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HMRC internal manual

Apprenticeship Levy Manual

Modified PAYE schemes: introduction

Modified PAYE schemes can be operated where circumstances require a variation in the operation of a normal PAYE scheme (for example, workers seconded abroad).

Employers of:

  • employees seconded abroad
  • expatriate employees
  • market research interviewers (for tax years up to 5 April 2007)
  • members of the reserve or auxiliary forces
  • employees who have been rewarded by a payment card company, bank or building society and the tax has been paid on that reward via a payment card rewards scheme

can operate a modified PAYE scheme.

Employers who have an agreement to operate a modified PAYE scheme when paying employees who are seconded overseas or who are working in the UK but employed by an overseas employer, pay their employer liabilities based on a best estimate of the employees’ earnings. At the end of the tax year when the actual earnings are known, they will then send a NICs settlement return with the correct amounts. Paying the Apprenticeship Levy works in a similar way.

If an employer operates a modified PAYE scheme, the pay bill for levy liability purposes will be the estimated monthly earnings on which they are liable to pay Class 1 secondary NICs for the modified PAYE scheme. If, at the end of the tax year, their actual pay bill is either smaller or greater and they use a NICs settlement return (NSR) to correct the difference in Class 1 secondary NICs due, then the amount of levy paid on the estimate will also be incorrect. They must recalculate the levy owed, then send in an updated Employer Payment Summary (EPS) and pay the difference or claim a refund. If a refund of levy is due, they must offset this refund against any other PAYE liabilities they have, before claiming a refund.