Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
HMRC named 389 employers who had underpaid around 60,000 workers, ordering them to repay more than £7.3 million in arrears and issuing about £12.6 million in penalties on top [1]. Every one of those repayments ended up as a back pay line on a payslip, processed through PAYE and reported to HMRC in real time.
Back pay, also called arrears of pay, is money an employee should have received earlier but is paid later. HMRC's Employment Income Manual defines arrears as "earnings paid after the date when the employee should have received the salary or wages" and confirms that they keep the character of the pay they replace [2]. That sounds simple, yet back pay touches income tax, National Insurance, student loans, pensions, statutory payments and the Full Payment Submission in different ways.
The most common trigger is a backdated pay award, where a rise agreed in one month applies from an earlier date. Others include minimum wage corrections, holiday pay recalculations, tribunal awards and simple payroll errors. Each source carries its own rules on timing and, in some cases, its own penalties.
This guide sets out how each deduction treats arrears, how to report them on the FPS, what changes when the arrears relate to a closed tax year, and how back pay interacts with minimum wage enforcement, statutory pay and employee claims. Every tax and National Insurance figure in the worked examples was computed by a payroll engine implementing HMRC's 2026-27 routines.
Key takeaways
- Arrears of pay are earnings, taxable under section 62 ITEPA 2003, and they keep the character of the pay they replace [2].
- PAYE is operated when the arrears are paid, but the tax liability belongs to the year of entitlement, and an employee can ask for the arrears to be related back [3] [26].
- National Insurance on arrears "lies where it falls": it is calculated in the earnings period in which the employer pays the money [5].
- Minimum wage arrears are recalculated using the current hourly figure. The penalty can reach 200% of the arrears, up to £20,000 per worker [12].
- A backdated rise that reaches into the relevant period for statutory maternity or other family pay means the average weekly earnings must be recalculated [17] [18].
What counts as back pay
Back pay covers any earnings that relate to an earlier period but are paid in a later one. HMRC treats them as earnings "just as if they had been paid at the right time" [4], and the label attached to the payment does not change that. A sum described as "compensation" for late pay is still arrears of pay if it replaces wages the employee was entitled to [2].
The usual sources of arrears
Most arrears fall into one of five families. Each carries a different legal basis and a different set of consequences for the payroll.
| Source of arrears | Typical cause | Main rule that applies |
|---|---|---|
| Backdated pay award | Annual rise agreed late, applied from an earlier date | Earnings, taxed and reported when paid |
| Minimum wage correction | Hours or deductions pushed pay below the legal rate | Arrears recalculated at the current rate |
| Unlawful deduction | Wrong deduction or missing pay element | Employee claim with strict time limits |
| Tribunal or equal pay award | Settlement or judgment for past pay | Arrears of pay for tax purposes |
| Payroll error | Wrong hours, rate or tax period | Correction on the next FPS |
Sources: HMRC Employment Income Manual [2], minimum wage enforcement guidance [12] and the Acas guide to deductions [20].
Tribunal and equal pay awards
Awards for past pay are a frequent source of confusion. HMRC's manual states that Equal Pay Act awards are arrears of pay "whether or not the employer settles or the dispute results in an award from a Tribunal" [2]. The tax rules for when earnings are treated as received, in section 18 ITEPA 2003, then decide which tax year the award belongs to [26].
Arrears ordered under a re-engagement order after an unfair dismissal claim follow a similar logic for National Insurance. The National Insurance Manual treats them as earnings payable "for the period specified by the employment tribunal", with the gross amount taken into account [7].
Income tax on back pay
Income tax is where back pay is least intuitive. The liability and the moment PAYE is collected do not always sit in the same tax year.
PAYE is operated when the arrears are paid
In the normal case, the employer deducts PAYE when it pays the arrears, using the tax code in force at that date. HMRC's reconciliation guidance confirms that "if arrears are paid in one lump sum in the current tax year then PAYE is due at the time of payment" [3]. The arrears are simply added to the pay for that period, and the tax is worked out on the total under the 2026-27 bands [27].
