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HMRC internal manual

PAYE Manual

PAYE operation: payments for PAYE purposes: payments to employees in accidents

If an employee is absent from work following an accident, an employer may pay the employee

  • Sick pay


  • An advance of pay


  • A loan

These may be paid on the undertaking that the employee, when awarded compensation for loss of earnings arising from a damages claim, will refund a suitable amount of that compensation to the employer.

However, PAYE should operate in the normal way on any sick pay and advances of pay that are made. The amounts should be reported in the employers FPS each time a payment is made.

If a refund of compensation or damages is made by the employee to the employer, there is no requirement for the employer to make any correction to the payments of sick pay or advances of pay reported in an FPS. This is because both types of payment are PAYE employment income which the employer must account for and deduct tax at the time of payment.

In some cases, employers pay only Statutory Sick Pay (SSP) to the employee for their period of absence, but may agree to provide a loan to the employee because the SSP is insufficient to maintain the employee living standards. If the employee genuinely has to repay the loan to the employer, then the loan is not classed as employment income or earnings.

If however, the loan is written off or the employer decides not to ask for repayment, then the employer should report the loan as earnings.

For guidance regarding NICs, see NIM02385