Checking how to claim a tax refund for negative earnings
Find out about negative earnings, clawback bonuses and claiming tax loss relief or a tax refund.
What negative earnings are
Negative earnings are where an employee has to pay back all or part of their earnings from their employment to their employer or ex-employer.
For the repayment to be classed as negative earnings:
- the original payment of earnings from the employer to the employee must have been correct and not the result of an error such as an overpayment
- the payment from the employee to the employer must have ‘arisen directly out of the employment’ — this usually means the employment contract requires the employee to repay some earnings to their employer
Negative earnings are most likely to happen where an employment contract contains a ‘clawback’ provision.
Clawback provisions are where employer and employee agree that if certain conditions are met, the employee needs to repay an amount of earnings they’ve already received.
The most common examples of this clawback are:
- signing on bonuses where the employee has to stay in that employment for a stated period of time or they’ll have to pay back some or all of that bonus
- bonuses paid to bankers who then breach prudential rules
When the employee pays back all or some of this bonus to the employer or ex-employer, the repayment can be classed as negative earnings.
If you’re an employer who has clawed back a bonus
Negative earnings do not change the National Insurance contributions or Income Tax position at the time when the original earnings were paid. This is because there was no overpayment or error at the time of payment. This means:
- there is no relief or repayment of National Insurance contributions
- the Income Tax cannot be repaid by PAYE
You should advise your employee, or ex-employee, that:
- you cannot amend their previous payroll records because they are a correct record of the position at that time
- you cannot make an adjustment to their payroll records for the year in which the repayment is made
- they need to contact HMRC themselves to get a correction and possibly a refund for the tax year when they paid back money to you
- they should read the guidance, ‘If you’re an employee whose bonus has been clawed back’
If you’re an employee whose bonus has been clawed back
If you have negative earnings, you may be eligible for Income Tax relief and might be able to claim a tax refund from HMRC. This is because negative earnings reduce the total amount of earnings that you need to pay Income Tax on in the year that you make the repayment.
You need to check your individual circumstances to see:
- if your bonus clawback or other payment can be classed as negative earnings
- the effect your negative earnings have on your taxable earnings
- if you are eligible for tax loss relief or can claim a tax refund
Checking if your bonus clawback can be classed as negative earnings
Your repayment can be classed as negative earnings for the tax year in which you made the repayment if:
- the original payment of earnings from your employer was correct and not the result of an error such as an overpayment
- your repayment to your employer or ex-employer ‘arose directly out of your employment’, that is your employment contract required you to repay some of your earnings to your employer
This applies even if you paid back part of your bonus or other earnings after you left the employment.
Working out the effect your negative earnings have on your total taxable earnings
You need to check if your negative earnings result in a total taxable earnings value that is negative for the tax year when you made the repayment.
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Work out the amount of your taxable earnings from the employment in the tax year when you made the repayment of all or part of your bonus.
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Subtract from that value the amount you had to pay back. This will give you your total taxable earnings for that tax year.
Checking if you can claim loss relief or a tax refund
If your negative taxable earnings are larger than your taxable earnings, this results in a negative total taxable earnings value. This is a loss which you can either:
- offset against other general income that you have in that tax year
- carry back to the previous year
If your negative taxable earnings are smaller than your taxable earnings, you’ll have a positive total taxable earnings value. You may be able to claim a tax refund on the amount that you paid back.
You can check the negative earnings and negative taxable earnings sections of the Employment Income Manual for more information including the following examples of negative earnings calculations:
- example where you may be able to claim loss relief — total taxable earnings after repayment is a negative value
- examples where you may be able to claim a tax refund:
How to claim loss relief or a tax refund as an employee
You need to claim direct from HMRC, not from your employer or ex-employer. You should claim the appropriate amount of tax deducted in the year that you made the repayment. You do this using Self Assessment if you already complete a Self Assessment return. Check the Self Assessment criteria. If you do not use Self Assessment you can write to HMRC.
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You should register for Self Assessment if you have not already done so or if you registered in a previous year but did not send a tax return last year. You need to register by 5 October.
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Enter the details of your claim for either PAYE tax or for loss relief. You do this by reducing the amount of pay in the ‘Pay from employment — total from your P45 or P60’ box by the amount you paid back. You then include a note of why you’ve done this in the ‘Any other information about this employment’ box.
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If you cannot file your return online, you can call us to request a paper return.
If you cannot make your claim using Self Assessment you should write to us. Use the title ‘Tax relief on bonus clawback’ on your letter. You’ll need to tell us how much you paid back to your employer or ex-employer and when you paid it.