Taxation of Termination Payments

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The tax arrangements for termination payments changed on 6th April, 2011. Previously, where termination payments (or parts of termination payments) made after a P45 was issued were taxable, they were taxed at the basic rate of income tax through PAYE using the code BR, irrespective of the individual’s earnings. Therefore if the employee was a higher rate or additional rate tax payer then any further tax liability was assessed and made by way of the self assessment system. From 6th April 2011, the PAYE code used for termination payments will be the 0T code. This means, where the termination payment is taxable, the employer will deduct tax at the employee’s own tax rate. Employers need to be aware of these changes and the impact they will have upon the taxation of all termination payments including those made under a compromise agreement.

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