If an employee repays a bonus or other earnings under a clawback agreement, the repayment may be considered negative earnings for UK tax purposes.
Negative earnings can occur when an employee or former employee has to repay earnings they previously received. For the repayment to qualify as negative earnings:
- The original payment must have been correct and not an overpayment or other payroll error.
- The repayment must arise directly from the employment. For example, the employee’s employment contract requires them to repay the earnings.
A common example is a signing bonus that must be repaid if the employee leaves before completing an agreed period of employment.
What should I do in payroll when an employee repays a bonus?
According to HMRC guidance, negative earnings do not change the National Insurance contributions or Income Tax position when the original earnings were paid because the original payment was correct at that time.
As the employer:
- Do not amend the employee’s previous payroll records.
- Do not adjust their payroll records for the tax year in which they make the repayment.
- Do not refund Income Tax through PAYE.
There is no relief or repayment of National Insurance contributions relating to the negative earnings.
Advise the employee or former employee to contact HMRC directly about a possible Income Tax refund or tax loss relief.
Can the employee claim a tax refund?
Possibly. HMRC states that negative earnings reduce the employee’s taxable earnings for the tax year in which they make the repayment.
The employee will need to check whether the repayment qualifies as negative earnings and whether it results in:
Positive total taxable earnings: They may be able to claim an Income Tax refund on the amount repaid.
Negative total taxable earnings: This creates a loss that may be offset against other general income for that tax year or carried back to the previous year.
The employee must make the claim directly with HMRC rather than through their employer or ex-employer.
Employees who use Self Assessment can include the claim in their tax return. If they cannot make the claim through Self Assessment, HMRC advises them to submit the claim in writing using the title “Tax relief on bonus clawback” and provide the amount and date of the repayment.