EIM11950 - PAYE: special types of payment: employee fails to make good PAYE: employer's requirement: notional payments
Section 710 ITEPA 2003
A notional payment is defined in Section 710 ITEPA 2003 as a payment treated as made by virtue of any of:
- Section 687 ITEPA 2003 - payment by an intermediary of an employer (EIM11810), or
- Section 687A ITEPA 2003 - payment of employment income under part 7A (EIM11813)
- Section 689 ITEPA 2003 - payment by non UK employer (EIM11820), or
- Section 689A ITEPA – oil and gas workers on the continental shelf
- Sections 693 to 700 ITEPA 2003 - payment in special types of income (EIM11803)
except any payments whose amount is given by Section 687(3)(a) or Section 689(3)(a) or Section 689A(4)(a).
Where an employer makes a notional payment of PAYE income, the employer is required to operate PAYE. As a notional payment does not involve the transfer of money from the employer to the employee, the employer is unable to deduct tax in the usual manner as required by the PAYE regulations. Nevertheless, the employer is required to notify HMRC of the amount of tax due under PAYE and to pay over that amount to HMRC.
Section 710 ITEPA 2003 says how the employer should operate PAYE in respect of a notional payment.
Deducting and accounting for tax
The employer must calculate the amount of tax that should be accounted for in respect of the notional payment. Then Section 710(1) ITEPA 2003 says that the employer should deduct that tax in the first instance from any actual payments made in the same income tax period subsequent to the date of the event giving rise to the notional payment. The income tax period will usually be the month ended on the 5th but (exceptionally) may be the quarter ended on the 5th.
If the amount deducted in accordance with Section 710(1) is insufficient to enable the employer to pay the full amount of tax that should be accounted for, then Section 710(4) says that the employer is required to account for the balance. That is, the employer must disclose and pay to the collector the amount due.
Employer does not operate PAYE correctly
If the employer fails to operate PAYE correctly, then you may need to consider taking action to address that PAYE failure.