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HMRC internal manual

Employment Income Manual

PAYE: special type of income: a payment that enhances the value of an asset: premium paid to an existing life assurance policy: example

Section 697 ITEPA 2003From the early 1990s onwards, a common non-cash remuneration scheme involved an employer paying a premium to a life assurance policy already owned by an employee. The most common scheme worked along the lines of the following example.

On 24 July 2003 the two directors of a close company each apply to a well known life assurance provider to open personal policies for which additional premiums may be paid and that may be encashed at any time. Each invests the minimum £1,000 required to commence their policy.

On 29 July the company awards each director a bonus in the form of a premium to be paid to any existing life policies in their name. On 4 August the employer pays £202,000 to the life assurance provider, to cover a £100,000 premium to be paid into each director’s policy, plus commission.

On 6 August both directors inform the life assurance provider that they wish to cancel their policies. Each director receives £101,000 from the life assurance company.
### Is the employer required to operate PAYE on the premium?Yes. The additional premium paid by the employer to each policy is PAYE income that has enhanced the value of an asset already owned by the directors. By virtue of Section 702(1)(c) ITEPA 2003 each life assurance policy, with its value enhanced by the amount of the premium, would be treated as a readily convertible asset if it were provided as PAYE income. Therefore Section 697 applies. The employer must operate PAYE on the value of the enhancement, which is £100,000 in each case.