Employment Income Manual

EIM42265 - Employment income: basis of assessment for general earnings: meaning of "received": backdated pay and arrears of pay

Section 18 ITEPA 2003

EIM42260Ìýexplains that money earnings are treated as received for assessment purposes, and paid for PAYE purposes, on the earliest of the following:Ìý

• when a payment of earnings is actually made or when a payment on account of earnings is made (see EIM42270)
• the time when a person becomes entitled to payment of earnings or a payment on account of earnings (see EIM42290)

There are additional rules for company directors.Ìý

Entitlement is not necessarily the same as the date on which an employee acquires a right to be paid, but the date on which they are first entitled to receive the payment (for example, if it is agreed on 1 January that a payment will be made on 1 March then the relevant date of entitlement is 1 March).

Particular care is required to determine when earnings should be treated as received in cases of backdated pay or arrears of pay.Ìý

Backdated pay

Backdated pay refers to a pay rise applied retrospectively to employees for work they performed in a period. Although the pay award relates to an earlier period, the employee does not usually have any entitlement to receive the higher rate of pay until the award is agreed and implemented.

The payment is treated as being received at the time when the employee first becomes entitled to receive it.

It is important to examine the terms of the pay award, and any existing contractual terms, to determine:

• Whether there is any pre-existing legal entitlement to the pay increase before the pay award is agreed, and
• The date at which the employee is entitled to receive the pay award - this might be specified in the agreement or announced separately by the employer.

Arrears of pay

Arrears of pay occur when an employee was legally entitled to receive a certain amount under existing contractual terms, but for some reason they didn't receive the full amount they were owed at the appropriate time.

Arrears of pay often arise due to administrative errors, for example where an employee is paid late or in the wrong amount.Ìý

In rare cases, arrears of pay can result from mistreatment 바카라 사이트“ for example in equal pay cases, where employees are paid less than they are entitled to under the Equality Act.

Arrears of pay are taxable at the time when the employee was first entitled to receive the earnings, even if the correct payment ¾±²õ²Ô바카라 사이트™t made until later.

Example 1

Alex startedÌýworking for a small companyÌýin January 2024.ÌýAs per her employment contract,ÌýAlex is paidÌýher salaryÌýin 12 monthly instalments on the last working day of each month.

Payment of herÌýMarch 2024 salaryÌýis delayed due to an administrative error.ÌýThe issue is subsequentlyÌýrectified, and the payment is made two weeks laterÌýin April 2024.

Although the payment is made in the 2024/25 tax year, Alex was entitled to receive the payment in March 2024 and itÌýis thereforeÌýtaxable in the 2023/24 tax year.Ìý

Date employee is entitled to be paid	Date employee is actually paid	Date pay is taxable
29/03/2024	12/04/2024	29/03/2024 (in 2023/24 tax year)

Example 2

A large employer is setting its staff pay increase for the 2023/24 tax year. Union negotiations begin in May 2023, and an agreement is only reached between the employer and the union in February 2024 바카라 사이트“ although the pay rise will be backdated to May 2023. The employer and the union agree that the employees will receive their new increased salary, along with the backdated pay for May 2023 to April 2024, in their May 2024 pay.

The employees did not have a legal right to receive the higher rate of pay before the pay award was agreed.Ìý

While the pay rise has effect from May 2023 and the agreement is reached in February 2024, the employees are not entitled to receive the pay rise until May 2024 바카라 사이트“ the date from whichÌýit was agreed that the employees will be paidÌýthe increased salary and backdated pay.

The backdated pay is therefore taxable in the 2024/25 tax year, even though it relates to a period within the 2023/24 tax year.Ìý

Date employee acquires right to be paid	Date employee is entitled to be paid	Date employee is actually paid	Date pay is taxable
01/02/2024	01/05/2024	01/05/2024	01/05/2024 (in 2024/25 tax year)

Example 3

The same large employer is setting its staff pay increase for the 2024/25 tax year. Union negotiations begin in May 2024 and continue for several months, with an agreement reached in December 2024 바카라 사이트“ although the pay rise will be backdated to May 2024.

The employer notifies employees that they will receive their increased pay, including the element backdated to May 2024, in their March 2025 pay, and employer records are adjusted to reflect the employees바카라 사이트™ new contractual higher salaries.

However, the employer is unable to secure the funding for the pay rise from their corporate parent company in time for March, and the employees only receive the payments on 20 April 2025.

The employees were entitled to receive the pay rise in March 2025 so, following the general rule that earnings are treated as being received at the earlier of the time when payment is made or the time when the person becomes entitled to payment, the payments should be taxed in 2024/25 (when the employees were entitled to be paid) even though they were only received by the employees in 2025/26.Ìý

Date employee acquires right to be paid	Date employee is entitled to be paid	Date employee is actually paid	Date pay is taxable
01/12/2024	01/03/2025	20/04/2025	01/03/2025 (in 2024/25 tax year