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HMRC internal manual

Employment Income Manual

PAYE: special types of payment: employee fails to make good PAYE: meaning of make good

Section 222 ITEPA 2003

Section 222 ITEPA 2003 is concerned only with the tax that the employer is required to account for to HMRC in accordance with section 710(4) ITEPA 2003 (see EIM11950).  If section 222 applies, the amount that is chargeable to tax is employment income of the employee.

Where an employer is treated as making a notional payment of PAYE income (see EIM11950) the value received by the employee will generally be the full amount of that PAYE income. The provisions of section 710 ITEPA 2003 make the employer responsible for paying over to HMRC the full amount of tax due to be collected under PAYE in relation to that notional payment. Some of the tax due in relation to the notional payment may have been deducted by the employer from any other PAYE income (e.g. salary or wages) actually paid in the same income tax period as the notional payment is treated as made. However, the employee (or former employee) treated as receiving the notional payment will be in a better position than an employee who has received a cash bonus, because a money payment of equivalent value would have suffered deduction of the full amount of PAYE tax due with only the net amount of the award being received by the employee.

For tax purposes, the employee is entitled to credit for the amount of PAYE tax that the employer must pay to HMRC. In effect, therefore, the employee who has received the notional payment has credit for the tax due but has not suffered deduction and so is better placed than the recipient of a net cash bonus. The purpose of section 222 is to address that advantage.