Application of PAYE and PRSI to Benefits

Best Estimate

PAYE and PRSI are to be applied by the employer to the best estimate that can reasonably be made of the amount of the notional pay or taxable benefit that is chargeable to income tax in respect of a benefit provided to an employee.

In many instances, the employer will be aware of the expense incurred in providing benefits and the value of the benefits. In these circumstances, determining the amount chargeable to income tax will generally be relatively straightforward (Please refer to Valuation of Benefits: General). It will not be necessary for the employer to estimate amounts involved. For example, where the employer pays medical insurance or club subscriptions on behalf of an employee the precise amount to which PAYE and PRSI is to be applied will be known.

Sections from Private Use of Company Cars to Other Benefits explain how to arrive at the amount of the taxable benefit (the notional pay) in the case of the following:

In the case of benefits where the expense incurred or value is not immediately evident and which are outside the scope of Sections from Private Use of Company Cars to Other Benefits, the best estimate should be determined by the employer in a common sense fashion having regard to the general rule set out in Valuation of Benefits: General Rule, the facts of the case and the nature of the benefit provided.

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Application of PAYE and PRSI to Notional Pay

The employer’s best estimate of the taxable value of a benefit is to be treated as notional pay in the pay period in which the benefit is provided and must be added to the money wages or salary for that pay period. It is the aggregate of the money wages or salary payment and the notional pay which must be used for the purposes of calculating PAYE and PRSI for that pay period. For example, if in a particular pay period an employee receives money wages or salary of €300 plus a voucher representing notional pay of €150, the pay for that period for PAYE and PRSI purposes is €450.

The employee's PAYE and PRSI liability, in respect of the €450, must be deducted from the money wages or salary for that pay period. In addition, employers’ PRSI is also due on the €450.

Insufficient Money Wages or Salary in Pay Period

Where, due to an insufficiency of money wages or salary in a pay period, all or part of the tax and PRSI due for that period in respect of the aggregate of money wages or salary and the notional pay cannot be deducted, the employer must pay the Collector-General any tax and PRSI which the employer is required, but unable, to deduct.

Example 1

An employee receives money wages of €300 plus a holiday voucher representing notional pay of €1,200 on 7 January 2007. The employee's liability for the pay period is:

     Aggregate payment (€300 + €1,200) =  €1,500.00
        PAYE due 		                   €466.92
        PRSI (employee) due		            €84.92
        Total employee liability	           €551.84

After deducting the employee's PRSI liability of €84.92 from the money wages, only €215.08 is left to meet the tax of €466.92. In the absence of any direct payment by the employee to the employer, this leaves a shortfall of €251.84 or more. Nevertheless, the entire employee liability of €551.84 must, together with the employers' PRSI of €161.25, be paid to the Collector-General by the employer at the time the employer ordinarily remits the PAYE and PRSI deducted from employees for the pay period, i.e. 14 February 2007. [€551.84 must be paid by the employer in respect of the employee liability regardless of whether the amount deducted by the employer is €215.08 or a lesser amount.]

The employer may, of course, arrange with the employee to recoup from subsequent money wages or salary any part of the employee liability paid by the employer to the Collector-General that was not already deducted from money wages or salary (or otherwise recovered from the employee, e.g. by direct payment by the employee to the employer).

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Employee fails to reimburse employer

If the employee fails to make good to the employer the whole or part of a shortfall in PAYE deductions that the employer has paid as described above, the employee is to be treated as receiving a taxable benefit for the following tax year, equal to the PAYE amount not made good. That benefit is to be treated as arising on the 31st March of that following year and should be taxed at the employee's marginal rate and not grossed up. Where the tax is reimbursed by the employee to the employer by that 31st of March, a taxable benefit will not be regarded as arising to the employee.

Example 2

In the example above, (and assuming the employer deducted €215.08), if the employee fails to make good to the employer the full €251.84 before 31 March, 2008, the employee is to be treated as receiving a taxable benefit of that amount on that date.

If the employer had recouped, €150 for example by that date, then the balance of €101.84 would be treated as a taxable benefit on 31 March 2008. (If the individual concerned is no longer employed by the employer at the 31st of March, any unrecouped balance should, instead, be returned as a benefit on form P11D.)

