Taxation of post-termination employee share and share option gains: changes ahead?

Since 6 April 2011, certain termination payments made to employees after issue of their P45 have been subject to a new tax regime implemented by the Income Tax (PAYE) Regulations 2011. “Share-based payments” (including employee shares, share options and related gains) made after the issue of the employee’s P45 were carved out of the new regime, but this is set to change. Under draft regulations recently published by HM Revenue and Customs (HMRC), with effect from 6 April 2012, employers will have to apply the new regime to all taxable termination payments which are not included in the employee’s P45. This will include notional payments received on the post-termination exercise of share options and release of share awards.

Under the new regime, employees may overpay tax which they will have to reclaim. If employers fail to make the correct deductions from an employee’s termination payments, HMRC will seek to recover unpaid tax from the employer. HMRC may also charge penalties and interest…

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