PAYE72025 | 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 or C prefix, this indicates that the employee is liable to tax at the Scottish (S) or Welsh (C) rate(s) and the employer must ensure they calculate the tax due using the correct rate(s). Further information about Scottish income tax is given at PAYE100035 and information on Welsh income tax can be found at PAYE100040.

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 payroll software to calculate the tax and NI due, paper products are no longer available from 2017-18.

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. The Employer Further Guide to PAYE and NICs (CWG2) provides more information and 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.