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HMRC internal manual

Employment Income Manual

PAYE: background to PAYE on special types of payment: introduction

Part 11 ITEPA 2003

Almost all tax on employment income, pension income and social security income is collected through the PAYE system. In essence, the PAYE system sets out to collect for each individual the correct amount of tax during the year, so far as possible, with that tax being collected evenly throughout the year. It does this with a system of code numbers and tax tables that tell employers, pension providers and others the amount of tax to deduct each time a payment is made.

PAYE is the biggest part of the income tax system and for many people their only contact with income tax. There are around 1.5 million PAYE schemes operated by employers, pension providers and others dealing with around 35 million employments, offices, pensions and soon. As a result, the majority of employees and pensioners never have to make a lump sum payment to HMRC. Employees remain liable for income tax on the basis of their income for the tax year. But PAYE deductions from their income are in effect payments on account of that tax bill.

The authority for the PAYE system is at Part 11 ITEPA 2003. Basically, Part 11 provides for the assessment, collection and recovery of income tax in respect of PAYE income.

PAYE income

Part 11 Chapter 1 defines PAYE income as consisting of:

  • any PAYE employment income for the year
  • any PAYE pension income for the year
  • any PAYE social security income for the year.

The meanings of PAYE employment income, PAYE pension income and PAYE social security income respectively are stated in Section 683 ITEPA 2003. Broadly these are amounts taxable as employment income, pension income and social security income respectively.

General application of PAYE

Part 11 Chapter 2 deals with the general application of PAYE, including the requirement for the Commissioners of HMRC to make regulations (the PAYE regulations) with respect to the assessment, charge, collection and recovery of income tax in respect of all PAYE income. Broadly, the PAYE regulations determine the process by which a person who is an employer or a pension provider, or otherwise makes payment of PAYE income, is required to deduct and account to HMRC for the income tax due in respect of any payment of PAYE income.

Usually deduction is straightforward. If a payment of PAYE income of £1,000 is made and, using the tax code and tax tables, the payer calculates that a deduction of £100 is appropriate, the payer will then deduct £100 and pay over £900 to the recipient. The payer will then account to HMRC for the £100 deducted.

Special types of payment

However, there are some instances where deduction is not straightforward. These are where payment is:

  • made by a special type of payer or to a special type of payee (see EIM11802), or
  • a special type of income (see EIM11803).