UK: Dividends Were Not Employment Income But Were Subject To National Insurance Contributions

Last Updated: 8 July 2009
Article by Nicholas Stretch, Tair Hussain and Isabel Pooley

In the recent case of PA Holdings Ltd and Kully Janjuah v HMRC, an employer argued that payments of dividends as part of an employee bonus scheme could only be taxed as such and so could not be subject to PAYE or NICs as employment income.

The Tax Tribunal (as the Special Commissioners are now known) agreed that the taxing provisions for dividends took precedence over the taxing provisions for employment income. However, there was no overriding provision for NICs and so it was possible for an NIC charge to arise on dividends.

The case will be of great interest to those who have used dividends as part of bonus planning schemes, and are still contesting liability with the Revenue, although, following anti-avoidance legislation introduced since 2003, the scope for using dividends as a tax-efficient way of paying bonuses has considerably diminished.

To view the article in full, please see below:

Full Article

In the recent case of PA Holdings Ltd and Kully Janjuah v HMRC, an employer argued that payments of dividends as part of an employee bonus scheme could only be taxed as such and so could not be subject to PAYE or NICs as employment income.

The Tax Tribunal (as the Special Commissioners are now known) agreed that the taxing provisions for dividends took precedence over the taxing provisions for employment income. However, there was no overriding provision for NICs and so it was possible for an NIC charge to arise on dividends.

The case will be of great interest to those who have used dividends as part of bonus planning schemes, and are still contesting liability with the Revenue, although, following anti-avoidance legislation introduced since 2003, the scope for using dividends as a tax-efficient way of paying bonuses has considerably diminished.


The case concerned a tax avoidance scheme implemented by PA Holdings (the "Company") to replace the cash bonus arrangements the Company previously used to reward employees. Under the scheme, the Company established an offshore employee benefit trust (the "EBT") and made a payment of approximately £24.6 million to the EBT which represented the amount which would have been paid to employees as bonuses.

This money was then invested in shares in a special Jersey company, which were awarded to employees. The shares then paid a dividend to employees of £24.6 million.

At the relevant time a higher rate taxpayer in the normal course of events only had to pay 25% tax on dividends and no NICs, compared with 40% tax and NICs (both employer's and employee's (in some years)). The total annual tax and NICs savings were approximately £6.7 million.

Tax treatment of the dividend payments

The Revenue instead argued that the dividends should be taxed as employment income and so subject to PAYE and NICs on the basis that the arrangements were orchestrated between the parties and that the employees received the payments not because of their holding of shares but because of their employment with the Company. The payments were clearly linked to their employment. The Company was heavily involved in the arrangements: the acquisition of the shares in a special Jersey Company was funded by the Company, continued employment with the Company was a condition of receiving both the shares and the dividends and the Company was heavily involved in "selling" the arrangements to employees. The Company informed employees of the new arrangements, stating that they were "exciting proposed changes to the delivery of current bonus awards". Further the EBT's resolutions stated that arrangements were intended to motivate and encourage employees in the performance of their duties.

The Company maintained that whatever the background, the fact was that the payments were received as dividends in respect of the shares they held and should only be taxed as dividends. If reinforcement was needed, specific legislation restricted dividends from being taxed as anything other than dividends (Section 20(2) Income and Corporation Taxes Act 1988 ("Section 20(2)", now s366(3) Income Tax (Trading and Other Income) Act 2005 and s716A Income Tax (Earnings and Pensions) Act 2003).

The Special Commissioners held that:

  • it was possible for the payments to be characterised as both dividends and employment income and on the facts of the case it was appropriate to do so;
  • Section 20(2) was unambiguous in providing that the tax charge on distributions (such as dividends) took precedence over the employment income charge and accordingly the payments could not be taxed as employment income and could not be subject to PAYE; and
  • the payments would, however, be subject to NICs as the payments were earnings and there was no NIC statutory provision or case law equivalent of Section 20(2) in the context of NICs.


The case is a partial victory for the Company as at least the scheme will have saved tax if not NICs. Many companies used this scheme to pay bonuses (it was particularly popular in the City) and (properly implemented) significant savings were offered and achieved. It is notable that Ernst & Young is reported in the case as having charged the Company a £335,000 fee for its intellectual property in this scheme, which gives some idea of what was at stake.

Those still tempted to take advantage of the tax planning opportunities apparently confirmed by the case should, however, be aware anti-avoidance provisions introduced in 2003 and 2004 are likely to curtail the scope for this. In particular:

  • Since 2003, companies have had had a statutory bar on corporation tax deductions for payments to employee trusts unless and until those monies are used to provide employment income. Not receiving tax relief for remuneration now severely reduces the attraction of the scheme (and in any event accounting changes and previous law may have denied a deduction anyway).
  • The success of the scheme was dependent in part on there being no upfront income tax charge when the employees acquired shares, which was possible under the legislation in place at the time even though they paid nothing for their shares.

    Under current legislation where an employee acquires shares for less than market value they can be made subject to an upfront income tax charge on the value of the shares if anti-avoidance activity is in play. Accordingly, in the PA Holdings case, the employees would have been taxed upfront on the value of their shares which would have taken into account the expected dividend and then the dividend itself - potential double taxation!
  • Finally, the Revenue has enacted legislation which purports to remove the automatic taxation of dividends as employment income (although some doubt the effectiveness of this). Specific legislation (if further legislation were needed) now allows an employee to be treated as receiving employment income where he receives a benefit in connection with shares he has acquired by reason of his employment. While in practice the Revenue had said that normal dividends would not be caught, dividends used as a way of avoiding tax on cash bonuses would probably be treated as a benefit.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 06/07/2009.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.