Reclassifying Backpay in the Tax Year 2023/24

Under UK tax law, income from employment is taxable at the date on which an employee becomes legally entitled to the payment.

With respect to back pay due under the terms of the recent pay settlement for teachers in Scotland, employees became legally entitled to the applicable amount on 14 March 2022, which was the date on which SNCT Circular 23/93 was issued to employers.

The EIS put the maximum possible pressure on Local Authorities to have the 2022/23 pay increase and all applicable back pay processed in their March 2023 payroll. Whilst a number were able to do this, many were not.

Where Local Authorities were unable to process back-pay within the tax year ending 5 April 2023, the amounts payable will be taxed under PAYE in the tax year 2023/24.

For many teachers, this treatment resulted in them paying more tax than would have been payable had their backpay been processed within the 2022/23 tax year. The precise amount payable will depend on the individual member’s point on the pay scale and their tax code.

However, for a teacher at Point 5 on the main grade scale with a standard tax code, the additional tax payable has been calculated at approximately £382 (on the basis that the higher rate of tax is only applicable earnings above £43,663).

Those below Point 3 on the main grade scale are unlikely to be affected as their top rate of tax will probably be 21% in both years, regardless of into which year the applicable back pay falls.

Similarly, those above Point 3 on the Chartered Teacher scale, Point 2 on the Principal Teacher Scale or on the Lead Teacher Scale are unlikely to be significantly affected as their top rate of tax will probably be 41%/ 42% in both years, regardless of into which year the applicable back pay falls. 

How can you reclaim overpaid tax?

On 30 April 2024, HMRC advised the EIS that they had written to all Local Authorities advising that, as it is only the employers who are able to determine what payments relate to which year, the necessary adjustments require to be made by them. Local Authorities were requested by HMRC to make the necessary adjustments via the PAYE system, to report corrected PAYE returns in respect of their affected employees and to file an updated Full Pay Submission for each affected year.

On 14 May 2024, the EIS wrote to the Directors of Finance of the affected Local Authorities asking them to confirm that they had received HMRC’s instruction and to confirm to us the timescales within which the necessary rectification would be processed. Local Associations have been copied in on this correspondence are being advised of any responses received so that  any issues arising can be followed up at local level.

Whilst we are aware that City of Edinburgh Council have undertaken to submit the requested revised returns to HMRC,  others appear to be waiting on further guidance from COSLA or to be looking for excuses to take no action.

In their correspondence with us, HMRC also advised that “In the circumstances, any direct approaches to HMRC from employees will be redirected back to their employer”, This is not, however, borne out in practice.

We are aware that some members have written to HMRC directly and have received refunds, whilst others have received requests for further information. Others, however, have seen their applications rejected on the basis that, as HMRC had suggested to us, the issue is for their employers to report. 

This inconsistency in approach has been communicated to HMRC but no response has been received.

On the basis of the above, if you are not required to complete a tax return, you could write (a physical letter) to HMRC, enclosing a copy of your P60 for the 2023/24 tax year and a copy of the payslip showing the payment of your back pay. A simple letter is all that is required, and can be based on the following template.

"Pay As You Earn
HM Revenue and Customs
BX9 1AS
United Kingdom

Dear Sir/Madam

During the tax year 6 April 2023 – 5 April 2024 I received from my employer (***Employer Name***) an arrears of salary payment for the tax year 6 April 2022 – 5 April 2023 in the sum of (£***)

As this was taxed in the 2023-2024 tax year I believe I have overpaid tax, can you please reallocate the payment to the correct year?

Thank you in anticipation of swift consideration of and response to this matter.  

Regards”

In the meantime, the EIS will continue to put pressure on the 15 remaining Local Authorities, directly and through COSLA, to take the action requested by HMRC in order that none of our members suffer a detriment as a result of the date on which their employer processed the back pay they were due.

This advice contradicts and supersedes the guidance previously published on this page.