What happens when the full amount of tax cannot be collected either within a pay period or tax year
Information about what happens when the full amount of tax cannot be collected either within a pay period or tax year.
There may be scenarios where the full amount of tax cannot be collected. This could be due to a number of reasons such as the:
- employee may have left or is on long term sick leave and there is not enough pay to cover the tax
- amount of tax due is over 50% of the pay for that pay period which could put the employee into hardship
It may also be the case that the employee leaves part-way through a pay period but after the payroll has been processed, resulting in an incorrect tax liability.
Employers must not deduct more than 50% of an employee’s pay in tax. This is called the overriding limit and makes sure that employees are not left with too little pay to cover their living costs.
Up to 50% of their pay can be deducted during any pay period with any remaining amounts owed carried forward to the next pay period, if possible. Therefore not all Income Tax will be able to be collected in real time from employees who are impacted.
Any uncollected amounts in excess of the 50% limit will be collected by HMRC after the end of the tax year by the existing end-of-year reconciliation (P800) process or Simple Assessment. Where a customer is already registered for Self Assessment, then uncollected amounts of tax will be collected by the Self Assessment process.
These rules will also apply to employees who receive less income, for example if they receive statutory payments in place of their salary.
Employers who have decided to voluntarily payroll loans and accommodation will continue to be able to remove an employee from voluntary payrolling in this case.
If the long service award provided is not exempt, then the amount must be reported on a Full Payment System (FPS). Cash awards will need to be added to the employee’s other earnings and Class 1 National Insurance contributions and Income Tax deducted.
For non-cash awards, the details of the award must be reported as a benefit in kind (BiK) on the FPS and Income Tax and Class 1A National Insurance contributions deducted as normal.
The 50% rule applies to tax deducted. Read What happens when the full amount of tax cannot be collected either within a pay period or tax year for more information.
Any uncollected amounts in excess of the 50% limit will be collected by HMRC after the end of the tax year by the existing end-of-year reconciliation (P800) process or Simple Assessment. Where a customer is already registered for Self Assessment, then uncollected amounts of tax will be collected by the Self Assessment process.
Employers are currently required to report details of termination payments and non-cash termination awards (such as assets transferred on termination) by a FPS. This process will continue without change when payrolling is mandated for BiKs from April 2027. Find out how to report these to HMRC by payroll software.
BiKs that are provided in the tax year that an employment terminates but not as a termination award (such as continued use of a company car) are currently reported on the P11D and P11D(b). If an employer is no longer paying an employee but is still providing a BIK then there is no earnings from which the tax due on that BIK can be deducted. Following the introduction of mandatory payrolling in April 2027 these BiKs should be reported on an FPS. Any uncollected amounts of tax could be collected in real time or collected by HMRC after the end of the tax year by the existing end-of-year reconciliation (P800) process or Simple Assessment. Where a customer is already registered for Self Assessment, then uncollected amounts of tax could be collected by the Self Assessment process.
Further guidance on how this will work will be provided in future updates.
If any of the events an employer provides to their staff is not exempt, then the costs will have to be reported to HMRC by payroll software.
The details must be reported on an FPS for each employee and Class 1A National Insurance contributions will be payable by the employer. Any costs above the £150 limit can be accounted for either in FPS spread out across the full tax year where a cash equivalent or an estimate is known at the start of the year, or the remaining pay periods once the cash equivalent can be estimated or becomes known.
The employer will need to decide the most appropriate way to report the costs depending on individual circumstances.
If you’re not sure what the value of the benefit is at the start of the tax year, you can make an estimate of the cash equivalent of the benefit. You can then adjust it later in the year when you know the exact value.
There are specific rules in tax legislation for exemptions and deductions for employees.
From April 2027, employers that pay expenses for which a claim can be made by the employee or provide non-exempt benefits will need to put those through the payroll and deduct tax and National Insurance contributions. Most BiKs, except for employment related loans and accommodation which are currently reported by the P11D process will need to be put through the payroll instead.
Expenses or benefits that are only partially exempted will need to be put through the payroll in full. Employees will need to claim a deduction from HMRC on the part that is exempt, using the existing process for employment expense claims. Find out how claims can be made. This process will be the same from April 2027.
If an employee is in receipt of a BiK that has no tax liability there will be no need to report this to HMRC by the FPS. This is same as the current reporting rules. These include:
- a loan for an amount below £10,000
- a BiK where the cost of providing the benefit to an employee is so marginal that the value is regarded as nil
- an exempt BiK
Employees and directors may receive BiKs but are not paid cash earnings from which the tax due can be deducted. Currently an employer will report the BiKs on a P11D and the employees’ or directors’ tax codes will be adjusted for the following tax year.
From April 2027, the employer will need to send details of the BiKs and expenses provided using an FPS. The FPS would usually report no payments of earnings other than BiKs, expenses and tax. Any uncollected amounts will be collected by HMRC following the end of the tax year using the current end-of-year reconciliation (P800) process or simple assessment. Where Self Assessment applies, the uncollected tax amounts will be collected by that process.
Further guidance on how this will work will be provided in future updates.
For employees, their student loan liability is calculated on earnings subject to Class 1 Secondary National Insurance contributions. The Student Loans calculation by payroll for payrolled BiKs remains correct as payroll software ensures the correct earnings are taken into account to assess the student loan liability.
The Self Assessment issues with student loan borrowers experiencing incorrect BiKs calculation due to the inclusion of BiKs liable to class 1A National Insurance contributions have been remedied using an additional box on the Self Assessment return.
Read the HMRC guidance for completing Self Assessment tax returns for more information.
The P11D and P11D(b) will initially be retained for a limited number of exception cases. A process will be introduced for employers to inform HMRC that a P11D or P11D(b) will be submitted for employees that will either need to have certain BiKs or all of the BiKs they receive to be excepted from the mandatory payrolling process. More information on this process will be provided in the first half of 2026.
From April 2028, penalties and interest may apply if these forms are not used as intended.
Guidance and legislation will be updated in due course to reflect this.
Read about penalties and interest in relation to mandatory payrolling of BiKs for more information.