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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: earmarking of deferred remuneration: fall-back charge

Section 554H(7) to (11) ITEPA 2003

Case 1: PAYE applies to the earmarked deferred remuneration
Case 2: the award is revoked
The fall-back charge
The notional PAYE amount
Relevant income
Award revoked outside the deferred remuneration terms

Section 554H is not necessarily a permanent exclusion. There is a fall-back charge.

There are two cases in which the fall-back charge does not apply.

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Case 1: PAYE applies to the earmarked deferred remuneration

In this case (Section 554H(10)), some or all of the earmarked deferred remuneration is provided to A:

  • before the end of the vesting date, and
  • in a way which attracts PAYE.

To the extent that it is provided in this way, the fall-back charge does not apply.

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Case 2: the award is revoked

In this case (Section 554H(11)), the award of some or all of the earmarked deferred remuneration is revoked:

  • before the end of the vesting date, and
  • in accordance with the deferred remuneration terms.

To the extent that it is thus revoked, the fall-back charge does not apply (because the arrangement has been unwound in accordance with the legislation).

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The fall-back charge

Otherwise, Section 554H(8) deems a relevant step to be taken with the following features.

  • The relevant step is within Section 554B.
  • It is taken at the end of the vesting date.
  • The subject of the relevant step is:

    • a sum of money of the ‘notional PAYE amount’, and
    • a just and reasonable proportion of any ‘relevant income’.
  • The relevant step gives rise to Part 7A income.

The relevant step gives rise to Part 7A income subject to the exclusion in Section 554A(4) (see EIM45095) and any relevant reliefs.

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The notional PAYE amount

Under Section 554H(9), you take three steps to calculate the notional PAYE amount.

Step 1. Exclude any of the earmarked deferred remuneration which is within case 1 above.

Step 2. Exclude any of the earmarked deferred remuneration which is within case 2 above.

Step 3. Assume that the remaining deferred earmarked remuneration is provided to A at the end of the vesting date in a way which attracts PAYE. Then the amount which would have attracted PAYE is the notional PAYE amount.

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Relevant income

Under Section 554H(12), any income which passes all of the following three tests is ‘relevant income’ for the purposes of this fall-back charge.

  • Before the end of the vesting date, the income arises directly or indirectly from a sum of money or asset held by or on behalf of P representing any of the earmarked remuneration.
  • Before the end of the vesting date, the income is the subject of a relevant step within Section554B taken by P which would give rise to Part 7A income but for Section 554Q (income arising from earmarked sum or asset see EIM45245).
  • At the end of the vesting date, the income continues to be held by or on behalf of P on a Section 554B basis (see EIM45095).

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Award revoked outside the deferred remuneration terms

Suppose the award is revoked outside the deferred remuneration terms. Then case 2 will not apply, and the fall-back charge will.

But relief may nevertheless be available under Section 554Z14 if (to summarise) P ceases to hold for A’s benefit the sum of money or asset which represented the earmarked remuneration. See EIM45875.