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From 6 April 2011, the pay-as-you-earn (PAYE) rules concerning the taxation of payments made to employees by an employer after a P45 has been issued have changed.
Previously, termination payments made after a P45 had been issued were taxed at source at the basic rate of income tax. This was irrespective of the tax rate the employee was taxed at during their employment. From 6 April 2011, employers must tax such payments at the employee's usual tax rate (20%, 40% or 50%). The employee can then apply to HMRC for a reimbursement, if appropriate (for example, if the employee does not work for the remainder of the relevant tax year). Employers will therefore need to ensure that they apply the correct tax code and that compromise agreements do not refer to termination payments being taxed at the basic rate. This change does not affect the £30,000 tax free amount that can be paid in certain circumstances upon termination of employment.
Increases in personal allowance and national insurance contributions also take effect from April 2011. Employee national insurance contributions have increased by 1% and the primary employee threshold for national insurance contributions has increased by £570. For employers, national insurance contributions have increased by 1% and national insurance thresholds have increased by £21 per week above indexation. The personal allowance for income tax for basic rate tax payers under the age of 65 is increased by £1,000.
Taken from Jordans Employment Law Bulletin 53
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