When must SIP trustees operate PAYE on capital receipts under section 514?

SIP trustees must operate PAYE on capital receipts that count as employment income in two situations: when HMRC directs that it is impracticable for the employer company to make the PAYE deduction, or when no qualifying employer company exists, for example because the employer has been dissolved following a restructuring.

How do trustees calculate the PAYE deduction on a capital receipt under section 514?

Trustees treat the participant as a former employee and calculate the deduction based on the 'taxable equivalent,' which is the amount counting as employment income. In practice, they deduct income tax at the basic rate from the capital receipt before paying the net amount to the participant and account for the tax to HMRC.

What is the 'taxable equivalent' referred to in section 514?

The taxable equivalent is simply the amount of the capital receipt that counts as the participant's employment income under the Share Incentive Plan code. It forms the basis on which the trustees calculate the PAYE deduction they must make when paying the capital receipt over to the participant.

Does section 514 override the non-UK employer PAYE rules under section 689?

Yes. Where section 514 applies, the separate provisions under section 689 dealing with employees of non-UK employers do not come into play. The trustees' PAYE obligation takes precedence, ensuring a single clear mechanism for collecting the income tax due on the capital receipt from the participant.

Income Tax (Earnings and Pensions) Act 2003 section 514

Capital receipts: PAYE deductions to be made by trustees

Section 514 requires Share Incentive Plan (SIP) trustees to make PAYE deductions from capital receipts paid to participants where the employer company either cannot practically make the deduction or does not exist.

Where SIP trustees receive money constituting a capital receipt that counts as a participant's employment income, and there is either no employer company or HMRC considers it impracticable for the employer to operate PAYE, the trustees must step in to make the PAYE deduction
HMRC may direct that this section applies where they believe it is impracticable for the employer company to make the PAYE deduction itself, or the section applies automatically where no qualifying employer company exists
When paying the capital receipt to the participant, the trustees must deduct PAYE as if the participant were a former employee of the trustees, with the deduction based on the "taxable equivalent" — the amount that counts as employment income
Where this section applies, the separate rules for employees of non-UK employers under section 689 do not apply, so the trustees' PAYE obligation takes priority

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member