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HMRC internal manual

Employment Income Manual

Employment income: negative earnings: examples

Example 1

A is employed by B. Under the contract of employment, A is entitled to an annual salary of £200,000 payable monthly and may be awarded a performance bonus at the discretion of the Remuneration Committee. Employment may be terminated by either party on giving 6-months notice.

Following a meeting of the Remuneration Committee, on 31 January 2016, A is notified of the conditional offer of a performance bonus of £200,000 in respect of the performance year ended 31 December 2015. £200,000 will be paid on 31 March 2016 subject to the following conditions:

  1. That A confirms acceptance of the offer by 1 March 2016.
  2. That A is still employed by B at 31 March 2016 and has not given or received notice of termination of the employment before that date.
  3. If A gives notice of termination at any time before 31 March 2018, A must pay to B an amount calculated using the formula £Y x (M/24), where Y is the gross value of the bonus and M is the number of complete months between the date of A giving notice and 31 March 2018, payable within 30 days of the date notice is given.

A confirms acceptance on 20 February 2016. On 31 March 2016, B pays £200,000 through the payroll alongside the regular salary payment. After deduction of tax (45%) and National Insurance contributions (2%), A receives £106,000 in respect of the bonus.

On 30 September 2016, A gives notice of termination. B informs A that under the terms of the performance bonus award, A must pay to B an amount of £150,000 (£200,000 x (18/24)) on or before 30 October 2016. A pays B £150,000 on 30 October 2016.

The employment ends on 31 March 2017. A continues to receive monthly payments of salary until 31 March 2017, paid under deduction of tax and NIC, a total of £200,000 (gross) for the tax year 2016 to 2017.

Tax relief

The payment of £200,000 (gross), £106,000 (net) was correctly made by B on 31 March 2016. The performance bonus had been offered and accepted and properly constitutes earnings of A from the employment with B, assessable to tax as employment income of A in respect of the tax year 2015 to 2016.

There is no adjustment to be made by B in relation to the 2015 to 2016 PAYE return. The guidance in the PAYE Manual at page PAYE72085 applies to unintentional overpayments.

Similarly, there is no adjustment to be made by A in the 2015 to 2016 Self Assessment tax return.

The salary of £200,000 is taxable earnings from the employment with B.

The £150,000 paid by A is negative earnings from the employment with B.

For the tax year 2016 to 2017, therefore, ‘TE’ is £50,000 (£200,000 - £150,000). Under ITSA, A is entitled to credit for the full amount of tax deducted by B under PAYE on payment of the salary. A will be entitled to repayment of PAYE tax.