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essentially earnings the employee must pay back to their employer or ex- employer. But not every repayment is classed as negative taxable earnings, and there are certain requirements that must be met. To be classed as negative taxable earnings, the payment must: l originally have been made as a correct payment of earnings and not resulted from an error, such as an accidental overpayment of wages l the earnings must also have been a result of employment and there should be a term in the employment contract which places the burden on the employee to repay the earnings in certain circumstances.
for the year in which the payment was received l employees aren’t eligible for tax refunds through their employment (PAYE) for negative taxable earnings; therefore, the employee would need to contact HMRC to ascertain whether they’re eligible for a refund of tax through income tax relief.
What about contractual maternity payments?
A common question into our Advisory Service concerns whether contractual maternity payments, which are made contingent on an employee returning to work for a certain amount of time, would classify as a claw-back provision that would satisfy the test to be classed as negative taxable earnings, much like in the HMRC v Julian Martin case. It’s important to note that Judge Warren, from the UT in HMRC v Julian Martin, explicitly stated in his judgment that the approach in his decision can only be applied to circumstances that are identical in nature, and where the contractual terms are identical. Where the facts are different, this remains to be tested in the courts. However, when it comes to contractual maternity payments, there’s a provision in legislation (https://ow.ly/QqWx50Qrm5m) which allows NICs to be refunded on overpaid contractual maternity payments in certain situations. The Social Security (Refunds) (Repayment of Contractual Maternity Pay) Regulations 1990 (SI 1990 No 536) grants this exemption where: l the payment of contractual maternity pay was made conditionally on the employee returning to work for a specified period, and l the employee has agreed to these terms. Bear in mind that if an overpaid contractual maternity payment isn’t repaid by the employee or ex-employee, then no refund of NICs can be given. n
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What makes negative taxable earnings any different to repaying an overpayment? Well, firstly, negative taxable earnings aren’t an accidental overpayment of wages. Therefore, this doesn’t alter the tax and NICs position from the time the payment was made. The employee isn’t entitled to a refund of NICs and the tax paid cannot be reclaimed through PAYE. However, the tax may be reclaimable via income tax relief through HMRC. This is because negative taxable earnings reduce taxable earnings during the year in which the repayment is made; therefore, a refund of tax may be due to employees when negative taxable and taxable earnings are offset against one another. If an employer finds themself in a situation where a claw-back provision is triggered and they must claw-back a signing bonus, then HMRC’s guidance advises employers to explain to the affected employee that: l the employee’s record cannot be amended as the earnings were paid and processed correctly at the time the payment was received l adjustments also cannot be made
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| Professional in Payroll, Pensions and Reward |
Issue 98 | March 2024
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