PAYE72025 - PAYE operation: payments for PAYE purposes: free of tax payments

A free of tax (FOT) payment is a payment where the employer rather than the employee bears any tax due.

By making payments free of tax an employer may find that wages costs increase because they will include

• The amount of the free of tax payment
• The tax due on the true gross pay relating to that payment
• The employer’s share of the National Insurance contributions (NICs) due on the true gross payment

And may include

• A free of National Insurance element

There are additional PAYE duties involved. Advise the employer to use

• Leaflet FOT1 (see below)
• Tax Tables G, Free of Tax Tables
• A special Deductions Working Sheet, form P11 (FOT)

The Free of Tax Pay leaflet FOT1 is reprinted every year, so you should be sure to use the latest version.

An employer may, exceptionally, agree to make only part of the payment to an employee free of tax, for example, travelling expenses from home to place of work. Where this is the case, paragraph 26 of the Employer Further Guide to PAYE and NICs (booklet CWG2) explains how this may be done using a percentage method.

Where an employer notifies their local HMRC office that such an arrangement exists Employer sections must follow the detailed advice in the subject ‘Free Of Tax System’ PAYE20035.