HMRC Makes PAYE Tax Code Change Proposals

by Robert Lee, Tax-News.com, London

23 January 2012

HM Revenue and Customs (HMRC) has released for comment draft legislation on proposed changes to the tax codes relating to share-based payments for former employees.

In its explanatory note, attached to the legislation, HMRC states that, on April 6, 2011, it changed the tax code applicable to certain payments of pay as you earn (PAYE) income made to an employee after the cessation of employment, which have not been included in the end-of-employment form P45.

The tax code to be operated against cash based payments changed from the basic rate (BR) tax code to zero T (0T). However, payments of PAYE income made in the form of share-based payments (those in the form of securities, interests in securities and securities options) continued to be taxed at BR whilst HMRC reviewed the operational effects a change to code 0T would have on such payments.

The BR tax code deducts tax at a flat rate of 20%, while code 0T is a progressive tax rate which deducts tax at basic, higher and additional rates depending on the level of PAYE income paid.

HMRC engaged with a number of different groups of employers, share scheme administrators and representative bodies in preparing its legislation. Most of those consulted favoured a process that was simple to understand and operate. In addition, HMRC says that some requested that a single tax code be applied to all payments of PAYE income, whether cash or sharebased, made after cessation of employment which have not been included in the form P45.

As a result, the draft legislation provides that, from April 6, 2012, the 0T tax code, rather than code BR, should be used on a noncumulative basis to deduct tax on share-based payments made to an employee after cessation of employment and which have not been included in the form P45. This change will align all post-employment earnings under the same tax code.

HMRC does not anticipate that this will cause significant costs to employers, but says it would welcome any evidence about the likely level of costs.

Published on January 19, the draft remains open for comment until February 16.

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