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Prior to 6 April this year where a payment was made to an employee after their P45 had been issued, the employer was only required to operate PAYE at the basic rate of income tax (20 per cent). This could represent a significant timing advantage for taxpayers who pay at higher marginal rates of 40 per cent or 50 per cent - particularly in the context of a lump sum termination payment - as they would not need to account to HMRC for the difference until 31 January following the end of the relevant tax year.

As previously announced in the Budget and beforehand, regulations have been brought in providing for such payments to be subject to PAYE with the tax code 0T rather than BR. 0T means tax should be deducted on the basis that there is no personal allowance and applying the appropriate marginal rate - thus giving the tax collector the benefit of any timing difference (as overpayments can only be claimed back in the individual's tax return filed the following year).

However, in a late change the new provisions have been changed so they do not apply to payments made by way of securities. This may represent an opportunity (albeit in limited circumstances) to make payment by way of securities in order to continue to enjoy the timing benefit referred to above. Care would need to be taken if this were attempted to ensure that the benefit of any non-taxable element of a termination payment was not lost.

This will also be of interest to share schemes and incentives advisers and their clients as it should mean that the PAYE treatment of share option and share award gains after employment has ceased will not be changing after all.

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