PAYE operation: payments for PAYE purposes: non-cash remuneration: operation of PAYE
If an employee is provided with a readily convertible asset, the PAYE income is likely to be the money’s worth of the asset. The money’s worth is
- The amount the employee can obtain for the asset by selling it to turn it into cash
- Any contribution the employee makes towards the cost of the asset
The employer may be able to operate PAYE on the precise amount of the PAYE income. That is the precise amount obtained by the employee. This is because the asset is usually sold at market value shortly after transfer to the employee.
If the asset is not sold shortly after transfer to the employee, the employer should estimate the amount based on the market value on the day it was provided
- For shares listed on a recognised investment exchange or the New York Stock Exchange, PAYE should be operated on the date of the award. This value should be available from published sources
- For unquoted or restricted shares it may be necessary to use a best estimate
Note: The amount (value or best estimate that can reasonably be made) is chargeable to tax at the UK (England, Wales and Northern Ireland) or Scottish tax rates depending on the individual’s residency status.
The Income Tax Residency Status screen on NPS will display ‘Scottish Taxpayer’ for the tax year where the individual is liable to pay tax at the Scottish rate(s) and their tax code will have an S prefix. Further information about the Scottish income tax is given at PAYE100035
If a notional payment of PAYE income is made the employer should
- Operate PAYE, even though money is not transferred and it is not possible to deduct tax in the normal way
- Report the payment in an FPS
- Pay over that amount to DMB
The employer should deduct tax from any actual payments made in the same income tax period that the notional payment was made. Where the actual payment is insufficient, the employer must still account for the balance of tax due.
Where there is no actual payment to make a PAYE tax deduction from, the employee must pay the tax to the employer within 90 days of the date of the notional payment
- If the employee pays the full amount, there are no further tax consequences
- If the employee does not pay the full amount within 90 days, they have effectively received tax-free remuneration
Any shortfall is treated as earnings from the employment in the year in which the event giving rise to the notional payment occurred. The amount chargeable to tax must be included on the form P9D or P11D for that employee.
Note: 15-16 is the last tax year the P9D can be used.
Technical advice is available in the Employment Income (EIM) Manual at EIM11804.
Employers should take care when completing their Final FPS or forms P45, to include
- Any notional payments
- Include the tax deducted, irrespective of whether or not the employee has made good the full amount to the employer
Any cases where there is doubt or difficulty in applying the PAYE rules to notional payments should be submitted to Personal Tax Customer, Product & Process, PAYE Technical, Shipley(This content has been withheld because of exemptions in the Freedom of Information Act 2000) .