Guide to notional payments

Notional payments are not something many people encounter often, this guide explains how they work.

What is a notional payment? 

When we calculate payroll the gross pay items are added together and this amount is used to calculate tax as well as NI. Depending on the Pay Code, they may be subject to Tax and NI, Tax Only, NI Only, or not subject to either..

Taxable gross - Total of the pay elements which need to be taken into account for the calculation of Tax.

NI'able gross - Total of the pay elements which need to be taken into account for the calculation of national insurance A system of contributions paid by workers and employers in the UK, which funds various state benefits, such as the State Pension and Jobseeker's Allowance..

Pay elements may be subject to Tax, NI, or both. It may not be subject to either. It depends on the pay element.

A notional payment allows you to calculate and deduct the amount of Tax and NI on a payment, without actually giving the payment to the employee. The employee won’t receive any more money, they will only pay the extra Tax, NI, or both.

Lets use an easy example, company cars.

We create notional payments automatically if needed for company cars and other benefits in kind.

The employer provides the employee a car, therefore the employee doesn’t have to pay out of their own pocket. The car has an amount assassinated to it, this is the cash equivalent value and its treated as earnings.

HMRC His Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, the administration of other regulatory regimes including the national minimum wage and the issuance of national insurance numbers. may require Tax, NI, or both be paid on the amount the employee benefits. As the car is a physical item with a cash equivalent value, the amount is paid to the employee but they dont receive any money therefore the same amount is then deducted from the employee..

Not all benefits are subject to tax and / or NI. Find out more.

To make a notional payment we have to pay the amount gross, subject to Tax, NI, or both as appropriate then deduct the same amount net.

Set up a notional payment

Notional Payments are configured as part of a new Pay Code.

A notional payment may be used as part of a benefit in kind. If required, this is automatic when adding a benefit to the employee. Find out more

Assigning the notional payment to the employee

Once configured, its added to the employee record in Additions & Deductions.

The pay line will show that the pay code added is a notional amount by showing an inactive Is Notional toggle.

Example...

Employee has a company car with a cash equivalent of £1000 a month.

  • The employee is paid £2000 a month.

  • Gross taxable (without notional payment): £2000.

  • Gross NI'able (without notional payment): £2000.

We only need to pay NI on the company car.

Employee is paid £2000 + £1000 (subject to NI only)

  • Gross taxable (without notional payment): £2000.

  • Gross NI'able (without notional payment): £3000.

The pay is calculated as normal.

The £1000 is then deducted from the net pay.

Good to know...