Operation of PAYE
As the employee has received shares rather than actual cash, it can be problematic to operate PAYE on the notional payment, because there may not be enough available real pay from which to make the necessary deductions. The employee may effectively be in a negative pay situation. Nevertheless, the employer must account for the tax and NICs due and pay it over to HM Revenue & Customs.
It is common practice for employers to withhold some of the shares and sell them on behalf of the employee in order to fund these statutory liabilities.
Any PAYE not immediately recovered from the employee must be made good by the employee within 90 days of the end of the tax year, otherwise the unrecovered amount must be shown as further remuneration on form P11D. If the employee subsequently repays the amounts due there is no relief from, in effect, a double charge to tax.
Ben Chaplin is managing director of Croner Taxwise
