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Tax code changes

Tax changes for 2011 - 20122010 did not prove to be a happy one for HM Revenue & Customs (HMRC) in many respects. Accusations of wholesale errors when issuing tax codes, and the late application of P11D also did not help matters - especially when some local tax offices attempted to pin the blame on employers.

However, the tax year 2011-2012 will see changes to payroll practice which will impact on various tax planning strategies. Employers need to be aware of the new rules to ensure that they do not fall foul and face consequential liabilities, penalties and interest charges.

Many of the so called errors were due to the incorrect use of the Tax Code BR (Basic Rate) on P46 forms and CWG2 guidance practices - resulting in people guessing actual tax liabilities.  The introduction of the additional rate 50% tax band brought difficulties in its collection with no tax code available to deal with secondary employments, such as non-exec directorships. Previously the assumptive tax code BR has been used for many special circumstances – these are now subject to potential change.

At last, 6 April 2011 sees the re-introduction of tax code D1. Where applicable, the employer will start receiving codes from February 2011 in readiness for the new tax year.

Also on 6 April 2011, the tax application will be applicable to a whole raft of changes for special cases. BR will no longer be the most common tax code application. As a result of changes to PAYE regulation (which will also come into effect from 6 April 2011) there will be changes to the tax codes HMRC authorises employers to operate. This will mean that certain amounts will no longer be taxed at only 20%, but will also now potentially attract tax deductions at 40% and 50%.

Payments and leavers

One of the most significant changes is in relation to payment to leavers. There are some employers and accountants who might partake in immoral practices, in an attempt to fiddle any taxable payments for leavers to suffer 20% tax reduction.  Sometimes it is assumed that leaver payments are taxed at 20% regardless, this is not true, only payments made after leaving and the issue of a P45 may benefit from 20% tax deduction.

Currently when a payment is made to an employee after issuing the P45, any additional amounts are taxed at BR. This has proved particularly beneficial to employees, who may have had higher or additional tax rate liabilities - thus providing them with a significant boost in cash. This may especially be the case for redundancy or termination amounts that exceeded £30,000.

Redundancy and termination

Often the operation of BR has been an attractive element of obtaining employee agreement in relation to redundancy or termination. However, this all changes, the correct tax code to be operated for payment made after leaving and the issue of the P45 from 6 April 2011 is now 0T on a week 1 / month 1 basis. No longer will individuals benefit from being under taxed to the prior extent. This is an extremely shrewd move by the government and results in bringing tax revenues in much earlier.

Retirement

Equally, complexities now come into play with retirement, where many individuals can look to enjoy their pension, yet continue to work and receive pay as well. Former guidance instructed employers to continue to use the existing tax code which results in many double personal allowance relief.  From 6 April 2011, the authorised code to be operated on the occupational pension is to be changed to 0T Week 1 / Month 1. Although not perfect in its operation, the change will reduce amounts of underpayment experienced in the past.

Similar use of Tax Code 0T on a week 1 / month 1 basis is to apply from 6 April 2011 to the following scenarios:

  • Payment to representatives of a deceased employee for whom a P45 has already been produced.
  • Payment made to a representative of a deceased employee in a later tax year to the one in which the employee died.

Code BR remains in use for the following special circumstance:

  • Pension payment passed from the pension recipient to someone other than the individual.
  • A pension or annuity payment continues for a ‘term certain’ following the death of the pension recipient or annuitant and the payment is being made to a Personal Representative, Trustee or Body corporate – the existing process continues and the correct tax code is BR.

Simon Parsons

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  • 1st February 2011

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