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Employers must act now over changes to taxation of post-termination payments

From the 6 April, organisations will need to withhold income tax rates of up to 50% when making post-termination payments to employees.

However, according to law firm Dechert, employers should already take the changes into consideration when planning terminations.

At present, employers must only withhold income tax at the basic rate of 20%, with any surplus tax owed being the responsibility of former employees during self-assessment.

However, three months today changes to the Income Tax (Pay as You Earn Regulations 2003) or "PAYE Regulations" by Revenue and Customs will mean that employers will be responsible for using the OT code to deduct full amounts.

Speaking to HR, the firms head of employment practice, Charlie Wynn-Evans, said: "At present big termination payments can represent a cash flow advantage to employees, because they are taxed 20% at the point of payment and can sit on the rest of the money until self-assessment, which can be considerably later.

"What this change means is that the tax will need to be deducted in full at the point of payment, which will not be so advantageous for departing employees.

"If the revenue were seeking to recover tax, the first person they will go to is the employer who should have deducted it. Employers must make sure that they haven’t agreed to only deduct basic rate tax and that the agreement is consistent with the fact that the rules are going to change."

Although the changes are not implemented until April, Wynn-Evans emphasised that organisations should already be taking them into consideration.

"In theory you could have an agreement that you reach between now and March with termination payments that are not to be made until April or later," Wynn-Evans said.

"Employers should keep an eye on any further guidance that comes out from the Revenue and make sure that termination negotiations and severance agreements comply with the new regulations.