Income tax paid on behalf of employee

Produced by Tolley in association with

Employment Tax

Guidance

Introduction

Employers may wish to make payments of employment income to an employee / director without the employee suffering a tax or NIC cost on that pay. In other words, the employer wants to pay an amount net of tax and NIC. In some instances, often with professional sports persons and performers, the engagement is defined in the contract as net of tax and NIC, so this outcome needs to be achieved.

To achieve this, the employer must gross up the amount of the payment to take account of the tax and NIC.

Tax-free payments to employees

An employer may knowingly choose to make a payment to an employee or director net of tax and NIC. In these instances, the amount should be grossed up to take account of income tax and Class 1 NIC, as the employer is effectively undertaking to meet the tax bill of that employee in relation to that payment. HMRC guidance is at EIM07700.

For example, an accountancy firm wishes to reward an employee for passing

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Paul Tew

Writer and advisor at Paywatch

Paul Tew is a freelance adviser, primarily in the areas of pay, personal taxation and remuneration planning. A frequent contributor to technical journals on pay and benefits issues, having written for the "In Business" section of the Times. Paul continues to supply articles for various recognised professional publications including Pay and Benefits magazine, Taxation magazine and Company's Secretary's Review. Paul also has had several loose leaf and bound books published on a variety of subject matter including PAYE, NIC, Sickness and Maternity Pay. Paul has written and presented training courses as well as headed up payroll and employment help desks and acted as an assessor for recognised Payroll/HR qualifications. Paul previously worked in the healthcare and oil sectors managing Pay and benefit services, so has many years of experience in dealing with PAYE and employment compliance issues across a broad range of industries and organisations.

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