In this section:

  • Expenses and benefits A to Z

Income Tax paid on director's behalf

Definitions or restrictions

You pay a company director without deducting tax under PAYE (Pay As You Earn) – and HMRC recovers the unpaid tax from you.

The tax that you’ve paid on the director’s behalf counts as a benefit.

What to report, what to pay

Unless the criteria outlined in the ‘Exceptions’ section apply, you must:

  • report on form P11D - section M
  • add the value of the benefit to the director’s earnings when deducting and paying Class 1 NICs (but not PAYE tax) through your payroll

Work out the value to use

The value to use is the amount of tax recovered from you by HMRC, minus any amount made good to you by the director.

Exceptions

The rules outlined above do not apply if your director doesn’t have a material interest in your company and either of the following applies:

  • he or she is a full-time working director
  • your company is a charity or not-for-profit organisation

In these cases, you have:

  • no reporting requirements
  • no tax or NICs to pay

In broad terms, a director has a material interest in a company if they (alone or together with associates) own or can control more than five per cent of its ordinary share capital. For full details, see the ‘Technical guidance’ section below.


Technical guidance

EIM21790: PAYE tax not deducted from director's earnings

NIM02370: Class 1 NICs - earnings of employees and office holders

EIM20212: the meaning of ‘material interest’ in a company