Termination will be even more taxing


17 March, 2011

There has been much publicity surrounding the changes to employment legislation due to come into force in April. However be careful not to miss a very subtle but important change that could have serious financial implications.

Previously when an employment dispute between an employer and employee has been resolved by entering into a Compromise Agreement usually there was no tax to be paid on termination payment of sums up to 30,000 pounds. Any amount payable over 30,000 pounds was only subject to a base rate tax deduction by the employer and the employee would be responsible for any additional tax, provided an appropriate tax indemnity was in the agreement.

All employers should be aware that as from the 6 April the Income Tax (Pay as You Earn) (Amendment) Regulations of 2011 comes into force. Tax at the full applicable rate, whether it be 20%, 40% or 50%, will be applied at the time the payment is made and must be deducted from the post-termination payment.

If an employer adopts the old regime and does not make the appropriate deduction after that date, it is extremely likely that HM Revenue and Customs will seek to recover the additional tax liability direct from the employer. It will then be a matter of the employer having to chase the ex employee personally to recover the additional sum. This may involve legal proceedings if necessary, again dependant upon there being an appropriate tax indemnity contained in the original agreement. This will be both inconvenient and expensive and may take a significant amount of time.

Should you need further clarification, please contact Peter Byrne at Forbes Solicitors who can advise you further on 01254 222399 or email Peter Byrne


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