Employment income manual update: grossing-up to pay employees tax-free payments

26 May 2022

Her Majesty's Revenue and Customs (HMRC) has updated its guidance to simplify the concept of tax-free remuneration, also known as gross-up payments. This refers to when an employer wants to make a payment of a fixed amount to an employee and cover the tax and National Insurance liabilities incurred from it.

The method is simple, increase the gross pay until the net pay becomes the amount you want to pay the employee. The HMRC guidance gives an example to illustrate, in which if you want to pay the employee £500, but on the payroll 20% is being lost to tax deductions, you would have to input £625 gross on the payslip to reach your target of £500. The calculation to reach the gross amount can be complicated as there may be multiple deductions that need to be made on the payment. Options for how to calculate are varied. Some payroll professionals have payroll software which has the functionality to do the gross-up calculation, some calculate manually, whilst others use Microsoft Excel and functions like goal-seek. 

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