Hi Emilyb
It is the employer’s responsibility to operate PAYE correctly and in doing so must consider when relevant payments made to employee’s should be subject to PAYE
Earnings are charged to tax on the earliest of the payment or entitlement to payment. 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, an employer makes a pay award for 2022-23 which includes backdated pay. The award is agreed on 1 August 2024 and states that the payments will be made on 1 September 2024. In these circumstances, the payment date is the earliest point at which the employees are entitled to payment, (1 September 2024), not the date of the agreement, (1 August 2024), or the dates of the period the backdated pay relates to. This is because the award, described as backdated pay, is a new entitlement rather than arrears of pay under an existing entitlement.
However, when the payment is received after the end of the tax year in which the employee became entitled to it, the employer should amend the previous year’s PAYE return to ensure the payment is taxed in the correct year.
Earnings are charged to NICs at the point of payment and the employer should include the full amount for NICs purposes in the PAYE return at the time of payment.There’s more information in the CWG2 (2023 to 2024: Employer further Guide to PAYE and National Insurance Contributions) at section 1.3 (When to work out National Insurance contributions and PAYE) and 1.19.2 (Arrears of pay for closed years) (link).
Where an error has been made, employers must report the correct year-to-date amounts through an updated Full Payment Submission (FPS). We have published guidance to help employers with correcting returns for PAYE payments, here.
