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Clawback of a bonus paid by an employer

by Sarah Wilson

It is becoming increasingly common for employers to attach conditions when paying bonuses to employees, and in many cases, this allows the employer to claw back the bonus paid if the employee breaches those conditions. Often, the conditions specify a period of time the employee must remain in their employment, which could be up to several years.

But what happens if, say, an employee leaves two years after receiving a bonus on which there is a condition that they must repay it if their employment ceases within three years? The employee may expect that the employer would request repayment of the net bonus actually received, leaving them in the position they would have been had they never received the bonus.

They may be surprised to find out that the employer requires the gross bonus to be repaid, meaning that the employee is forced to pay back more than they originally received. Assuming a 40% tax rate paid on the bonus, for every £10,000 the employee is requested to repay they would only have received £6,000.

Unfortunately, this is the correct approach for the employer to take as it is not possible for them to reclaim the PAYE which was originally paid on the bonus back from HMRC themselves via the PAYE system. So where does this leave the employee?

It is possible for the tax paid to be reclaimed but to do so the employee has to make a claim to HMRC for what is called negative earnings, which arise when the following occur.

  • The original payment from the employer was correct, and not the result of an error.
  • The payment from the employee has arisen directly out of the employment, for example it is required by their employment contract.

The negative earnings can be deducted from the total earnings for the tax year of repayment, reducing the amount of income subject to tax and creating a repayment for the year.

If deducting the negative earnings results in an overall loss (as in the gross bonus repaid is more than the earnings for that tax year) then it is possible to set this loss against general income of either the current tax year or the previous tax year. The employee can choose to make the claim in the tax year which results in the largest repayment.

If you find yourself in this situation, we can assist with ensuring the maximum amount of tax relief possible is reclaimed back from HMRC, so please get in touch.

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