Overpaid Leavers and Tax Liability

deadeyeshark · PayPerShop Newbie Joined: 07 Nov 2007 Posts: 2

hi

just a quick pick of your brains:

If we overpay an employee who has left our business, are we liable to pay the tax and NIees and ers on the amount we have overpaid? Or can we recalculate the month the employee left in and then recalculate their taxable pay upto the date of leaving (eg the money owed prior to overpayment). I would think that the tax liability should fall back with the employee (if the amount is not repaid)?

Can anyone confirm or at least point me in the right direction, I've searched the web and can find no legislation that would agree with my point.

thanks in advance

Ian Congreave

We had a similar issue tackled recently and you many find the comments at http://www.paypershop.com/phpBB2/salary-overpayments-t420.html helpful. Our general view is that the overpayment is still a payment made by the employer from the employment, even though in error, and that adjustments to tax and NICs can only be made if and when the money is returned.

It would be helpful to have some specific guidance from HMRC on this, but that seems to be the situation.
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apserve · PayPerShop Member Joined: 23 Apr 2008 Posts: 44

HMRC will not commit themselves to advise on this matter because there is no legislation. however there is legislation as to what is a contractual payment and any thing received 'by reason of employment'.

An overpayment is not a payment made by reason of employment and cannot be regarded as a taxable emolument. The overpayment is the net amount received by the payee.

There is nothing to stop an employer reversing the overstated taxable pay, tax and ni without having to wait for the overpaid employee to pay back the net cost - this is a myth just as it is a myth that the overpaid employee should pay back the gross and recover the tax themselves.

Further, I did a contract with a County Council a couple of years ago, for a number of reasons there are always problems with Teacher's pension contributions being missed and some of them go back for years.

The net employee cost of the contributions had not yet been collected but HMRC advised to make adjustments to P14s on line decreasing Taxable pay and Tax and changing NI from A to D categories.

Ian Whyteside · Posted: Thu Apr 24, 2008 10:17 pm Post subject: Overpayments and Leavers

I have to say that I am with Ian on this matter and the issue as to whether the overpayment is a true part of the ex employees remuneration is actually irrelevant.

If the payment made by the employer remains in the hands of the employee it is a taxable payment even if the basis of the payment cannot be substantiated as part of their remuneration.

By all means recalculate and issue an invoice in an attempt to recover the sums due, and I would strongly encourage that in this case, but if recovery is unsuccessful then the income tax and national insurance contributions originally deducted must lawfully stand.

Ian Whyteside