Section 222: PAYE not recovered from a director

When a company is treated as making a notional payment to a director, such as an award of readily convertible shares, it must account to HMRC for PAYE even though there was no cash to deduct it from. If the director does not make good that tax to the company within 90 days after the end of the tax year, section 222 of the Income Tax (Earnings and Pensions) Act 2003 treats the unrecovered tax as further earnings of the director, so the director pays tax on the tax. Paying it back late does not cancel the charge.

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What does section 222 do?

Section 222(1) applies when three conditions are met:

the employer is treated by sections 687, 687A, 689, 689A or 693 to 700 ITEPA as having made a payment of income to the employee, called the notional payment;
the employer is required by section 710(4) to account to HMRC for an amount of income tax on it, called the due amount; and
the employee does not make good the due amount to the employer before the end of 90 days after the end of the tax year in which the relevant date falls.

Section 222(2) then treats the due amount as earnings from the employment for the tax year in which the relevant date falls. The rule applies to any employee, but it bites most often on directors of owner managed companies, who are more likely to receive shares or other non cash rewards and to control whether the company chases the tax.

EIM11952 explains the logic. An employee who receives a notional payment gets credit for the PAYE the employer pays over, yet suffers no deduction, so is better off than someone paid a cash bonus net of tax. Section 222 removes that advantage.

What is a notional payment?

EIM11950 explains that section 710 defines notional payments as payments treated as made under:

section 687, payments by an intermediary of the employer;
section 687A, employment income under Part 7A (disguised remuneration);
section 689, where the employee works for a UK person but is employed by a non UK employer;
section 689A, continental shelf workers; and
sections 693 to 700, payments in special forms such as readily convertible assets, vouchers, credit tokens and employment related securities.

Under section 710(1) the employer must first deduct the tax from any actual pay in the same income tax period. Only the balance it cannot deduct, which it must still pay under section 710(4), is the due amount. HMRC’s example at EIM11972 works out the due amount as the tax on the notional payment minus the net pay available in the same period, whether or not the employer actually made the deduction.

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How long does the director have to repay?

For notional payments made after 5 April 2014, the deadline is 90 days after the end of the tax year in which the relevant date falls (EIM11956). For earlier payments it was 90 days after the relevant date. The relevant date is normally the date of the notional payment; section 222(4) moves it to the date an Act is passed where legislation deems a payment to have been made before that date.

Because the tax year ends on 5 April, the deadline is 4 July following that year end, whatever date in the year the award was made. HMRC’s example at ERSM170400 gives an event on 28 February with a make good deadline of 4 July.

What counts as making good?

The law does not define “make good”. EIM11964 says the obvious method is for the employee to pay the employer cash, cheque or bank transfer equal to the due amount, but something else of value can count if it is quantifiable and worth at least the due amount. Two points cause most disputes.

Partial repayment

EIM11962 is clear that there is no allowance for an amount partly made good. If the director repays less than the due amount within the time allowed, the whole due amount is still treated as earnings.

Indemnities

Many share plans make participants indemnify the employer for tax. EIM11966 and EIM11968 accept that a genuine, habitually enforced indemnity giving the employer a contractual right to recover the full due amount normally counts as making good, even if the employer later fails to collect. EIM11970 says an indemnity in an avoidance scheme, contingent on the scheme failing, does not, and nor does one the employer routinely ignores. A director who sits on both sides of the arrangement should expect HMRC to look closely at whether the company really enforces it.

What if the company never ran PAYE on the award?

The charge still arises. EIM11954 says the amount the employer must account for under section 710(4) is the same whether or not PAYE was operated correctly, so if the director does not make good within the time allowed, section 222 applies. ERSM170400 and EIM11956 add that making good after the deadline leaves the charge in place.

In Chilcott v HMRC the Court of Appeal applied the section strictly to an employee who repaid long after the deadline, while accepting its effect could look penal. In Benedict Manning v HMRC the tribunal found for the employee on the scheme rules and stressed that the facts must be examined carefully. EIM11974 tells officers that if the facts can reasonably be read so that a condition is not met, there is no charge.

How is the charge reported, and is National Insurance due?

EIM11956 says the employer must report the amount on form P11D for the tax year in which the relevant date falls. HMRC’s 2026 Class 1A guide (CWG5) lists “Income Tax paid on notional payments not borne by employee within 90 days of the end of the tax year” as liable to Class 1 National Insurance, included in gross pay, not Class 1A, and entered in section B of form P11D. See benefits in kind and form P11D.

How is it different from section 223?

Section 223 is a separate director only charge where a company pays a director actual cash earnings, fails to deduct the PAYE, and then pays the tax to HMRC itself. The tax paid becomes earnings of the director for the year it is accounted for. Unlike section 222, section 223(6)(c) reduces the charge by whatever the director makes good, with no 90 day deadline. Section 223(7) excludes directors with no material interest who work full time or whose company is non profit making or charitable. Where a company has simply failed to deduct and pay PAYE, EIM21790 says HMRC will normally recover it from the company by a regulation 80 determination on the company, and regulation 81 lets HMRC direct that tax on a notional payment left unpaid after a final determination is recovered from the employee.

How does it work in practice?

Illustration only. On 15 January 2027 a company gives its director listed shares worth £20,000. They are readily convertible assets, so PAYE applies. Assume the PAYE due on the award is £8,000 and the director’s net salary for that tax month is £1,000.

Step	Amount
PAYE due on the notional payment	£8,000
Deductible from net pay in the same period	£1,000
Due amount the company pays from its own funds	£7,000
Deadline to make good	4 July 2027

If the director repays £7,000 by 4 July 2027, there is no further charge. If not, £7,000 is added to the director’s earnings for 2026 to 2027 and taxed again at the director’s marginal rate. Repaying in August 2027 does not help.

What mistakes do directors make?

Leaving the PAYE shortfall on the director’s loan account without a clear, enforceable obligation to repay by the deadline.
Repaying a round sum that falls short of the due amount, which does not reduce the charge.
Assuming that because the company paid HMRC, the matter is closed.
Correcting the PAYE failure years later and finding the 90 day window has long gone.
Forgetting the Class 1 position and the P11D entry.

For the share rules behind most of these cases, see giving shares to employees and employment related securities basics.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.