An important change has been made to the new regulations on PAYE treatment of payments to former employees (Income Tax (Pay As You Earn) (Amendment) Regulations 2011 (SI 2011/729)).   This change preserves the original position in relation to PAYE on shares and interests in shares which obtained prior to the new regulations.  This is summarised below. 
 
The new Regulations
 Previously, income tax on payments to former employees would be deducted only at the basic rate. Under the new regime, this is no longer the case and former employees will in many cases be subject to PAYE income tax at significantly higher rates.
 
For any such payments on or after 6 April 2011, an employer must use the 0T tax code which applies on a “non-cumulative” basis. This means that none of an individual’s personal allowance is available and, for an employee who is paid on a monthly basis, only 1/12th of the basic rate band (and if relevant, 1/12th of the higher rate band) will be available in the month of payment. Any excess will be taxable at 50%.
 
If, therefore, a taxable payment of £20,000 in cash is made to a former employee, the first £2,916.67 will be taxed at 20%, the next £9,583.33 at 40% and the balance of £7,500 at 50% (resulting in a tax liability of £8,166.66, instead of £4,000 (£20,000 x 20%) under the previous rules).
 
The Change
Since publication of the original proposals, concerns have been expressed to HMRC that the 0T code would impose unfair levels of taxation, in particular on participants receiving shares under all-employee arrangements, such as (to take one example) HMRC approved Share Incentive Plans (SIP). Employees could have been liable for taxation deductions at rates which are not appropriate to their taxation position. This could have resulted in a significant number having to fill in tax repayment claims to reclaim back tax and they might have had to wait for up to 22 months before they received any repayment of tax. SIP administrators also objected to the significantly increased administrative burden involved and the lack of notice of the change.
 
HMRC has responded positively to these representations. With effect from 6 April 2011, the BR tax code, rather than the 0T tax code, will apply to all payments to former employees in respect of shares or interests in shares (Income Tax (Pay As You Earn) (Amendment) (No. 2) Regulations 2011(SI 2011/1054)). This means that where a PAYE liability arises in relation to a former employee’s shares or interest in shares, tax will only be deducted at the basic rate, preserving the original position.
 
However, in relation to all other situations in which a PAYE liability arises in respect of a former employee, the 0T tax code will now apply.