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HMRC internal manual

Employment Income Manual

Particular benefits: PAYE tax not deducted from director's earnings

Section 223 ITEPA 2003Where there is an agreement to make free of tax payments to employees, the employer has to deduct tax from the grossed-up amount of the remuneration (see


It sometimes happens however that the employer simply fails to deduct tax under PAYE from remuneration. If this is deemed to be the employer’s fault, the tax will normally be recovered by way of a determination under Regulation 80 of Statutory Instrument 2003/2682.

The tax collected under Regulation 80 cannot be charged on the employee as earnings from the employment under Section 62 ITEPA 2003 as the employer is not discharging a debt of the employee (see EIM00580). This is because the obligation to account for PAYE tax falls on the employer. Equally it is not easy to show that in failing to deduct tax an employer has “provided any benefit” on which directors or employees could be assessed under Part 3 Chapter 10 ITEPA 2003.

In practice the failure to deduct tax from remuneration nearly always occurs in respect of certain directors. So special legislation was introduced to treat the amount of any tax paid by someone other than the director as a benefit chargeable on the director.

For details of this special charge see:

EIM21791 – to which directors do the special rules apply and when does a charge arise?

EIM21792 - the amount of the charge under the special rules and the year for which it is chargeable.

See EIM11800 onwards where the failure to deduct tax is in respect of a readily convertible asset.