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Where Taxpayers and Advisers Meet

Tax and NI on back pay

Posts: 2
Joined: Fri Aug 28, 2015 7:12 pm

Tax and NI on back pay

Postby DevonandCornwall » Sat Mar 11, 2017 8:25 am

Following a miscalculation around overtime covering a period of around 6 years, I am due to receive circa 40k in relation to unpaid hours. Roughly speaking, the 40k represents around 6.5k a year, evenly spread. I am a 20% tax payer with a salary around 38000 for each of the years in question. When this money is paid, likely to be in April 2017 at the beginning of the tax year, this will immeditaely put me in to the top band of tax for this year as this, added to this years 38000 salary will sky rocket me up.

I would be grateful if anybody could advise me on the tax situation around this back pay. I have heard different things around how it should be taxed, with some advising that it should be taxed at the rate that it should have been had it been correctly paid at the time. Thus some would be lower rate, some at higher. Some have advised that its tough luck and that its 40% tax and 12% NI and that I am stuck in 40% for the remainder of this year. This seems very unfair as I am being punished for something that is not my fault and although I will be slightly better off, I will still be financially penalised.

Any advice would be gratefully received...!

Posts: 215
Joined: Mon Jan 09, 2017 4:12 pm

Re: Tax and NI on back pay

Postby AmanSood » Sat Mar 11, 2017 9:51 am

tricky situation! from the Company's perspective, it's simpler to just tax it when it's paid to you in the relevant tax year as otherwise they would have to open up their payroll records for the last 6 years which would be difficult for them. Unfortunately with this approach, as you say you would be worse off as some of the income would be taxable at 40% and this is due to no fault of your own. If the Company decides to tax this in the month of payment, then you have a basis on which to go back to the Company and ask them to compensate you for the additional tax you are having to pay as a result of their error so you are no worse off from a tax perspective. In addition, I would look for interest to be paid on the amount given it's not been paid for 6 whole years! Also just keep in mind with this approach you would be better off from a NI perspective i.e. paying more at 2% and less at 12% (but still overall 10% worse off from a tax perspective).
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Re: Tax and NI on back pay

Postby bd6759 » Sat Mar 11, 2017 12:15 pm

Tax is payable at the point when an employee becomes entitled to payent. If the employee was enitled to the payent 6 years ago, the employer should work out the tax that would have been paid had the payments been made at the correct time.

There is no such provision for NIC, but this is to your advantage beause you will be over the upper limit and only pay 2% on a large proportion.

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