Arrears of Pay - Does it need a Tax Return?

A lump sum received includes “arrears of pay” due to contractual amounts due from previous tax year.

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A lump sum received, mostly due to Arrears of Pay, caused a tax overpayment, the personal allowance vanished and the person fell into the 60% trap. I understand that even if the employer reported the lump sum paid in the current tax year and withheld tax in the current tax year., HMRC has to reallocate the Arrears of Pay to the corresponding (previous) tax year. The individual should not be subject to a higher tax rate and have his/her personal allowance removed due to not having been paid by his/her employer at the right time. Could you please comment / confirm the treatment? Also, if the only reason why the employee went over 100k was a Payment in Arrears - Should the person fill a tax return? My understanding is NO, he/she should not. Thanks

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By Liz_N
07th Dec 2023 09:59

Thanks. I’ve read it.

If the employee doesn’t regularly file a tax return but the arrears of pay pushed him beyond £100k, should the person file a tax return? I believe he should not. I believe he should ask HMRC to reclassify the income but I wanted to confirm.
If the person made more that 100k through PAYE he should file a return but if the only reason he made more than £100k is the arrears of pay, I believe he should not file as the income belongs to the previous year. Am I right?

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Replying to Liz_N:
By FactChecker
07th Dec 2023 12:28

AFAIK the relevant rule regarding the processing of pay under PAYE is quite simple ... it is that the pay should be processed as at the date when payment is made (not when the work for which it is payment was performed).

If I'm right, then the 'extra hit' (due to late payment in arrears) was correctly processed ... and any argument for restitution is entirely a commercial one between employee and employer (i.e. nothing to do with HMRC).

Thanks (2)
Replying to FactChecker:
By Wanderer
07th Dec 2023 12:37

Employer deducts tax in the current tax year

Some employers will not contact you to agree a settlement because they have paid the arrears as one lump sum in the current tax year and deducted PAYE. This may give rise to higher rate liability on employees who are basic rate taxpayers.

If an employee contacts you before the end of the tax year claiming to have paid too much tax on the arrears and asking that the arrears are taxed on the correct basis you should

Set the Inhibit Automatic Reconciliation signal so that the liability can be reviewed at the end of the year
Make a Contact History note ‘Inhibit Automatic Reconciliation signal set arrears of pay case’
The estimated pay used in coding calculations will be incorrect due to the lump sum payment on the FPS. This estpay cannot be overwritten and may result in tax codes that will cause hardship for the customer in year. If this is the case, set the Manual code indicator & issue manual codes through SEES.
Tell the customer that the matter cannot be reviewed until the end of the year but their record has been flagged for an automatic review at the earliest opportunity.

Ask the customer to

Send you their P60 for the relevant year as soon as they receive it
Confirm the total payment and the amounts applicable to each tax year it covers
Provide copies of any documents the employer has given them in respect of the payment
You should then follow Action guide tax80121.

Thanks (2)
Replying to Wanderer:
By FactChecker
07th Dec 2023 13:29

Thanks ... so I was right on my first point (payroll processing), but my memory failed me on the second point (HMRC's ability to do something about it). Useful!

In terms of OP's core question, that degree of off-line correction/manipulation by HMRC does suggest that the taxpayer's SA should be kept well out of the process?

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