PAYE72065 - PAYE operation: payments for PAYE purposes: restrictive covenants

An employee may receive a payment for agreeing to restrict future conduct or activities. For example, an employee might agree that if she leaves her current employment she will not work within a fifty mile radius for a competitor, or for herself, for five years.

Such an agreement is called a restrictive covenant. Where the covenant was entered into after 9 June 1988, any payments in connection with it are chargeable to tax.

More information on restrictive covenants and a definition of payments chargeable to tax are given in the Employment Income (EIM) Manual at EIM03600 - 03626.

Operation of PAYE on payments

Payments failing within EIM03600 onwards are treated as earnings of the office or employment in connection with which the covenant is given. The employer should operate PAYE as normal on any such payments.

If an employer fails to operate PAYE on a payment

• Send a form P400 to the Debt Management Office
• Take no action to recover the tax from the employee unless you receive a Regulation 72 ruling from the Debt Management Office
• Where a Regulation 72 ruling is not appropriate and the employer fails to pay the PAYE due on the payment consider making a determination under Regulation 80.

Payments in kind

In the unlikely event of a payment being made in kind, refer for advice to  PSN PAYE Technical, Shipley.

Restrictive Covenant entered into before 9 June 1988

Payments resulting from restrictive covenants entered into before 9 June 1988 do not form part of the employee's earnings for tax purposes. Such payments are only chargeable at higher rate(s) on the amount of the payment grossed at basic rate.