Holiday back pay tax implications ?

deejaybee · 11 January 2019 at 9:41PM

Hi all,

If i accept a settlement i will be receiving a decent amount of money, mostly made up of back-holiday pay from approx the last 3 years ( 2 years before claim started, and from start of claim up till now )

I cant go into detail on amount of payment due to confidentiality etc.

It will be paid in 2 parts in February and March this year- so i am concerned about the Income Tax and NI implications of it being all paid in a single tax year, but the amount has been calculated over a 3 year period.

I am self employed now , but will be classed as a worker ( albeit still self employed but with more rights ) if i accept the settlement and sign new contract. Again cant go into details.

Are there any rules around this scenario ? Or any way of spreading it over a longer period ?

Advice appreciated , Ta.

00ec25 · 11 January 2019 at 10:21PM

it will be taxed at the point it is paid, but the pay should be allocated to the tax year in which it was earned.

see here for full details :
https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye70023

deejaybee · 11 January 2019 at 10:31PM

Thanks for the feedback, appreciated.

Had a look at the link, but unless i have misunderstood, it applies to PAYE ?

I am on self-assessment.

dont_use_vistaprint · 11 January 2019 at 11:26PM

They have the facility to treat certain types of incomes as a different year and can recalculate a previous tax years balance that's been closed and issue credit/debit, just call them and tell them what years its should apply to. They will do it if you owed them money, and they will do it for gift aid, so maybe for this?

Its a bit like revenue recognition in business , it should have been recorded as deferred and now its become recognised in the previous year

jimmo · 12 January 2019 at 12:21AM

You seem to be talking tax riddles.
Either you are, and have been for the last 3 years, self employed or you are an employee, albeit incorrectly treated as self employed by your employer.
My guess is the latter, after all how can a self employed person be entitled to holiday pay?
You need to explain in detail what your situation is/was.
If you are employed there is one set of rules.
If you are self employed there is another set of rules.
The amounts of money involved are probably not as important as the principle of whether you are truly employed or self employed but if you can't or won't share details on a forum you, frankly, can't expect any useful answers.

deejaybee · 12 January 2019 at 9:39AM

Hi jimmo,

As it stands now ( and for last 9-10 years ) I am working in " gig economy" classed as self employed.
Over the years more and more control has been placed over us, early last year a group of people doing same job as me gave evidence in an employment tribunal, backed by a law firm, which was funded by a trade union. We won the case to be recognised as " workers under direction" - still self employed but with more rights including holiday pay.

The company appealed this decision, and we were supposed to be hearing at end of Jan 19 if the EAT would allow the appeal to continue.

But in the meantime, we have heard from the law firm/union, that following negotiations, the company is willing to settle the claims, so it is up to the individuals who are part of the case to either accept the settlement cash and sign a new contract, or refuse the cash and carry on under existing contract.

If i accept the cash, it will be paid in 2 parts, 1 in Feb and the other in March, hence my original post about the tax/NI implications ( I will still be classed as self-employed ( albeit with more rights ) and will still be using the self-assessment system to file my returns.

Hope that explains a little better.

getmore4less · 12 January 2019 at 10:28AM

Will the payment make you cross a tax boundary which it would not if it was spread over more years?

Holiday pay is around 12% 3 full years would be around 36%

You could just up your pension contributions to bring it back under

deejaybee · 12 January 2019 at 3:55PM

My profits after expenses are usually around the 28-30K mark, so fall in the 20% tax band, i think the settlement figure may take me into the next tax band for this tax year.

Regarding making a pension payment, i am not currently contributing to one, and i understood that if i put a lump sum into a fund for pension purposes, hmrc would add the tax relief onto the lump sum ?

Dazed_and_confused · 12 January 2019 at 4:56PM

i understood that if i put a lump sum into a fund for pension purposes, hmrc would add the tax relief onto the lump sum ?

No, the pension provider gets basic rate tax relief from HMRC and adds that to pension fund.

The gross contribution (your payment plus basic rate tax relief) should be declared on your Self Assessment return and this increases the amount of basic rate tax you can pay, which can in turn reduce any intermediate rate or higher rate tax payable.

For example if you were to pay £10,000 into a relief at source pension scheme then this would become £12,5000 with the basic rate relief added.

Your basic rate tax band (assuming you aren't a Scottish taxpayer) would be increased from £34,500 to £47,000 (current tax year).

deejaybee · 12 January 2019 at 5:37PM

Thank you for explaining that Dazed and confused.

< edit > but i would still pay more income tax & NI, albeit at basic rate ?

Dazed_and_confused · 12 January 2019 at 5:48PM

Yes.

Maybe I have misunderstood this thread. I thought you were principally concerned about the lump sum being paid all in one tax year and that that might (will) push you into the higher rate tax bracket.

Are you now saying you are looking to avoid paying tax (and NI) on the lump sum

Holiday back pay tax implications ?

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