold or held back for tax purposes than the eventual adjusted tax liability of the individual. Therefore, a disproportionate amount of tax would be deducted, leading to overpayments. It was claimed that this could act as a large disincentive to invest in employment related share schemes, both by employers and employees.

After consideration, the government and HMRC took immediate action and amended regulation 37 of PAYE regulations 2003 to take effect on 6 April 2011, without the normal 21 days notice. As a result, the Income Tax (Pay As You Earn) (Amendment) (No.2) Regulations 2011 came into force on 6 April 2011.

The new regulations present that:

• Payment made by an employer to an employee after their employment ceased, which are not included on the form P45, will be taxed using the zero T (0T) tax code on a non-cumulative basis.
• Payment made in connection with employment related securities, made after the employee has left the employment, will be taxed at the Basic Rate of tax.

The change in regulation requires an employer making a payment in connection with securities, interests in securities, or securities options, to deduct tax at the Basic Rate for the tax year in which the payment is made. All other payments of PAYE income, paid after an employment has ceased, will continue to be subject to tax deducted using the 0T tax code on a non-cumulative basis.

Alexy Armitage, head of employee share ownership of IFS Proshare, with the support of UK employers including BT, National Grid, Kingfisher, Smith and Nephew, and BAE systems, along with employee share plan administrators Computershare, Equiniti and Killik Employee Services, worked closely with HMRC to achieve the outcome stated:

I am delighted with the outcome of the discussion with HMRC. This clearly shows that they have listened constructively and taken into consideration the important concerns raised by companies and administrators of employee share plans. Alexy Armitage, head of employee share ownership of IFS Proshare,

Payroll now has the difficulty of potentially operating different tax rules for different types of payments after the issue of form P45.