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Ask an expert: Termination payments

Q. How should a payment under a settlement agreement made in relation to a termination of employment be taxed after a P45 has been issued? Should the employer still deduct tax at the basic rate?

A. Prior to 6 April 2011 payments made to an employee as part of a termination of employment and after a P45 had been issued could be paid subject to basic rate tax at 20%. Tax was deducted by the former employer using the BR tax code and any further tax owed because the former employee was a higher rate taxpayer was dealt with through self-assessment.

Following changes made to the PAYE code by HMRC in December 2010 all...

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