PAYE20035 - employer records: set up employer record: free of tax system
There is a system available to employers who wish to adopt a
system of making payments to their employees ‘free of
tax’ (FOT).
In establishing whether an FOT system is applicable it is
important to know why the employer has made payments without
deduction of tax. This will determine whether payments were
‘gross’ or ‘net’ (free of tax).
Gross Payments
This will be where the employer has failed to deduct PAYE
tax from payments. Tax on these payments should be calculated on
normal PAYE lines.
Net Payments
This will occur where the employer has an agreement with
their employees and
- Intends to bear the tax on behalf of the employee
Or
- Considers the payment to be an amount after deduction of tax
Where net payments have been made, further tax is due on the
employee’s earnings, which is borne by the employer. The
correct tax due is to be calculated using special Free of Tax
tables (Tax Tables G) and a special deductions working sheet
P11(FOT).
Free Of Tax Employer Package
Where an employer contacts you wishing to make payments net
to his or her employees for the first time, you should set up a P
scheme in the normal way. See
PAYE20135 for further details. In
addition you will need to send them the following Free of Tax
Package which is available through the Purchasing Cycle System
(PCS)
- Leaflet FOT 1 (gives details of system)
- Free of Tax Tables G
- Deductions working sheets P11(FOT)
The employer’s details should then be entered in the
‘Free of Tax’ employer related electronic file, so that
any new Tax Table G and FOT 1 can be issued to them.
Advising the employer
You should ensure that the employer fully understands
that
- Payments made free of tax increase costs because the payment will include the
- Amount of the free of tax payment
- Tax due on the true gross pay (TGP) relating to that payment
- Employer's share of the National Insurance contributions due on the true gross pay
- May also include a free of National Insurance element
- They will be expected to operate special PAYE procedures in accordance with the FOT1 guidelines
- Only figures of true gross pay and tax should be shown on forms P45 and P14
- They will have to ensure that the employee(s) involved understands and agrees with the terms and effects of the free of tax arrangement, bearing in mind that as HMRC is not a party to the agreement it will not get involved
- The arrangement between the employer and employee should make clear that
- Any tax actually suffered by the employee must be repaid to them (usually when an employee is taken on during the year and a repayment is due for the period prior to commencement)
- A new employer or HMRC will repay any tax certified on forms P45 or P14 to the employee even though the employer has borne the tax
- Entitlement to refunds during the year, of tax paid under free of tax arrangements, can be agreed between employer and employee
An employee may bear some part of the tax due under a free of
tax arrangement, provided that the employer and employee concerned
agree to this and how it should be done. Refer to leaflet FOT1 for
further details.
Ensure that you keep a record of any advice given to the
employer for future reference.
Refer any problem that you are unable to deal with using
this guidance to
PSN PAYE Technical
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
