PAYE72040 - PAYE operation: payments for PAYE purposes: non-cash remuneration: operation of PAYE

Where an employee is provided with, or otherwise receives, a readily convertible asset, the PAYE income is likely to be the money’s worth of the asset. The money’s worth is

• The amount the employee can obtain for the asset by selling it or otherwise turning it into cash

Less

• Any contribution the employee makes towards the cost of the asset

The employer may be able to operate PAYE on the precise amount of the PAYE income. That is the precise amount obtained by the employee. This is because the asset is usually sold at market value shortly after transfer to the employee.

If the asset is not sold shortly after transfer to the employee, the employer will have to estimate the amount based on the market value on the day it was provided

• For shares listed on a recognised investment exchange or the New York Stock Exchange, PAYE should be operated on the date of the award. This value should be available from published sources
• For unquoted or restricted shares it may be necessary to use a best estimate

Employer’s responsibilities

Where an employer makes a notional payment of PAYE income he or she is required to

• Operate PAYE, even though money is not transferred and it is not possible to deduct tax in the normal way
• Notify HMRC of the amount of tax due under PAYE
• Pay over that amount to Banking Operations

The employer should deduct tax from any actual payments made in the same income tax period (usually month) subsequent to the event that gave rise to the notional payment. Where the actual payment is insufficient, the employer must account for the balance of tax due.

Employee’s responsibilities

The employee must make good to the employer the full amount of the tax that the employer is required to pay, within 90 days of the event giving rise to the notional payment

• If the employee makes good the full amount, there are no further tax consequences
• If the employee does not make good the full amount within 90 days, he or she has effectively received tax-free remuneration

Any shortfall is treated as earnings from the employment in the year in which the event giving rise to the notional payment occurred. The amount chargeable to tax must be included on the form P9D or P11D for that employee.

Technical advice is available in the Employment Income (EIM) Manual at EIM11804 - 11805.

Employers should take care when completing their annual return and forms P45, to include

• Any notional payment in pay

And

• All the tax paid by the employer for that employee, irrespective of whether or not the employee has made good to the employer all that tax

Any cases where there is doubt or difficulty in applying the PAYE rules to notional payments should be submitted to PSN PAYE Technical, Shipley quoting reference C9350.