Spreading the liability throughout the tax year

In general, any PAYE and PRSI due in respect of a taxable benefit must be paid to the Collector-General for the month in which the pay period in which the benefit is treated as being provided ends (please see Application of PAYE and PRSI to Notional Pay). Effectively, this means the month in which the next money wages or salary are paid. [As mentioned above, where due to the insufficiency of these money wages or salary, the employer pays the shortfall in the tax or PRSI collected, the employer may agree an arrangement with the employee to recoup that shortfall by deduction from subsequent payment of wages or salary to the employee. Payment of tax and PRSI by employers with subsequent recoupment from employees will not be regarded as involving preferential loans.]

However, in the case of benefits consisting of the private use of a company car or van, a preferential loan, or the use of accommodation or assets which belong to the employer, the annual taxable value of the benefit for a tax year – the notional pay - can be apportioned over the relevant pay periods for which it is available in that year and subjected to PAYE and PRSI on that basis.

Example 3

A monthly-paid employee with an annual taxable benefit of €4,800 in respect of the free use of private accommodation can be treated as receiving a monthly notional payment of €400 in respect of that taxable benefit.

Where an employer pays a pecuniary liability of an employee in instalments throughout the tax year e.g. the payment of an annual medical insurance premium in quarterly instalments, the instalments are chargeable as they are paid by the employer. However, where the liability is paid in one annual payment then the full amount is to be taken into account for PAYE and PRSI purposes at the time of payment and spreading does not apply.

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Employer arrangements to discharge employees' liabilities to tax and PRSI

As under the previous system in force to 31 December 2003, an employer may make an arrangement with Revenue to pay on behalf of their employees the tax and PRSI due in respect of certain taxable benefits provided for the employees.

Such arrangements do not displace the general requirement that employers must operate PAYE and PRSI on an employee's emoluments including taxable benefits. However, the Revenue Commissioners are prepared to agree arrangements with employers for the payment of employee's liabilities in respect of minor benefits payable on an irregular basis.

Arrangements will not be agreed in respect of:

  • cash payments of wages, salaries or bonuses
  • large benefits provided to individual employees such as company cars, free accommodation or preferential loans
  • round sum allowances.

The PAYE and PRSI due under such arrangements must be determined by reference to the 'grossed-up' value of the benefit, that is, the notional amount which, if PAYE and PRSI were deducted from it, would leave each employee with a net amount which would be equal to the benefit or notional pay represented by the benefit if there were no special arrangements for payment of the tax and PRSI due. The grossed-up amount will be determined in all cases by reference to each individual employee's marginal rate of tax and, where relevant, PRSI rate. The amount to be paid by the employer is the difference between the grossed-up amount and the net amount of the taxable benefit or notional pay. The employer must account for employers' PRSI on the grossed-up amount.

Example 4

An employer gives an employee a taxable benefit valued €110. The employee is liable to income tax at 41% and PRSI at 6% on the benefit. If the employer wishes to pay the tax and the PRSI, the €110 will represent 53%, i.e. 100% -(41% + 6%) of the grossed-up value. The grossed up amount is therefore €110 x 100/53 = €207.55

The amount to be paid by the employer is:

	Income tax    €207.55 @ 41%         =   €85.10
 Employee PRSI €207.55 @ 6%          =   €12.46
 Employer PRSI €207.55 @ 10.75%      =   €22.32

When the employee's liability of €97.56 (€85.10 + €12.46) is deducted from the grossed-up payment the balance is equal to the €110 value of the benefit.

Where a benefit is chargeable at different rates, the calculations may be complicated and would be best done using a computerised payroll system that is able to gross up 'tax-free' amounts. Local Tax Offices will assist in the matter.

Taxable benefits in respect of which PAYE and PRSI have been paid by the employer under the arrangements referred to at Employer arrangements to discharge employees' liabilities to tax and PRSI - paragraphs 1 - 4 above will not count as income of the employees concerned for either tax or PRSI purposes nor will the employees be entitled to a credit for the tax or contribution record for PRSI paid under such arrangements.

However, where the employer agrees to provide an employee with regular or major benefits free of tax and PRSI (e.g. where an employer agrees to discharge the employee's PAYE and PRSI liability on a taxable benefit as part of his or her remuneration package), PAYE and PRSI must be determined by reference to the grossed-up value of the taxable benefit having regard to the employee's marginal rate of tax and, where relevant, PRSI rate and Employer arrangements to discharge employees' liabilities to tax and PRSI - paragraph 6 will not apply. The grossed up notional pay, tax and PRSI paid must be included in the payroll of the employee in the year the benefit was provided.

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