Notional Pay

Notional pay is an accounting term for amounts that are run through payroll for tax and NI purposes only - the employee never receives the corresponding cash. Common examples include the cash equivalent of a payrolled benefit in kind (a company car or medical insurance), the income-tax element of a vested share award where the employer has agreed to pay the tax for the employee, and certain expense reimbursements that fail the wholly-and-exclusively test.

On the payslip notional pay typically appears twice: once as a positive 'addition to pay' that lifts gross taxable pay, and once as a negative 'notional pay deduction' that strips the same amount back out before net pay is calculated. The result is that PAYE income tax and Class 1 NIC are levied on the wider figure, but take-home pay reflects only the actual cash earnings.

Worked example: Maya earns £4,000 cash per month and has a payrolled company car with a monthly cash equivalent of £500. Her payslip shows £4,500 of taxable gross pay (£4,000 + £500 notional), the PAYE engine calculates tax on the full £4,500, and a £500 'notional car benefit deduction' brings cash gross back to £4,000. Tax and NI rise as if she had had a £4,500 salary; her bank credit reflects only the £4,000 cash. From April 2026, payrolling benefits becomes mandatory for most employers, so notional pay lines will appear on far more UK payslips.