Payrolling benefits for irregularly paid employees

The usual method of payrolling a benefit is to divide its annual taxable value by the employee’s expected number of pay periods.

That works for an employee paid weekly or monthly. It does not work as neatly where there is no regular payday and no certainty about when the employee will next be paid.

HMRC’s interim guidance uses a daily calculation for these cases.

What is an irregular pay period?

HMRC describes irregular pay periods as payments of employment income that have no set pattern.

This may apply where an employee:

• works only when required;
• is paid after completing particular assignments;
• receives payments at unpredictable intervals; or
• continues to receive a benefit during periods in which no cash payment is made.

An employee whose hours vary but who is still paid every Friday may have variable earnings without having irregular pay periods. The issue here is the absence of a predictable payday, not simply a variation in hours or pay.

The daily calculation

If the employer does not know how many times the employee will be paid, it cannot reliably divide the benefit by a fixed number of pay periods.

HMRC’s proposed formula is:

Annual cash equivalent ÷ number of days in the tax year × days in the relevant period

The divisor will normally be 365. A 366-day tax year may require a different calculation, although the final operational guidance should be checked.

The first payment

Nadia is employed on an irregular basis and does not have a fixed payday.

She is provided with gym membership throughout the tax year. Its annual cash equivalent is £1,750.

Nadia receives her first payment of employment income on 20 May. This is the 45th day of the tax year, counting from 6 April.

The taxable value included in that payroll is:

£1,750 ÷ 365 × 45 = £215.75

The £215.75 is added to Nadia’s taxable pay for the purpose of calculating PAYE. It is not additional cash paid to her.

If Nadia is liable to tax at 20%, the benefit would, considered separately, produce approximately £43.15 of Income Tax:

£215.75 × 20% = £43.15

The actual deduction will depend on her tax code, cumulative earnings and other taxable pay.

The first payroll has now included the benefit provided from 6 April to 20 May.

The next payment

Suppose Nadia is next paid on 7 July.

The employer must not calculate the benefit again from 6 April because that would include the first 45 days twice.

The second calculation covers the 48 days from 21 May to 7 July:

£1,750 ÷ 365 × 48 = £230.13

The position after the second payment is:

Payment dateDays includedTaxable benefit20 May45£215.757 July48£230.13Total93£445.88

The day after the previous calculation ended becomes the first day of the next calculation. Payroll will therefore need to retain the last date to which the benefit was reported.

The calculation is not based on days worked

Nadia may have performed no work between 21 May and 7 July. If the gym membership remained available, the benefit continued to be provided.

The calculation does not ordinarily count:

• days worked;
• shifts completed;
• hours paid; or
• days covered by the payment.

It counts the calendar days for which the benefit was available.

Payroll therefore needs both the payment date and accurate details of the period during which the benefit was provided.

What if the benefit starts after 6 April?

The first calculation should only include the period during which the benefit was actually provided.

Suppose Nadia’s membership began on 1 May and she was first paid on 20 May. The benefit was available for 20 days:

£1,750 ÷ 365 × 20 = £95.89

The period from 6 to 30 April should not be included.

The same principle applies where the benefit ends before the next payday. The calculation should stop when the benefit ceases to be available.

Payroll must therefore be told both when a benefit begins and when it ends.

What if the annual value changes?

A benefit may change in cost during the year, or an initial estimate may later prove inaccurate.

HMRC’s general approach is to revise the expected annual cash equivalent, take account of the amount already payrolled and correct the position during the remaining part of the year.

For an irregularly paid employee, the employer does not know when those remaining payments will take place. Records should therefore show:

• the original estimated value;
• the period for which it was used;
• the revised value;
• the date on which the circumstances changed;
• the amount already reported; and
• any adjustment included in a later payroll.

Final guidance is still needed on the detailed treatment of revised estimates and retrospective changes under the daily method.

What if there is no pay?

A benefit can continue even when the employee receives no cash payment. If there is no pay, there may be nothing from which to deduct the tax.

