HMRC has published for comment draft amendments to PAYE regulations relating to a tax code change for share-based payments made after cessation of employment not included on Form P45.

On 6 April 2011 HMRC changed the tax code that applies to certain payments of PAYE income made to an employee after cessation of employment which have not been included in form P45. The tax code to be operated against cash based payments changed from the basic rate tax code (BR) to zero T (0T). Code 0T is a progressive tax rate which deducts tax at basic, higher and additional rates depending on the level of PAYE income paid.

However, payments of PAYE income made in the form of share-based payments (those in the form of securities, interests in securities and securities options) continued to be taxed at BR.

Since last April HMRC has engaged with a number of different groups of employers, share scheme administrators and representative bodies about how to code this income. Most favoured a process that was simple to understand and operate. Some requested that a single tax code be applied to all payments of PAYE income, whether cash or share-based, made after cessation of employment and which have not been included in the form P45.

From 6 April 2012 HMRC propose that the 0T tax code, and not code BR, should be used on a non-cumulative basis to deduct tax on share-based payments made to an employee after cessation of employment and which have not been included in the P45. The intention is that this change will align all post-employment earnings under the same tax code.