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HMRC internal manual

Employment Income Manual

PAYE: special type of income: estimating the amount on which to operate PAYE

Section 696(2) ITEPA 2003

Where an employee is awarded or otherwise acquires unquoted or restricted shares, it may not be possible for the employer to operate PAYE on the exact figure of income chargeable to tax as employment income. The employer may need to estimate the value of the shares in order to calculate the amount on which to operate PAYE.

Consequences of using an estimated figure

Where PAYE is operated on an estimated figure, neither HMRC nor the employee is obliged to accept that amount when calculating the actual amount chargeable to tax as employment income. For example, information on restrictions influencing the share value may come to light after the date on which the employer must operate PAYE. Consequently the figure on which the employer operates PAYE may be different from the amount subsequently included in the employee’s self assessment.

The employer’s obligation is to operate PAYE at the right time on the best estimate that can be reasonably made at that time of the amount likely to be PAYE income. Provided an employer meets this obligation, any discrepancy between this figure and the amount charged to tax as employment income will be dealt with after the end of the year through the employee’s self assessment. In the self assessment the employee must return the correct amount chargeable to tax and the amount of PAYE deducted and accounted for.

If an employer operates PAYE on a figure that is substantially less than the amount chargeable to tax as employment income, the employer may have failed to operate PAYE correctly. HMRC may then ask the employer to demonstrate that the amount subject to PAYE was the best estimate that could reasonably have been made at the time. Action under Regulation 80 procedures should be considered.