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HMRC internal manual

Employment Income Manual

Particular benefits: PAYE tax not deducted from director's earnings: the amount chargeable and when chargeable

Section 223 ITEPA 2003

Where there has been a failure to deduct tax from remuneration of certain directors (see EIM21791) the amount chargeable under the special rules in Section 223 ITEPA 2003 is:

  • the amount of tax paid to the Inland Revenue by the person who failed to deduct it from the director’s earnings less
  • any amount made good to that person by the director (see EIM21120 to EIM21122).

See the example below.

Year in which benefit chargeable

Liability on the director arises for the tax year in which the person who failed to deduct the PAYE tax accounts for it to the Inland Revenue (Section 223(4)). But there are two exceptions to this rule:

  • Firstly, if by the time the person who failed to deduct PAYE tax accounts for it to the Inland Revenue the director’s employment has ceased, the charge is to be made for the year in which the employment ended (Section 223(5))
  • Secondly, no charge for any year is to be made if the director had died before that person accounts for the tax to the Inland Revenue (Section 223(6)(a)).


In 2001/2002 a company pays £10,000 remuneration to a director with a material interest in it without deducting tax under PAYE (see EIM21791).

In 2003/2004 the company pays under a Regulation 80 determination the £2,500 tax which should have been deducted.

The director is then chargeable on £2,500 for 2003/2004 (see EIM21795) less any amount he reimburses the company (see EIM21120 to EIM21122).

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