With effect from 6 April 2012, employers are required to account for income tax on share based payments made to employees following the issue of a P45 (a tax form provided to employees on or shortly after cessation of employment). The new "0T" tax code requires an employer to disregard all taxable income received and tax paid by an employee in the relevant tax year and apply the tax rates (currently 20%, 40% and 50%) to the payment in isolation. In applying the rates, any personal allowance is disregarded and the taxable bands which determine the rates are pro rated according to the frequency of salary payments (for example, weekly or monthly).
Additional rules apply to employees on non-taxable codes (usually non-UK resident employees) or employees who are allocated codes which require deduction of tax at the higher or upper rates (currently 40% and 50%). Specific advice should therefore always be taken on the application of the 0T code.
Prior to the introduction of the 0T code, it was relatively easy for an employer to determine the tax due on share based payments made after the issue of a P45 as, regardless of the individual circumstances, income tax was only applied at the basic rate (currently 20%). The application of the 0T tax code to share based payments therefore increases the complexity of determining an employer's tax obligations in respect of share based payments to a former employee.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.