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  • FIRST POST
    • deejaybee
    • By deejaybee 11th Jan 19, 8:41 PM
    • 442Posts
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    deejaybee
    Holiday back pay tax implications ?
    • #1
    • 11th Jan 19, 8:41 PM
    Holiday back pay tax implications ? 11th Jan 19 at 8:41 PM
    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.
Page 1
    • 00ec25
    • By 00ec25 11th Jan 19, 9:21 PM
    • 7,799 Posts
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    00ec25
    • #2
    • 11th Jan 19, 9:21 PM
    • #2
    • 11th Jan 19, 9:21 PM
    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
    • By deejaybee 11th Jan 19, 9:31 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    • #3
    • 11th Jan 19, 9:31 PM
    • #3
    • 11th Jan 19, 9:31 PM
    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
    • By dont_use_vistaprint 11th Jan 19, 10:26 PM
    • 393 Posts
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    dont_use_vistaprint
    • #4
    • 11th Jan 19, 10:26 PM
    • #4
    • 11th Jan 19, 10:26 PM
    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
    Last edited by dont_use_vistaprint; 11-01-2019 at 10:29 PM.
    "It is not the critic who counts..." - Theodore Roosevelt
    • jimmo
    • By jimmo 11th Jan 19, 11:21 PM
    • 2,031 Posts
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    jimmo
    • #5
    • 11th Jan 19, 11:21 PM
    • #5
    • 11th Jan 19, 11:21 PM
    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
    • By deejaybee 12th Jan 19, 8:39 AM
    • 442 Posts
    • 94 Thanks
    deejaybee
    • #6
    • 12th Jan 19, 8:39 AM
    • #6
    • 12th Jan 19, 8:39 AM
    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
    • By getmore4less 12th Jan 19, 9:28 AM
    • 34,968 Posts
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    getmore4less
    • #7
    • 12th Jan 19, 9:28 AM
    • #7
    • 12th Jan 19, 9:28 AM
    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
    • By deejaybee 12th Jan 19, 2:55 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    • #8
    • 12th Jan 19, 2:55 PM
    • #8
    • 12th Jan 19, 2:55 PM
    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
    • By Dazed and confused 12th Jan 19, 3:56 PM
    • 4,216 Posts
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    Dazed and confused
    • #9
    • 12th Jan 19, 3:56 PM
    • #9
    • 12th Jan 19, 3:56 PM
    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
    • By deejaybee 12th Jan 19, 4:37 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    Thank you for explaining that Dazed and confused.


    < edit > but i would still pay more income tax & NI, albeit at basic rate ?
    Last edited by deejaybee; 12-01-2019 at 4:41 PM.
    • Dazed and confused
    • By Dazed and confused 12th Jan 19, 4:48 PM
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    Dazed and confused
    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
    • deejaybee
    • By deejaybee 12th Jan 19, 5:45 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    Sorry for any mis-understanding




    Yes i am/was concerned about being pushed into higher tax band, but i think i will be ok on that one .


    I dont want to avoid paying tax/NI , ideally wanted to minimise it.


    Initially i was under the misguided impresssion that because the payment is a "settlement" following a tribunal, that it wouldnt be treated as taxable income
    • Accountant_Kerry
    • By Accountant_Kerry 12th Jan 19, 6:03 PM
    • 343 Posts
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    Accountant_Kerry
    Is this actually ‘wages’ or is this a settlement agreement? the tax implications are quite different
    • Accountant_Kerry
    • By Accountant_Kerry 12th Jan 19, 6:06 PM
    • 343 Posts
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    Accountant_Kerry
    Ah I see you’ve answered this, if they are in fact giving you back pay I effect rather than a settlement then yes it’s taxable, you can most likely do an adjustment to previous years income if it relates to previous years. Will of course only make a difference if you end up in a different tax bracket by paying it all this year
    • deejaybee
    • By deejaybee 12th Jan 19, 7:55 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    Apparently another claimant has spoken to the legal firm involved in the case, and had it confirmed that the settlement is taxable, i need to speak to the firm anyway, so i will get this confirmed one way or the other.


    After doing some calculations, its not going to bust me into the next tax bracket, so no disadvantage to pay it this tax year ( if confirmed taxable ) as Kerry said.
    • getmore4less
    • By getmore4less 12th Jan 19, 8:38 PM
    • 34,968 Posts
    • 21,336 Thanks
    getmore4less
    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 ?
    Originally posted by deejaybee
    Not by much if it is 3 years holiday on that level of earnings.

    Might be worth working out what what you will be paying.

    Could take a month off as holiday.
    • jimmo
    • By jimmo 12th Jan 19, 9:58 PM
    • 2,031 Posts
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    jimmo
    "Workers under direction". Don't remember ever seeing that phrase before but its a very long time since I did any Status work.
    I get the impression that the Employment Tribunal has found that the workers are legally employees and in order to get around the ET ruling your "employer" is introducing new contracts in order to make you self-employed.
    As you will be speaking to the legal team it might be worthwhile asking them to clarify what "worker under direction" means for tax purposes and do they know whether the "employer" will be operating PAYE.
    • greatkingrat
    • By greatkingrat 12th Jan 19, 11:12 PM
    • 172 Posts
    • 157 Thanks
    greatkingrat
    From the NI point of view, you will almost certainly be better off getting paid in one big lump sum as it will likely take you over the Upper Earnings Limit and so will only pay 2% NI on the excess.
    • EmilyFrost
    • By EmilyFrost 15th Jan 19, 1:23 PM
    • 6 Posts
    • 0 Thanks
    EmilyFrost
    Thanks for the feedback
    • deejaybee
    • By deejaybee 16th Jan 19, 8:51 PM
    • 442 Posts
    • 94 Thanks
    deejaybee
    "Workers under direction". Don't remember ever seeing that phrase before but its a very long time since I did any Status work.
    I get the impression that the Employment Tribunal has found that the workers are legally employees and in order to get around the ET ruling your "employer" is introducing new contracts in order to make you self-employed.
    As you will be speaking to the legal team it might be worthwhile asking them to clarify what "worker under direction" means for tax purposes and do they know whether the "employer" will be operating PAYE.
    Originally posted by jimmo

    You have got the wrong impression then,,,


    We were already self-employed before the tribunal judge ruled that we should be classed as workers under direction.


    Even as workers under direction we are still actually self employed, use self-assessment etc, but we have extra rights including holiday pay.
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