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HMRC internal manual

Employment Income Manual

PAYE: special types of payment: employee’s requirement to make good PAYE: meaning of 'the due amount'

Section 222 ITEPA 2003

The employer must calculate the amount of tax that should be accounted for in respect of the notional payment. Then section 710(1) ITEPA 2003 says that the employer should deduct that tax in the first instance from any actual payments made in the same income tax period subsequent to the date of the event giving rise to the notional payment. The income tax period will usually be the month ended on the 5th but (exceptionally) may be the quarter ended on the 5th.

If the amount deducted in accordance with section 710(1) is insufficient to enable the employer to pay the full amount of tax that should be accounted for, then section 710(4) says that the employer is required to account for the balance. That balance is ‘the due amount’.


John receives gross pay of £5,000 in the pay period (tax month) ended 5 May 2014. After the deduction of PAYE income tax, John receives net pay of £3,500.

John exercises a share option on 30 April 2014 and realises a gain of £10,000. The option is over shares in X plc (John’s employer), which are listed on the Official List of the UKLA and admitted to trading on the London Stock Exchange. X plc’s shares are therefore ‘readily convertible assets’ and X plc should have accounted for PAYE income tax of £4,000 on the amount of the option gain realised by John. However, because of an administrative error. X plc did not account to HMRC for the PAYE due, nor did it recover the amount from John.

X plc becomes aware of the fact that it failed to account for PAYE income tax on the option gain in August 2016 and requests payment of the PAYE income tax from John. John makes full payment to X plc in September 2016. Assuming that the conditions in s.222(1)(a) to (c) are satisfied, HMRC imposes a section 222 charge on John for failing to make good the due amount to X plc by 6 July 2015. The amount of the tax due amount for the purposes of s.222 is calculated as follows:

Step Action Amount
Step 1 Calculate PAYE income tax on the notional payment £4,000
Step 2 Calculate amount of net pay in the same pay period (tax month) in which notional payment is made (this is the amount which X plc could have deducted but did not deduct - see section 710(4) ITEPA) £3,500
Step 3 Due amount (as defined in section 222(1)(b)) equals Step 1 minus Step 2 £500