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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: basis of assessment for general earnings: the time when earnings are received: payments on account of earnings: general: director's drawings

Rule 1, Sections 18(1) and 686(1) ITEPA 2003

GeneralEarnings are treated as received when a payment is made on account of earnings (see


A payment on account of earnings is not the same thing as a loan.

A payment on account of earnings is a payment in respect of which the employer has no right of recovery. There is a payment on account of earnings when the employer agrees to pay the employee money the employee has earned but which is not yet due for payment. For example, where an employee is entitled to be paid a salary at the end of each month, he or she will have earned half a month’s salary halfway through the month, but it will not be due for payment until the end of it. One month, the employer may agree to pay something on account halfway through the month that is not repayable. This is a payment on account of earnings.

If an employer and employee make an agreement under which the employer lends the employee money and the employee agrees to repay it at a future date or dates, the amount in question is a loan, not a payment on account of earnings. For example the Civil Service removal scheme may allow a transferred member of staff to draw an “advance of salary”. Here the proper construction of the arrangement is that the employee is getting a loan that is repaid by instalments out of future salary payments. PAYE is applied when the salary is paid. It does not apply when the advance is made.

The terms used to describe a payment do not decide its treatment. You have to look at the substance of the matter. Something described as an advance may be a loan or a payment on account.

In Williams v Todd (60TC727) an Inspector of Taxes received an interest-free advance from his employer to help him purchase a new residence following a compulsory transfer. He claimed it was a payment on account of earnings that should have been taxed under PAYE. Walton J said:
“I do not consider that the advance can be truly called anything other than a loan. It is not a payment on account of [earnings] because it is not a part payment which cannot be recovered: on the contrary it is an express term of the advance that it is repayable on demand. I do not see that the advances fall within the scope of income to be assessed under the PAYE system” (page 736).
(There may be liability to tax on the benefit of an interest-free or cheap loan (see EIM26101onwards).

Directors’ drawingsDirectors very often draw money from the company during the year, which is debited to their loan account and repaid at the end of the year by crediting fees, or a dividend, voted or declared after the end of the year. Until that time, and in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director. The in-year drawings are not payments on account of earnings for the purpose of Sections 18(1) and 686(1).

The way in which directors become entitled to remuneration is explained at EIM42300.