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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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PAYE operation: payments for PAYE purposes: free of tax payments

A free of tax (FOT) payment is one where the employer rather than the employee bears any tax due, and so there are additional PAYE duties involved.

Where the employee has a tax code with an S prefix, this indicates that the employee is liable to tax at the Scottish rate(s) and the employer must ensure they calculate the tax due using the correct rate(s). Further information about the Scottish rate of Income Tax is given at PAYE100035.

By making payments free of tax an employer may find that wages costs increase because they will include

  • The amount of the free of tax payment
  • The tax due on the true gross pay relating to that payment
  • The employer’s share of the National Insurance contributions (NICs) due on the true gross payment

And may include

  • A free of National Insurance element

You should advise the employer to use

  • The current version of Leaflet FOT1 (it is reprinted every year)
  • Tax Tables G, Free of Tax Tables (includes pages with the Scottish Income Tax rate(s) to be used when an employee has a tax code with prefix S)
  • A special Deductions Working Sheet, form P11 (FOT)

An employer may, exceptionally, agree to make only part of the payment to an employee free of tax, for example, travelling expenses from home to place of work. If so, paragraph 26 of the Employer Further Guide to PAYE and NICs (booklet CWG2) explains how this may be done using a percentage method.

If an employer notifies HMRC that such an arrangement exists, Employer sections must follow the detailed advice in ‘Free of tax system’ at PAYE20035.