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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: basis of assessment for general earnings: the time when earnings are received: entitlement to payment of earnings

Rule 2, Sections 18(1) and 686(1) ITEPA 2003

Earnings are treated as received when a person becomes entitled to payment of or on account of earnings.

  • For employees, the terms of service agreed by the employer and employee will tell you when an employee is entitled to be paid earnings.
  • For directors, see EIM42300.

Note that the rule is when a person becomes entitled to payment of earnings. This is not necessarily the same as the date on which an employee acquires a right to be paid. For example, an employee’s terms of service may provide for the employee to receive a bonus for the year to 31 December 2004, payable on 30 June 2005 if the employee is still in the service of the employer on 31 December 2004. If the condition is satisfied the employee becomes entitled to a payment on 31 December 2004 but is only entitled to payment of it on 30 June 2005. So PAYE applies to it on 30 June 2005 and it is assessable for 2005/06. The date that matters is the date the employee is entitled to be paid the bonus.

It can happen that payment is actually made after the date the employee is entitled to be paid. For example, to help out a hard-pressed employer employees may agree not to draw their pay. In that situation they are deemed to have been paid on the day they were entitled to be paid. However, if employees have effectively waived their rights to receive earnings before the date when entitlement arises they are not treated as having “received” earnings. See EIM42705 for guidance on waivers.

Where an employer gets in to financial difficulties, wages and salaries may not be paid. Employees may be “entitled” to earnings under of the terms of their employment contracts and are therefore treated as having “received” earnings under this rule. No tax charge arises for the employees they are entitled to a credit for the PAYE that should have been deducted. The employer-company is indebted to the employees for the unpaid wages/salaries. If the company goes into liquidation the employees are creditors of the company.

The Equal Pay Act (1970) and the National Minimum Wage Act (1998)

The Equal Pay Act (1970) (see EIM02530) and the National Minimum Wage Act (1998) give entitlement to employees in similar ways. Both Acts insert a clause into the employment agreement, if it does not already exist, giving the worker the right to equal pay and/or the appropriate national minimum wage rate. Entitlement to equal or higher pay arises from the time when lower or discriminatory wages were paid.

If a sum is paid to an employee in respect of arrears of pay Rule 2 of s18 ITEPA gives the earliest time; entitlement arose before the arrears were paid. The lump sum is not assessable in the year in which it is paid. It must be broken down into sums attributable to the years that the arrears are for.

Rule 2 of Section 686(1) ITEPA gives the same result for PAYE purposes. The employer should have operated PAYE when the employee was entitled to receive the payments. When paying the lump sum, the employer may in fact deduct PAYE at the rates that should have been operated for the years to which the arrears are attributable.

The employee is always assessable upon the gross arrears for each year, and is entitled to a credit for the PAYE tax referable to each year.