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Taxation on back pay


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I was underpaid for several years along with several others somewhere I used to work. At the time the pay would have been at the usual PAYE rate. The employer has agreed to pay a lump sum in compensation however as its several years later the large sum will be be in the next tax band. I have read http://www.hmrc.gov.uk/manuals/pommanual/paye70023.htm#IDAPZRFH and do not understand:

 

Legally, an employee’s tax liability on a payment of arrears arises in the tax year that the employee was originally entitled to be paid the extra amounts, not in the year that payments are eventually made. However, if arrears are paid in one lump sum in the current tax year then PAYE is due at the time of payment

 

Does this mean you get taxed at the current rate or the rate at the time you were due the wages?

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I'm no expert but would read that as separating out:

Assessment and

Payment

 

You are assessed for liability on what you would have had to pay had the details been known in the "correct" tax year.

 

You have to pay it, through PAYE, in the current tax year.

 

What then arises as a question is how they deal with the "liability only on what you would have paid " :

Do they leave your tax code alone so take it at today's rates (and possibly at the higher rates of tax) and then "sort it out at the end of the year ", or can they adjust your tax code to "only take the correct amount " ?

 

I suspect it'll be the former. They'll take a big chunk currently, and sort out the detail after.

That HMRC webpage seems to suggest so, too.

You contact them to suggest you've overpaid, and they review it, but not before year end.

 

 

I wonder how they deal with any NI that would have been due c.f. any NI due in this tax year?

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