How does tax on back pay work (UK)?

The personal tax allowance is proportioned over the year, and works out at just under £540 a month. Future intentions or potential earnings are not taken into account, so if earnings in one month are a lot higher, it can put you into the higher rate band, although with PAYE being operated on a cumulative basis, when you revert to the normal amount in future months' salaries, the tax would be adjusted. 5th August is the final day of income tax month 4, so then you will get free pay of £2160. You will get taxed at 20% on the next £12466, and will get taxed at 40% on any excess on £14626 pay to date.

Your mate is either :-

1) on 40% Tax already (or very close to the threshold) or

2) does not know what he's taking about.

You get TAXED on your TOTAL earnings for the ENTIRE Tax year .. if your total earnings exceed the Higher Earnings threshold you will get Taxed at 40% on your earnings ABOVE that level ..

PAYE just takes Tax off gradually during the year .. at the end of the year, the total taken by PAYE will be EXACTLY EQUAL to what is due ...

If your earnings are getting close to the 40% limit, near to the end of a Tax year, you may be able to 'cheat' and 'push' the overtime payments into the next tax year... however since MOST people get paid MORE each year, chances are 'cheating' is only going to end up with you paying EVEN MORE Tax at the 40% rate next year ....

Assuming that you are taxed under PAYE, tax is not calculated by reference to the pay in the month or period of payment. The accumulated pay over the tax year to date is identified and, after deduction of deductible allowances, compared to the accumulated tax tables giving an accumulated tax liability. The tax already paid is deducted and the balance is paid in respect of the current payment period.

If you receive a significant bonus or back payment - particularly in the earlier part of the tax year - you could become liable for 40 % income tax. However, as your earnings in subsequent payment periods revert to a lower figure, your tax will adjust in subsequent periods so that by the final payment in the tax year - if your total earnings for the tax year do not reach the 40% tax level - the effect of the additional marginal tax - difference between basic and 40% - should have been cancelled out.

Yes, you are right, you pay tax on your income so far this year. However, if you, for instance were paid £5000 overtime in a month, the tax tables would assume you were going to be paid £5k every month and this would knock you in to the 40% tax band. However, in the following month when you were back to your normal pay, you would get a refund of some of the 40% tax, and so on until you were back to 20%. By claiming all your overtime in one month you will not pay any more tax over the course of a year than you would if you staggered your claim.

Back Pay Tax

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