HM Revenue & Customs ("HMRC") has announced a proposed change from 6 April 2012 to the way in which PAYE is applied to shares after someone has left employment and their P45 has been issued.  This will affect all leavers receiving shares with PAYE income tax charges - whether under options, executive awards or under SIPs, where certain leavers have to remove shares from the plan and suffer income tax.

Changes introduced from 6 April 2011

The PAYE treatment of cash and certain other non-cash payments made to leavers after a P45 has been issued was changed on 6 April 2011.  Rather than applying PAYE at the basic rate, as had been the position for many years, employers were required to apply a special "0T" code.  This deducts PAYE as if the employment was continuing and the employee did not have a personal allowance.  Almost inevitably more tax would therefore be deducted.

However, following concerns about how the 0T code would be applied to share awards - particularly where shares are required to be withdrawn from a SIP - HMRC announced just before the change was due to take effect that employers should continue to apply PAYE at the basic rate for all share-related payments made after a P45 has been issued.

Proposed change from 6 April 2012

HMRC has now announced that it proposes that from 6 April 2012 the 0T code must also be applied to all payments (including share-related payments) made after a P45 has been issued.  HMRC has proposed this change as it found that many payroll administrators favoured the simplicity of applying a single tax code to all remuneration provided after a P45 has been issued.  Applying a BR code to share-based payments and 0T code to other payments was problematic, especially when these payments were made at the same time.


While this was one problem which has clearly now been addressed, the result is still not an ideal arrangement.  Employers will still in many cases need to sell more shares to cover PAYE liabilities than is necessary to meet the ultimate tax bill.  Where leavers have paid too much tax at the end of the tax year they will need to reclaim any over-payments through self-assessment.  They may also have lost out on potential share price growth.

Planning points to consider

  • Companies, trustees and share plan administrators may need to change their systems to cater for this change.  HMRC is planning to issue further guidance.
  • Where termination cases are settling in the next couple of months and include a share-related element, there may be a timing advantage in receiving share-related payments before, rather than on or after 6 April 2012.
  • From 6 April 2012, there will be little reason to delay the receipt of share-related payments until after the issue of the P45, although in practice the timing of such payments will be governed by the plan rules and other administrative factors.  Indeed, it may be practical to delay the issue of the P45 until all outstanding remuneration has been paid or provided to the employee to avoid the 0T code.

We would be happy to pass on any experiences or comments clients may have to HMRC.

For a copy of HMRC's announcement please click here.

The closing date for comments is 16 February 2012.  For a copy of our earlier Law-Now, please click here.

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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 20/01/2012.