With the end of the 2010/2011 tax year drawing to a close in the next few days, some higher rate tax paying employees may find it beneficial to agree with their employers to extend their employment in to the next tax year. Whether this trick will work will depend on individual circumstances. PJH Law provide advice on Compromise Agreements on a daily basis, so call us if you need advice on a Compromise Agreement.

On the basis that many employees may have to endure 6 months + out of work, it is quite possible that they won’t be higher rate tax payers in the new tax year (as even an above average salary of £60k for only half of the tax year would leave an employee a basic rate tax payer by the end of the 2011/2012 tax year as their income in that tax year will be £30k, ignoring any non-employment sources of income) and therefore any termination payment over the £30k tax free termination payment limit will be taxed at 20% not 40% in the long run.

However, because of the change to the treatment of termination payments from 6 April as reported here, tax will have to be paid at 40% and the extra 20% clawed back from HMRC at the end of the 2011/2012 tax year. Still a tax saving in the long run, but doesn’t help cashflow in the short term.