Correcting backpay/P60 and NI contributions query

gt94sss2

In Tax Year 21/22 I was underpaid for several (5/6!) months by my employer - their error. They eventually corrected the underpayment in April 22 (in the 22/23 tax year) as they failed to do it by March 2022.

This has the impact of changing my increasing tax band this year - hence my employer has agreed to correct my pay records and amend my 2022 P60 to reflect what I should have earned in 2021/22.

My question relates to the related NI Contributions.

1. When my backpay was paid in April 2022, it went above the NI Upper Earnings Limit resulting in a NI saving. This would also have been the case if my employer had managed to do it by March 2022.

2. However, rather than just moving the pay arrears in "one lump" to 22/23, they propose to recalculate all my earnings to the correct monthly periods in 21/22 meaning I lose the NI benefit above.

I was wondering if anyone knows if this is normal practice (or not)  and/or can point to any HMRC guidance on how employers should deal with this situation?

I appreciate that I am trying to "eat my cake" in some ways - its just that I would have got the benefit from the NI Upper Earnings Limit if they had managed to do it in a lump sum/March 22 as they should have..

Dazed_and_C0nfused

This has the impact of changing my increasing tax band this year - hence my employer has agreed to correct my pay records and amend my 2022 P60 to reflect what I should have earned in 2021/22.

On what basis do they think this is the correct thing to do?

gt94sss2

Dazed_and_C0nfused said:

This has the impact of changing my increasing tax band this year - hence my employer has agreed to correct my pay records and amend my 2022 P60 to reflect what I should have earned in 2021/22.

On what basis do they think this is the correct thing to do?

Not my area of expertise but they accept that it was due to their error so I assume https://www.gov.uk/payroll-errors/correcting-pay-or-deductions (or similar) applies

Jeremy535897

gt94sss2 said:

Dazed_and_C0nfused said:

This has the impact of changing my increasing tax band this year - hence my employer has agreed to correct my pay records and amend my 2022 P60 to reflect what I should have earned in 2021/22.

On what basis do they think this is the correct thing to do?

Not my area of expertise but they accept that it was due to their error so I assume https://www.gov.uk/payroll-errors/correcting-pay-or-deductions (or similar) applies

Not my area of expertise either, but I think this just deals with NIC, not income tax, so I am not sure that it will achieve the objective of shifting the earnings into 2021/22. Nor will it achieve the NIC benefit OP is looking for.

Dazed_and_C0nfused

gt94sss2 said:

Dazed_and_C0nfused said:

This has the impact of changing my increasing tax band this year - hence my employer has agreed to correct my pay records and amend my 2022 P60 to reflect what I should have earned in 2021/22.

On what basis do they think this is the correct thing to do?

Not my area of expertise but they accept that it was due to their error so I assume https://www.gov.uk/payroll-errors/correcting-pay-or-deductions (or similar) applies

It wasn't an error though, they reported the pay correctly.

Jeremy535897

There are two deductions (tax and NIC) and two systems (collection under PAYE and income tax rules). The basic rule for income tax on employment earnings paid in cash while the job is in existence is that it is taxable on the earlier of when it is paid and when the employee is entitled to it (there are special rules for directors). In practice, the tax treatment is likely to follow the PAYE treatment unless the employee requests otherwise:
https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye70023

gt94sss2

Dazed_and_C0nfused said:

It wasn't an error though, they reported the pay correctly.

They paid the incorrect amount, hence there was an error..

Jeremy535897 said:

There are two deductions (tax and NIC) and two systems (collection under PAYE and income tax rules). The basic rule for income tax on employment earnings paid in cash while the job is in existence is that it is taxable on the earlier of when it is paid and when the employee is entitled to it (there are special rules for directors). In practice, the tax treatment is likely to follow the PAYE treatment unless the employee requests otherwise:
https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye70023

Thanks  @Jeremy535897

Reading your link, it states that an employer should:

"Calculate and deduct tax for each closed year as if the additional pay had been paid at week 53"

As such, am I correct in thinking that they should do it as a lump sum and not correct the pay on a monthly basis?

Jeremy535897

gt94sss2 said:

Dazed_and_C0nfused said:

It wasn't an error though, they reported the pay correctly.

They paid the incorrect amount, hence there was an error..

Jeremy535897 said:

There are two deductions (tax and NIC) and two systems (collection under PAYE and income tax rules). The basic rule for income tax on employment earnings paid in cash while the job is in existence is that it is taxable on the earlier of when it is paid and when the employee is entitled to it (there are special rules for directors). In practice, the tax treatment is likely to follow the PAYE treatment unless the employee requests otherwise:
https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye70023

Thanks  @Jeremy535897

Reading your link, it states that an employer should:

"Calculate and deduct tax for each closed year as if the additional pay had been paid at week 53"

As such, am I correct in thinking that they should do it as a lump sum and not correct the pay on a monthly basis?

That would be my view.