EIM02530 - Employment Income: arrears of pay and awards under the Equal Pay Act 1970

Arrears of pay are earnings paid after the date when the employee should have received the salary or wages. For tax purposes, arrears of pay retain the character they would have had if they had been paid at the right time. Arrears are “earnings” within the meaning provided by Section 62 ITEPA 2003.

Arrears may arise from an error in the employer’s HR systems. The employer or employee may discover that wages or salary paid in an earlier period were less than what should have been paid under the terms of the employment agreement. The employer will usually calculate the arrears and pay them in a lump sum.

The Equal Pay Act 1970

The Equal Pay Act 1970 was intended to end discriminatory practices under which women were paid less than male counterparts. Female employees may lodge a grievance with the employer setting out their case for higher wages. Alternatively, individuals or groups of employees may lodge a complaint with an Employment Tribunal.

Awards in respect of claims under the Equal Pay Act are arrears of pay whether or not the employer settles or the dispute results in an award from a Tribunal. Awards may be accompanied by a schedule setting out how the sum awarded has been calculated. This may show wage deficiencies for specific years.

EIM42290 explains that liability to tax arises in the year of entitlement not in the year of eventual payment. This accords with Rule 2 of Section 18 ITEPA 2003. It is incorrect to treat the lump sum award as earnings of the year in which it is paid. The employer should operate a special PAYE procedure to calculate tax arising in each year covered by the settlement.

Compensation or arrears of pay?

Some employers may describe the award as “compensation” and refuse to accept that payments are earnings. Do not accept these claims. The character of the aggregated payments does not change when paid as a lump sum. You should ask the employer to provide for all available information to substantiate the claim. (This text has been withheld because of exemptions in the Freedom of Information Act 2000)

When faced with the possibility of a complaint to an Employment Tribunal, employers may offer an amount to settle an actual or potential claim and link the payment to a compromise agreement. In these cases:

• the award may be less than actual arrears that have arisen and
• it may not be possible to show that arrears are attributable to specific years even though there is an agreed period in which deficient wages or salaries have been paid.

Do not accept these claims. If a lesser sum is accepted by a creditor in satisfaction of a debt the character of the payment remains unchanged. That principle applies in these cases. You should ask the employer to provide for all available information to substantiate the claim. (This text has been withheld because of exemptions in the Freedom of Information Act 2000)PAYE Technical(This text has been withheld because of exemptions in the Freedom of Information Act 2000)

Sometimes awards are described as “compensation for hurt feelings”. Employers may claim that payments are not arrears of pay but payments to compensate employees for the distress they may have suffered in consequence of being paid less than male counterparts. In cases where the nature of the discrimination is financial, the proper redress will usually arise from the Equal Pay Act and result in arrears of salary or wages. It is possible that employees have experienced hurt feelings and qualify for compensation. However, this is likely to be in addition to not instead of arrears of pay. Where these claims are made you should ask the employer to provide information to substantiate the claim. (This text has been withheld because of exemptions in the Freedom of Information Act 2000)