When the employee is eventually paid, the calculation may include a long period of benefit in one payroll. The tax deduction could therefore be much larger than it would be for an employee paid regularly.

PAYE remains subject to the overriding limit. No more than 50% of the employee’s relevant pay can normally be deducted as Income Tax.

If the full tax cannot be collected:

• tax should be deducted up to the permitted limit;
• the balance may be carried into a later payroll where possible; and
• tax still outstanding after the end of the year may be collected through P800, Simple Assessment or Self Assessment.

The benefit must still be reported even if the full tax cannot be deducted from the employee’s pay.

What if there is no further payment?

HMRC’s example explains what to do when the employee is paid again. It does not yet provide complete instructions for an employee who receives no further payment before the tax year ends.

HMRC intends to introduce an end-of-year benefits update process for amounts that cannot be dealt with during the year. Under the interim proposals, outstanding benefit information would need to be reported by 22 July following the end of the tax year.

Further guidance is needed where:

• a benefit continues after the employee’s final payment;
• there are no earnings from which tax can be deducted;
• the employer does not know whether another payment will be made;
• the employee leaves but retains the benefit for a period; or
• the final benefit value becomes known only after the year ends.

These circumstances are foreseeable where employees are paid irregularly. The processes will need to deal with them without assuming that another payday will occur.

The records payroll will need

For each irregularly paid employee, the employer is likely to need a record of:

• the benefit start date;
• the benefit end date, if applicable;
• the expected annual cash equivalent;
• whether the value is actual or estimated;
• the last date to which the benefit has been payrolled;
• the next period’s starting date;
• the number of days included in each calculation;
• the amount reported on each FPS;
• any change in the benefit or its value; and
• any tax that could not be collected.

The “last date payrolled” is particularly important. Without it, the next calculation has no reliable starting point.

The benefit record should also be reconciled with payroll. Otherwise, payroll may continue reporting a benefit after it has ended or overlook a benefit that remained available during a long gap between payments.

Checking the cumulative position

A cumulative check can help identify missing or duplicated days.

At any point in the year, compare:

Annual cash equivalent ÷ days in the tax year × total days the benefit has been provided

with:

Total taxable benefit reported through payroll to date

Small differences may arise from rounding. A larger difference may indicate that:

• some days have been omitted;
• the same days have been counted twice;
• the wrong annual value has been used; or
• a change in the benefit has not been reflected.

This provides a useful independent check without requiring every previous payroll calculation to be reconstructed.

Why HMRC’s gym membership example is not an April 2027 example

HMRC uses gym membership to demonstrate the irregular-pay calculation. Following the revised phased introduction announced in June 2026, gym membership is not among the benefits entering mandatory payrolling from April 2027.

The first phase covers:

• company cars;
• car fuel;
• vans;
• van fuel; and
• employer-provided medical benefits.

Most other taxable benefits are expected to follow from April 2028. Loans and living accommodation are expected to remain voluntary.

The gym membership example explains the proposed calculation method, but it should not be read as confirmation that gym membership will be subject to mandatory payrolling from April 2027.

What should be taken from the example?

The daily calculation deals with the unknown number of paydays:

Calculate the benefit by reference to elapsed days rather than an assumed number of pay periods.

To apply it correctly, the employer must also know:

• when the benefit began;
• whether it remained available between payments;
• the last day already included in payroll;
• whether its value or availability changed;
• whether another payment is likely; and
• whether there is enough pay to collect the tax.

The calculation itself is not difficult. The main requirement is a continuous record of the benefit across an irregular series of payments.

Payroll software can perform the calculation once it has the dates and values. The employer must make sure that those details are complete, accurate and available when the employee is paid.

This article examines HMRC’s interim guidance and uses an adapted example with different names, dates and values. The legislation and operational guidance are not yet final and may change before implementation. HMRC’s original example appears in its payrolling examples for different scenarios, alongside its latest announcement on phased implementation.

About the authorStephen Hendren is a payroll consultant and founder of BeePayWise. He works with employers, accountants and payroll bureaus on payroll compliance, operational controls and the practical implementation of legislative change.