Underpaid for years, what are the tax implications? Potentially changing tax band.

Frannie123

Hi,

I've recently out that I've been significantly underpaid for the last few years. Long story cut short, it's all based on a failure to properly calculate my contracted pay rates by my employer, or rather my employers payroll officer.

I've been told to try and claim it back, and since it runs into several thousands of pounds, I'd be mad not to. However, the backpay will most likely be processed with my monthly wage, and I'm concerned about how this is going to affect my tax payments. 


Someone has told me that the rules around earnings and tax changed this year, and now you have to pay 40% of your wage if you earn over £37.5k?
Is that correct? 


Taking a lump sum now (if my calculations are correct) could potentially take me just over £37.5k by a couple of hundred quid, so I'm concerned about how much money I stand to lose to tax, because payroll let this go on for so long. It seems unfair that this has been discovered now, if the rules on allowances have changed.


Does anyone know how the changes and the 40% tax on £37.5k will play out, since the extra I receive that will take me over the threshold is from past years when the £50k limit applied?

Is there any way to avoid losing an extra 20% of my money because of this screw up that was out of my control? 

Is there any one (other than HMRC) that I can speak to regarding my employer allowing this to go on for so long, and potentially leaving me out of pocket for claiming a lump sum back? 


Would it be legal for me to avoid claiming it back until the allowences return to 40% on £50k? Or am I stuffed now? 

If anyone could offer me some insight/advice on this issue, I'd really appreciate it.

Thanks.

chrisbur

There has been no change, your "someone" does not understand how PAYE works.  The start of the 40% band is after the personnel allowance and the 20% band; they are just quoting the 20% band and forgetting the personnel allowance. 

The actual bands can be seen here....
https://www.gov.uk/income-tax-rates

See  

Income Tax rates and bands

The 40% band for most people starts at £50271

If your total taxable pay with backpay included will not go over £50270 then no 40% tax will be due though depending when paid there may be some deducted that is repaid to you as the tax year progresses.  It is possible that you may even save a bit on national insurance depending on the back pay figure.

There was and probably still is a procedure that can be used to allocate back pay to the correct year though many employers do tend to just bung it in the currant year but on the details you have given (could potentially take me just over £37.5k by a couple of hundred quid,) 40% tax seems very unlikely.

MattMattMattUK

I am presuming you are PAYE? How much do you currently earn and how much is the extra lump sum? Were your payslips correct, but the incorrect amount paid into your bank account, or were the payslips incorrect, but the payments match the payslips?

The 40% rate only kicks in over for amounts over £50,270 pa, I think there might be a misunderstanding in that the first £12,570 is tax free, then the next £37,500 is taxed at 20% which takes the total to £50,270, before the 40% rate kicks in, the higher rate is only charged on the amount over £50,270, not on everything. Do not forget that National Insurance will also be payable on the amount (12% probably). 

https://www.gov.uk/income-tax-rates
https://www.gov.uk/national-insurance-rates-letters

Frannie123 said:

Is there any way to avoid losing an extra 20% of my money because of this screw up that was out of my control? 

You could potentially ask your employer to split the payment over two years, pay half in 21/22 and the other half in 22/23, although that does mean you would have to wait for the amount. You could also ask your employer to increase the amount to take account of any tax implications, that may be something that they would be open to as the fault lays with their payroll department. 

Frannie123 said:

Is there any one (other than HMRC) that I can speak to regarding my employer allowing this to go on for so long, and potentially leaving me out of pocket for claiming a lump sum back? 

You could try ACAS or Citizens Advice.

Frannie123 said:

Would it be legal for me to avoid claiming it back until the allowences return to 40% on £50k? Or am I stuffed now? 

I do not think based on PAYE you can change previous years tax, but you might need to take specialist advice.

If you can answer the questions above then we might be able to get you an answer, or at least the potential cost on here.

chrisbur

MattMattMattUK said:

You could potentially ask your employer to split the payment over two years, pay half in 21/22 and the other half in 22/23, although that does mean you would have to wait for the amount. You could also ask your employer to increase the amount to take account of any tax implications, that may be something that they would be open to as the fault lays with their payroll department. 

Without knowing exact figures it is impossible to be certain of anything but splitting the payment over two years does raise the possibility that you might make no difference to the tax paid but could increase the national insurance paid.  It would be advisable to check here when you have the exact figures before agreeing to this if your employer was willing to do it.  

Skint_yet_Again

Arrears of pay is covered here 

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye70023