We recently reported that changes were being introduced from 6 April 2011 to the way in which PAYE would be applied to cash payments and share vestings which occur after someone has left employment and their P45 has been issued.  Under the new rules, employers are now required to apply tax code "OT", rather than applying the basic rate of income tax.  The OT code means that PAYE is applied as if employment was continuing but the employee did not have a personal allowance.
There were concerns that this would make the administration of employee share plans for leavers more difficult to administer, particularly where an income tax charge arises when shares are required to be withdrawn from an approved share incentive plan.

However, following representations about these difficulties, the Revenue has announced that the new rules will not apply for share based payments.

From 6 April 2011, the position in respect of cash payments and share vestings which occur after a P45 has been issued will now be as follows:

  • Cash payments – employers will be required to apply PAYE using the "OT" code. 
  • Share awards – there is no change from the position which existed before 6 April 2011.  Accordingly, where income tax arises on the exercise of options, vesting of share awards or withdrawal of shares from an approved share incentive plan after the employee's P45 has been issued, employers will continue to operate PAYE at the basic rate only.  Any additional income tax payable by the employee will continue to be payable through self-assessment.

There has been no change to the NICs arrangements, which continue as they did before 6 April 2011.

For a copy of our earlier Law-Now, please  click here.

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The original publication date for this article was 11/04/2011.