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HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: employer compliance: guidance by subject: free of tax payments: gross payments and 'net' (free of tax FOT) payments - overview

Tax free payments to employees may be ‘gross’ or ‘net’ payments.

Gross payments:

  • are where the employer has failed to deduct PAYE tax from them

Net payments (or ‘free of tax’ payments):

  • are where the employer has an agreement with their employees and
  • intends to bear the tax on behalf of the employee, or
  • considers the payment to be an amount after deduction of tax.

To establish whether the employer has made a ‘gross’ or a ‘net’ payment, you should:

  • ask the employer why the payments were made without deduction of tax.

The response to this question should determine whether payments were ‘gross’ or ‘net’ and how the tax underpaid should be calculated.

The tax due on ‘gross’ payments should:

  • be calculated on normal PAYE lines.

Where ‘net’ payments have been made further tax is due on the employees tax which is borne by the employer. The correct tax due is to be calculated using the free of tax (FOT) system.

You should:

  • read background information
  • at PAYE20035 and PAYE72025, and
  • the relevant paragraphs in the CWG2 (Employers Further Guide to PAYE and NICs).

See COG913030 if the system is applicable but has not been used.