The payment after leaving

25 September 2017

Payroll managers still receive instruction from HR departments and solicitors that a termination payment must be taxed at Basic Rate. Why these continue to be demanded since the rules changed on payment after leaving we do not know.

When the actual HMRC instructions are carried out and the correct action taken then communications and misunderstandings can occasionally occur, referring back to an agreement with an employee which is likely to have not been seen or passed via payroll.

Why do employers and employment solicitors state Basic Rate tax in what are now out-dated templates?

Former HMRC rules and law stated that any payment made after the issue of a P45 was to be taxed at Basic Rate (20%). An element of termination may not be taxable at all, with some elements up to £30,000 being tax free subject to the appropriate contractual or non-contractual conditions being met. However, the excess would be subject to tax and any contractual payments would be subject to tax and NICs.

Often solicitors and HR departments would use the Basic Rate tax position as part of the bargaining tools to exit employees out of a business. If the employee agreed to the pay-off, the amount will only be subject to Basic Rate tax (20%).

The reality was actually something else. The amounts would at the end of year be tallied with the full individual liabilities and potentially an underpayment may have occurred and a tax bill delivered for higher rate (40%) or even additional rate (45%) tax liability on the additional amount. However, some employees would not be receiving paid income for a period of time and equally may have unused personal allowances up until the end of the tax year. So the operation of Basic Rate was never accurate and would create situations of overpayment but more frequently, underpayment.

What are the rules and how do they sit now?

The CWG2 (2013) – Employer Further Guide to PAYE and NICs states:

"If you have already given an employee a form P45 you should deduct PAYE using code 0T (non-cumulatively on a week 1 month 1 basis) using the normal pay period for the employee”, this includes employment related securities. The employee is requested to “provide the employee with documentary confirmation of the payment (for example by letter, payslip or other printed/printable document)."     

The next bit in CWG2 is where HMRC advice starts to get extremely confusing, is out of date and potentially states an oxymoron:

"It is important that you include a date of leaving on the P14. This should be the date that you made the payment." 

In most cases the date of leaving would be the date of leaving, and not the date of payment – and the P14 is no more! Under Real Time Information the guidance is different and contrary to both the E13 (Day-to-day payroll) and the CWG2. RTI guidance on leavers is found on pages titled ‘when an employee leaves or retires’.

Although a P45 is still given to the employee when they leave, actual P45’s are no longer passed to HMRC at all.

Once you start reporting your PAYE information in real time you won’t be able to submit forms P45 and P46 via HM Revenue & Customs’ (HMRC’s) Online Service – this is because you must tell HMRC about people who’ve started working for you, or left, using your real time submissions (Full Payment Submissions, or FPS) through your payroll software.

The guidance states:

"In most cases you must work out, record and deduct PAYE tax as usual on any standard payment you make to your employee, include any leaving details on your final FPS and make sure you give the employee a P45." 

What it does not state is anything to do with the judgment point of when the employer is assuming that the P45 is issued to the employee, such as before the final payment or after, or whether the suggestion is a viable option for employers in real life.

What the RTI guidance then goes on to cover is:

"Any further payment made after giving the employee a P45 where the instruction is to Deduct PAYE tax using code 0T, including the payment and the PAYE tax and NICs you’ve deducted on the employee’s payroll record." 

On the RTI submission the software or payroll solution is to set the payment after leaving indicator and show the original date of leaving. This is where things start to get really confusing and where HMRC will unfairly claim that employers are getting things wrong, or is it the HMRC that are getting their ‘working correctly’ solutions wrong?

In the case of some termination or compromise agreement payments, there will have been no reporting on the prior FPS of a leave date. So the employee is both a leaver and receiving a payment after leaving on the same FPS submission. Are one or two FPS records required? What about year to date value? The tax code will have also changed from their prior tax code to 0T on a non-cumulative basis.

What do HMRC RTI systems do in these cases?

It treats the employer as having done something wrong (they haven’t) and will treat the payment after leaving as an additional separate payment and employment. As Year To Date totals already include all prior tax and NICs paid along with a second accumulated amount of this time and the prior year to date amounts, HMRC will now double account both the tax and NICs adding both separate records together and be looking for a higher payment amount from the employer. This is the current error of the HMRC systems which are ‘working according to design’!

So the days of operating Basic Rate (BR) have gone on termination payments, this was only allowed to be operated where a P45 had already been issued to the employee, and for some years the correct tax code to operate is 0T non-cumulative. HMRC RTI would claim that the normal tax code should be applied unless the leave date has already been notified on a prior FPS!

However, if HR and employment solicitors are insisting on operating payment after issue of P45 rules, then RTI goes horribly wrong and misbalances occur all over the place. Duplications of records are caused (by HMRC poor design) and double amounts of payment are being expected to be paid across.

HMRC have only in the past understood a corrected tax year end P14 position, a single submission. They have little or poor knowledge of period to period payroll practice and the contradictions of their own guidance between RTI v E13 v CWG2.

As opposed to sweeping issues under the carpet, the pleas from software developers to clarify and correct the process of handling leavers and termination payment must be undertaken. What is not needed is further guidance, what is needed are HMRC systems which work with real life. So Real Time Information for Real Life Payroll.

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