Tax question re backdated pay

dgiise · 10 December 2012 at 11:45AM

I recently received a large backdated pay payment into my wages , (shown on my payslip as "pay arrears") ,this backdated pay actually dates back to April 2011 (so spans 2 tax periods), in reference to a significant pay rise which I was due to receive in April 2011, but didn't.

So in effect, I have been underpaid every month since April 2011, and received a lump sum backdated payment last month (Nov 2012) to make up for this.

I was wondering if anyone could give me some advice with regards to the tax implications of this backdated pay payment. Obviously I was taxed rather heavy on the month the lump sump back-payment when in , and the payment now counts towards the taxable pay for this year, when in fact it should have been split between this year and last year. As this payment was a rather large one, it has pushed me very close to the 40% tax bracket for this year (which I really shouldnt be near), so I am keen to get things sorted.

One last point, I am still paying off my student loan, and my student loan deduction for the month I received the backdated pay was astronomical (over £1000). Now I know that Student Loans contributions are 9% of your yearly salary, but it looks like they have just taken 9% of my pay for that month. I believe again that I have been overtaxed here, because not all of that back-payment should count towards this years taxable pay.

I intend to phone HMRC to discuss the matter further, but was hoping for some advice or guidance before I speak to them.

Any advice greatly appreciated.

ceeforcat · 10 December 2012 at 11:52AM

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

However, if arrears are paid in one lump sum in the current tax year then PAYE is due at the time of payment.

The payment is taxed when received is the short answer I am afraid.

agrinnall · 10 December 2012 at 11:55AM

Do you anticipate earning any extra in the next 4 months that would push you into higher rate tax? If not then from a tax perspective it doesn't make a lot of difference whether the back pay is counted in this year or spread over last year as well. Depending on how much the back pay lump sum was you may actually have paid less NI (if it took you over the UEL) than if it had been paid on a monthly basis.

I'm not sure about the student loan (too old, they didn't exist when I was an undergraduate) but I believe I have read that it may be possible to reclaim an overpayment.

somethingcorporate · 10 December 2012 at 12:01PM

As per the HMRC treatment of the payment it seems logical that the student loan deduction was correct too - whether you got that payment phased correctly or paid in one go given it was likely above the minimum threshold you would still have paid 9% of it.

It's not a tax either, but reducing a debt you owe so arguably you are no worse off whether it is lowering your student debt or increasing your bank account. Although, I completely agree - come bonus month I usually lose £900-£1100 in a single month to repay my student loan and that hurts! Never mind, when it gets cleared all that money will be ours to keep!

dgiise · 10 December 2012 at 12:05PM

Thanks for the replies guys.

ceeforcat: thanks that's actually a really useful link. I appreciate that the payment will be taxed when it is received, however it seems that this will now mean I will be financially worse off that I would have been, for a mistake that my employer made. Looking at the section headed PAYE in the link you sent, it seems like my employer should be calculating tax for the closed years, I will need to speak to my employer to see if this was done.

agrinnall: Its going to be close, but yes I foresee it pushing me over by a £2000 - £3000. Doing some research I see that HMRC actually hold your student loan profile, and pass it to student loans at the end of the tax year, so again this may be something worth speaking to HMRC about.

somethingcorporate: yeah I know its going to pay off a debt, and thats great, but with the interest rate so low, I would have rather paid off other debts first. I will live, but its slightly annoying!!

getmore4less · 10 December 2012 at 12:19PM

You might be suprised by how little the difference in tax might be.

normaly you only pay 10% more as you hit the 40% bracket(NI drops 10%).

Also it is likely you paid lower NI on some of the lump sum offsetting the extra 10% on the bit that goes over.

CLAPTON · 10 December 2012 at 12:24PM

tax is about details and actual facts really help

what would your salary be for this year without the back pay?
how much was the back pay?
do you contribute to a pension scheme ; if so how much?
do you have any benefits in kind?

dgiise · 10 December 2012 at 1:41PM

Apologies wasnt sure on the ettiqute with regards to posting actual figures.

(All figures quoted before tax)

- my salary for this year without the backpay would have been 32,000 (not including overtime)
- backdated pay sum was 11,500 (amounts to an underpayment of about 600p/m since April 2011)
- My taxable pay to date for this year now sits at 34,445 (as of Nov2012)
- I have also received a pay rise as of this month, so my new salary starting this month is 38800 (3200p/m)
- so projecting forward to March wage, I will be sitting at taxable pay of £47,245 (i think this then pushes me into the 40% band)

- I do not contribute to a pension scheme yet (I do plan to start soon) , my only deductions other than tax is Student loan, which is usually 130-150 per month (but shot up to 1230 on the month I received my backdated pay sum)

again any help is appreciated

somethingcorporate · 10 December 2012 at 1:44PM

https://www.listentotaxman.com

If you plug the numbers in there it will tell you your HR tax but I agree it appears to push you into the higher rate band.

Your best bet of avoiding this is to start a pension and get some of that tax back.

dgiise · 10 December 2012 at 2:03PM

yes seems 40% bracket is £34,371 + £8,105 (personal allowance) = £42,476 , so I will be over this by a good £5000

I would have thought that there would have been a form that my employer could send to HMRC for backdated pay circumstances like this , where they could say, using my case as an example, £7000 of the backdated pay should be taxed on the year 2011-2012 , and £4500 of the pay should be taxed on the year 2012-2013.

Again it goes back to a mistake from my employer, means that overall I am financially worse off getting the backdated pay, as I would have been if I had received the pay-rise in April 2011 like I should have!!

On strict advice from some of my older colleagues I will be joining the pension scheme as of next month, so hopefully that will help a bit.

CLAPTON · 10 December 2012 at 2:07PM

40% tax becomes payable after annual salary is 42,475 (i.e. 8105 + 34,370)

1. so if your projected income for this tax year is 47,245 then yes you will pay 40% tax on 4,770 i.e. as extra £954

2. your total student loan is 9% on anything over £1316.25 pm; whereas last year you would have paid 9% on income over 1250pm
so the fact you are paying it all this year makes absolutely no difference to the total payable as your monthly pay has always been above the 1,250 or 1,316 per month allowance.

3. NI is paid at 12% on amounts over 632 pm and at 2% on amounts over 3540pm
so by receiving the 11,500 in one lump sum you have paid LESS in NI than had the money been spread throughout the two years; depending upopn what assumptions one makes you have probably saved about £300

to reduce the 40% tax bill you could put some money in a pension ... still plenty of time to do this before 5th april 2013

Tax question re backdated pay

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