UK: Post-P45 Cash And Share Payments And Preparing For Higher Rates Of NICs

Last Updated: 12 January 2011
Article by Nicholas Stretch, Tair Hussain and Isabel Pooley

Post-P45 cash and share payments and preparing for higher rates of NICs

A significant change in tax deduction obligations for post-P45 cash payments and share vestings takes place on 6 April 2011. There will also be an increase in the rates of National Insurance contributions (NICs) from that date.

Companies may benefit from considering in advance how to react to both changes.  We consider both of these issues below.

Payments after the issue of a P45

Payments received by departing or former employees have traditionally been able to benefit from a significant cashflow advantage. The ex-employer is currently only required to deduct basic rate tax under PAYE so long as payment is made after the issue of the P45. While further tax is payable where relevant, this is payable later by the employee with his tax return for the year. This is very helpful if an employee is out of work and had a short-term need for cash. Indeed, if employees are leaving employment at the conclusion of the termination agreement, the agreement has often specifically delayed the payment so that it is only made after the issue of the P45 to enable the lower deduction rate to apply.

However, from 6 April 2011 the Revenue have announced that PAYE legislation will be changed. Tax on payments made after the issue of the P45 will in future be deductible in full. A special "OT" code will apply.  Although full details have yet to emerge, this means that deduction would apply as if employment was still continuing and the employee did not have a personal allowance. The tax deferral opportunity on termination payments which has existed for many years will therefore cease to apply, whichever side of the P45 they are paid.

Care will also need to be taken in the administration of employee share schemes where shares are provided after the departing employee has been issued with the P45. Rather than automatically applying the basic rate, any tax which arises will also need to be deducted using the "OT" code.

Some planning points to consider are:

  • Companies (and trustees/administrators of employee share plans) may need to change their systems to cater for this change.
  • There may be a considerable timing advantage in agreeing a termination payment before rather than after 6 April 2011 in termination cases which are settling at about that time.
  • From 6 April 2011, there will be little reason to delay the payment of termination payments until after the issue of the P45 and so a procedural step which used regularly to occur, will soon no longer be advantageous. For tax compliance professionals, however, this may be welcome because it is administratively easier for employers and employee alike for P45s to include all payments as separate reporting arrangements have to be made for post-P45 payments.

The Revenue announcement is not yet published on its own website, but for a link to the ICAEW press release on the changes, please click here.

National Insurance Contributions

Subject to special arrangements for contracted-out employment, 6 April 2011 is also the date on which the starting rate for employee's NICs will increase from 11% to 12%, with the rate for higher earners increasing from 1% to 2%.  At the same time, the NIC rate for employer contributions will increase from 12.8% to 13.8%.

Given the mutual benefit for both employers and employees in mitigating the impact of the increased rates, it may be worth considering accelerating payments so that they occur before 6 April 2011 when the higher rates would arise. 

For a company with a bonus pool or monthly salary bill of £1 million, accelerating payment to before 6 April 2011 would result in a saving of £10,000 for the employer alone.

Although it may technically be more difficult to accelerate salary to take advantage of lower NIC rates due to the application of regular earnings periods for NIC purposes, accelerating the payment of bonuses/vesting of share awards to avoid the increase is more feasible.  This is because the payment of the bonus or shares (irrespective of the period to which it relates) will be part of the earnings period in which it is paid. The acceleration of bonuses is particularly attractive for companies where the performance target has been achieved or is discretionary. For example, for a December year end company which normally only pays bonuses in May on the basis of performance to December, it would be financially prudent to pay the bonuses early in March since company performance would be known by then and the early payment would result in a saving for the company without the risk of targets not having been met. The situation would be different for a March year end company accelerating bonus payments, since it may not have definitive performance figures to act on (particularly as the figures will not have been audited).

There will be also be considerable commercial considerations for companies contemplating accelerating remuneration, such as additional cash-flow costs, what to do with employees who leave before the date on which the bonus would normally be paid or where targets are subsequently found not to be met, and not least the extra administration costs which may mean that it is not a worthwhile exercise.  However, some companies will be able to benefit from work done last year in accelerating income to avoid the 50% tax bracket – except this time, acceleration would not be relevant just for a few employees, but for all employees and employers.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 11/01/2011.

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