Code 0T will apply from 6 April 2012, and HMRC is consulting on changes to the PAYE regulations
HMRC has announced a change to the PAYE code that should be used for share-based payments made to individuals after they have ceased employment and which have not been included on form P45. Share-based payments are those in the form of securities, interests in securities and securities options.
From 6 April 2012 the 0T (zero T) tax code should be applied on a non-cumulative basis to such payments. The code 0T will replace code BR, and means that both cash payments and notional payments, eg payments in the form of shares or securities or share/securities options, will be subject to the same code number. This aligns all earnings received after cessation of employment under the same (0T) tax code (0T).
HMRC published a Technical Note on 19 January 2012 which includes the proposed draft amendments to the PAYE Regulations 2003. Comments are requested by 16 February 2012. The Tax Faculty will be responding and ICAEW members are invited to send comments to Peter.Bickley@icaew.com.
HMRC informs us that a Q&A document will be available on the HMRC website in the week ending 29 January 2012, to assist with making comments on the draft regulatory changes.
Some background and more detail about the change
Up to 5 April 2011, if an employee received a payment from their employer after the employment had ceased which had not been included on the individual’s form P45, the employer was required to deduct tax at BR. As noted on HMRC’s website, from 6 April 2011 the employer is required to deduct tax using the 0T code on a non-cumulative basis from earnings with the exception of notional earnings such as employment-related shares and share options for which BR is still applied (reg 37A of the PAYE Regulations 2003). Where both types of payment are made in the same pay period two different code numbers have to be used, which gives rise to ccomplications (HMRC has confirmed that returns should cite code 0T when both are applied). From 6 April 2012 tax code 0T will be applied to all earnings made after form P45 has been issued.
A BR code means that all tax is deducted at basic rate. Code 0T gives no allowances and ensures that tax is deducted at the basic, higher and additional rates. Deducting tax at 0T on a non-cumulative basis (as required in reg 37A) means that the rates of tax applied are those which relate to the pay period; thus, for monthly paid individuals, one-twelfth of the annual basic and higher rate tax bands with the excess at additional rate.
Where tax on payments made after the issue of form P45 was all deducted at BR, it meant that higher and additional rate taxpayers would settle the underpaid tax some considerable time after having received the income – by which time the funds for settling the tax might have been spent. Code 0T reduces the likelihood of an underpayment of tax at the year-end, and means that affected ex-employees are unlikely to be faced with a large tax bill later on. It does however mean that those who receive a payment from their ex-employer after the P45 has been issued but are BR taxpayers overall for the year, perhaps because they do not get another job, will have to make a repayment claim to recover the overpayment before HMRC undertakes the annual reconciliation. It is likely also to lead either to employers clawing back PAYE in excess of the final liability on share-based payments or larger charges under s 222 ITEPA 2003 (payments by employer on account of tax where deduction not possible).