Susan Ball

Written by: Susan Ball

Susan Ball


What does equal pay mean for the tax system?

The Courts are seeing a significant rise in the number of employment claims relating to worker status and equal pay. Whilst recent news has highlighted the likes of Sarah Montague or Samira Ahmed, the Asda equal pay claim is currently moving through the Courts demonstrating how equal pay claims are moving more widely into the private sector, rather than being primarily a public sector issue.

Historically this is probably because public sector pay structures are generally more transparent but that has started to change with the introduction of gender pay gap reporting. It is likely that sectors such as financial services, STEM and retail are especially vulnerable. 

As anyone who has been involved in an equal pay claim knows, they are complex and costly. Sarah Montague said recently: 'Last year after a long period of stressful negotiations, I accepted a settlement of £400,000 subject to tax and an apology from the BBC for paying me unequally for so many years'.

How are awards treated for tax? 

The tax and national insurance contributions treatment of such settlements depends on what the payment is for:

  • retrospective pay;
  • a compensation payment awarded by an Employment Tribunal, or higher Court; or
  • a compensation payment made to buy out the right to retrospective pay. 

The rules are complicated. Broadly, if the arrears have arisen because there has been a breach of employment law (which could equally arise for holiday pay or National Minimum Wage back payments) then HMRC guidance confirms that the tax is due on the arrears in the year of entitlement not the year of payment. However, large employers have the benefit of an HMRC special arrangement.

Week 53

Where this doesn’t apply, employers should allocate the arrears of pay between the tax years in which the payment should have been made. They should calculate and deduct tax for each closed year in accordance with the employee’s tax code for the year, and as if the additional pay had been paid at ‘week 53’. Employers should submit an Earlier Year Update (EYU) for each of the employees concerned for all relevant years. As EYUs are being submitted to account for the tax, they will also attract interest charge for late payment.

The week 53 procedure will often see a worker receiving an extra ‘slice’ of personal allowance and might push them into a different tax bracket and so have underpaid tax. Strictly, HMRC could seek to claw this money back, however they tend to operate a £50 de minimis where items cannot be easily coded out (as set out in PAYE Manual 12070) which may cover it.

National insurance contributions

But for national insurance contributions – it is calculated based on the year the payment is made and doesn’t relate back to prior years. An employer should report the national insurance contributions through payroll via Real Time Information for the period in which the payment is made. Support may be required from the payroll software provider as to how to process payments for national insurance purposes, but not tax purposes in the same year. 

There is also the potential impact on earnings related benefits to consider or tax credits. All of which is confusing for both employers and employees alike.

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