Tax on income from previous year?

noncom_2

Hi

I'm trying to do my wife's Self Assessment form for her (actually filing it online with the Inland Revenue website tools)

Problem is, for a job she did in the 2009-2010 tax year and earlier, they miscalculated her pay scale and underpaid her for a long period of time. When this finally came to light after much chasing they paid her the deficit in a big lump sum last year (in the tax period) 2010-2011.

The Inland Revenue helpline told me I should just fill this in as another employment in the Tax year in question. But when I do, we end up owing over £2k in tax - I think mainly because the correction payment was originally taxed at the Standard rate, but having it all come in at once pushes her income into the Higher Rate bracket for 2010-2011.

If it had been paid properly in 2009 and earlier, then she wouldn't have had to pay the extra tax (because she would still have been in the lower tax bracket), so it seems very unfair that the employer's mistake is now costing us so much in tax.

Is there a way to assign this payment to an earlier tax year, or another (legal) way of declaring it so that it doesn't attract the additional tax?

I don't really want to involve an accountant if possible; although that's only because of the cost of doing so, not because we have anything to hide!!!

Thanks for any advice anyone can give

Mikeyorks

You need to clarify. 'Payscales' etc sound very much to be PAYE? If the arrears of pay were paid in 10-11 then surely she paid the tax at that point. And would have paid at 40% on the lump sum if that was applicable. Did she earn over £43875 (inc the arrears) during 10-11 as that's the 40% threshold.

Generally tax is due when you are 'entitled' to the income. Most pay settlements create the 'entitlement' date by virtue of the agreement - ie the tax is due when the income is paid. That accounts for the majority of cases. In a few cases there are genuine 'arrears' of pay due to HR / payroll issues and these can be reprofiled across the applicable years. But you will need some evidence to do that - from the employer.

http://www.hmrc.gov.uk/manuals/pommanual/PAYE70023.htm

noncom_2

Thanks for the answer. To clarify:

Yes, all my wife's employment is PAYE (NHS, to be precise, but each change of post in her training programme means she leaves one Hospital or Primary Care Trust and is re-employed by another one).

The arrears of pay were paid to us in a single lump sum in 2010-2011 and taxed at 20% (presumably because that Trust knows nothing about any other income she has in that year), and her usual income is under the 40% threshold.

If that pay had been paid at the right time, her income would have remained below the threshold. (Partly because she was underpaid for the rest of the time!)

If it's all added onto this year, when she's been paid the correct amount by the two employers she HAS actually worked for, then it takes her income significantly over the £43k threshold (in fact, as her "proper" income is only just below the threshold, most of the arrears is "over")

Does this make sense?
Thanks

Mikeyorks

Yes it makes sense.

If this was under the NHS 'agenda for Change' programme - then they are considered to be genuine arrears of pay and the sum can be profiled to the years they should apply to.

In which case you're into complexity getting it changed - as you need to get HMRC to do the PAYE first. Then you file the SA and will need to amend the previous Return? I'd take HMRC advice on that.

noncom_2

Thanks again

No, it was nothing to do with "Agenda for Change" afaik. Payroll just cocked up.

It was a slightly complicated situation, with my wife being a part time flexible trainee but with pay protection from her previous experience as she retrained through more junior posts, and they just put her on the wrong scale as if she hadn't had all her previous service.

Sounds like it's going to be tricky to sort out, and not much time left to do it.....

Mikeyorks

I would consult with HMRC first - and get a specialist. They may be prepared to reprofile the payments - or not.

Most elements of 'backpay' are taxable when paid. As the 'entitlement' only arises at the point of agreement to pay.

noncom_2

Ok, thanks.

All seems monumentally unfair..... paying for someone else's mistake.

I'll go back to HMRC and see what they suggest.

Cheers