Back pay and arrears: which tax year they belong to

Employment income is taxed in the tax year it is received, and section 18 of ITEPA 2003 treats pay as received at the earlier of when it is paid and when you become entitled to be paid it. A backdated pay rise agreed after the event is usually taxed in the year it is paid, which can push income into a higher band; true arrears that you were already owed belong to the year you should have been paid. National Insurance is always worked out when the money is actually paid.

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Which tax year does employment income belong to?

Section 15(2) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) makes the full amount of general earnings received in a tax year taxable in that year, and section 15(3) says this applies whether or not the employment is still held when the earnings are received. This is the receipts basis. It does not matter which period the work was done in; HMRC’s Employment Income Manual at EIM42202 gives the example of a bonus for one year’s results, paid the following year, which is taxable in the year of payment.

The key question is therefore when pay counts as “received”. Section 18 ITEPA sets out the rules for money earnings:

Rule 1: the time when payment is made of or on account of the earnings.
Rule 2: the time when a person becomes entitled to payment of or on account of the earnings.
Rule 3: for directors only, further rules about pay credited in the company’s records or determined for a period (see when a director’s pay counts as received).

The earliest of these times applies. EIM42240 confirms that the same definition is used for PAYE, so the year in which the employer must operate PAYE matches the year in which the pay is taxable.

Is back pay the same as arrears of pay?

No, and the difference decides the tax year. HMRC’s guidance at EIM42265 draws a clear line:

	Backdated pay	Arrears of pay
What it is	A pay rise applied retrospectively to work already done, for example after late pay negotiations	Pay you were already legally entitled to under your contract or statute but did not receive in full on time
Typical causes	Annual pay awards agreed after the start of the period they cover	Payroll errors, late payment, equal pay claims, minimum wage underpayments
When taxed	When you first become entitled to receive it, usually the payday on which the award is implemented	When you were first entitled to receive the original pay, even if it is paid later

For backdated pay, EIM42265 explains that the employee “does not usually have any entitlement to receive the higher rate of pay until the award is agreed and implemented.” HMRC’s example is a pay rise agreed in February 2024, backdated to May 2023, with the back pay included in May 2024 wages. All of it is taxable in 2024 to 2025, even though it relates to 2023 to 2024.

Entitlement can come before payment, though. In a second HMRC example the employer told staff the backdated award would be paid in March 2025 pay, but funding delays meant it was not paid until 20 April 2025. Because the employees were entitled to it in March, it is taxable in 2024 to 2025, not the year it reached their bank accounts.

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How are genuine arrears taxed?

EIM42290 says that where the Equal Pay Act or the National Minimum Wage Act gives entitlement, it arises from the time the lower wages were paid. A lump sum of arrears “is not assessable in the year in which it is paid”; it must be broken down into the amounts for each year it relates to. The PAYE Manual at PAYE70023 puts it the same way: the employee’s liability arises in the tax year in which they were originally entitled to be paid the extra amounts.

EIM42265 gives a simple administrative example: a March salary paid two weeks late in April is still taxable in the earlier tax year, because the employee was entitled to it in March.

For earlier tax years that have closed, HMRC’s employer guide CWG2 (2026 to 2027) tells employers to calculate tax for each closed year as if the extra pay had been paid in week 53 of that year, using the employee’s tax code for that year, and to give each employee a letter showing the revised pay, tax and National Insurance for each year. The payroll mechanics are covered in correcting payroll errors from earlier tax years.

Why can back pay push me into a higher band?

Because backdated pay is usually taxed in the year it is paid, a year’s worth of increase can be added on top of a full year’s salary at the new rate. For 2026 to 2027 the basic rate band ends at £50,270 of income for someone with the standard Personal Allowance, and income above that is taxed at 40%.

Illustration only. Chris earned £45,000 in 2025 to 2026. A pay award agreed in 2026 raises the salary to £48,500 and is backdated a full year, so £3,500 of back pay is included in July 2026 pay.

As backdated pay, the £3,500 is taxable in 2026 to 2027. Chris’s income for that year is £48,500 plus £3,500, which is £52,000. £1,730 of it falls above £50,270 and is taxed at 40% rather than 20%, costing an extra £346.
Had the £3,500 been arrears Chris was already owed for 2025 to 2026, it would belong to that year, taking income to £48,500, all within the basic rate band.

The same effect can matter at other thresholds that depend on adjusted net income, such as the Personal Allowance taper above £100,000 and the High Income Child Benefit Charge above £60,000.

Why does the payslip look so heavily taxed?

On a normal cumulative code, gov.uk explains, tax is worked out on your total income so far in the tax year. A large lump sum in one month can still trigger 40% tax in that month, with the position evening out over the rest of the year if your total stays within the basic rate band. On an emergency code ending W1, M1 or X, tax is worked out on that period alone and will not even out without HMRC’s help. The same mechanics apply to bonuses; see how bonuses are taxed through PAYE.

How is National Insurance worked out on back pay?

National Insurance does not follow the income tax year rules. CWG2 says that extra payments are treated as part of total pay at the time they are paid, no matter when they were earned, and that for arrears relating to closed tax years the full amount is entered on the current year’s payroll record at the time of payment, with contributions worked out in the normal way.

A side effect is that much of a large lump sum can fall above the upper earnings limit for that pay period. For 2026 to 2027 the employee rate is 8% on monthly earnings between £1,048 and £4,189 and 2% above £4,189. For backdated pay paid after someone has left, CWG2 says to use a weekly earnings period with the rates current at the time of payment.

What if my employer taxed arrears in the wrong year?

Some employers pay genuine arrears as one lump sum in the current year and deduct PAYE on it then. PAYE70023 recognises that this can create higher rate liability for basic rate taxpayers, and tells HMRC staff how to review the position after the year end where the employee asks for the arrears to be taxed on the correct basis. HMRC asks for the P60, the amount relating to each year and the employer’s paperwork. For people in Self Assessment, HMRC’s Self Assessment Manual at SAM121160 says the arrears can be spread back to earlier years on request.

What mistakes come up most often?

Treating every late payment as “back pay”. Whether it is a new award or money already owed decides the tax year.
Assuming a waiver or repayment fixes things. EIM42260 says it is not possible to rewrite history by repaying earnings once they have been received.
Expecting National Insurance to be spread back. It is calculated when paid.
Forgetting the knock on effect on adjusted net income thresholds in the year of receipt.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.