That approach can push a single pay period into the higher-rate band. Under a cumulative tax code the calculation looks at pay to date, so an over-deduction in the arrears month can unwind across the rest of the tax year if annual pay stays below the higher-rate threshold [27]. On a non-cumulative basis, such as a Month 1 code, it does not unwind through payroll, and the employee recovers any excess through HMRC [3].
The tax liability belongs to the year of entitlement
The legal liability follows the year the pay was earned. HMRC's PAYE Manual states that the liability arises in the year of entitlement, "not in the year that payments are eventually made" [4]. The Employment Income Manual goes further for lump-sum awards: "It is incorrect to treat the lump sum award as earnings of the year in which it is paid" [2].
Where the employer does not relate the arrears back, the full sum appears in the current year's figures, and the employee can ask HMRC to relate the arrears back to the year they were due [3]. That request matters most when the employee was a basic-rate taxpayer in the earlier year but is pushed into a higher band by the lump sum [26].
Arrears for closed tax years
Larger payouts, such as a multi-year equal pay settlement, may follow a special procedure. HMRC describes allocating the arrears to the year they were due and calculating the tax "as if the additional pay had been paid at week 53", using that year's tax code [4]. Under Real Time Information this is reported with an Earlier Year Update or a revised year-to-date FPS for each closed year [4].
The tax under that procedure is due "thirty days from the date of payment of the arrears of pay", with interest running from that date [4]. GOV.UK's correction guidance confirms that FPS corrections for earlier years are made with an FPS carrying the corrected year-to-date figures for that year [11].
National Insurance on back pay
National Insurance follows a different and simpler rule. Arrears are "part of gross pay in the earnings period in which the employer pays them", so they "lie where they fall" [5]. Contributions are not spread back over the months the pay relates to.
Arrears are added to the period's earnings
The National Insurance Manual instructs that arrears "must be added to any other earnings received by the employee in the pay period under consideration" [6]. The total is then assessed against that period's thresholds. Even where tax is related back to a closed year, HMRC's PAYE Manual confirms that the full arrears are entered on the current year's payroll record for National Insurance [4].
The monthly thresholds for the 2026-27 tax year that apply to an arrears month are set out below.
| Monthly threshold | 2026-27 value | Effect |
|---|---|---|
| Secondary Threshold | £417 | Employer NI at 15% above this |
| Lower Earnings Limit | £559 | Qualifying year for benefits |
| Primary Threshold | £1,048 | Employee NI at 8% above this |
| Upper Earnings Limit | £4,189 | Employee NI falls to 2% above this |
Sources: HMRC rates and thresholds for employers [8] and National Insurance rates and category letters [9].
Why the timing changes the cost
Because each earnings period stands alone for most employees, a lump sum that lifts pay above the monthly Upper Earnings Limit attracts employee NI at 2% on the excess, not 8% [9]. Employer NI at 15% has no upper limit, so the employer cost of arrears is the same whichever month they land in [8].
Directors are the exception, since their contributions are assessed on an annual earnings period. For them, the period in which the arrears are paid makes little difference to the year's total [5] [6].
Worked examples: back pay on the payslip
Two examples show how arrears change the deductions in the month they are paid. Both use the 1257L tax code and category A National Insurance, and both are calculated for a single month on its own.
A backdated pay award at basic rate
An employee in England on a salary of £30,000 is paid £2,500 a month and repays a Plan 2 student loan. A backdated pay award is settled late, and £1,200 of arrears is paid in one month, lifting pay for that month to £3,700.
| Line on the payslip | Normal month | Month with arrears |
|---|---|---|
| Gross pay | £2,500 | £3,700 |
| Income tax | £290.20 | £530.20 |
| Employee NI | £116.16 | £212.16 |
| Plan 2 student loan | £4 | £112 |
| Take-home pay | £2,089.64 | £2,845.64 |
| Employer NI | £312.45 | £492.45 |
In this example the arrears add £240 of income tax, £96 of employee NI and £108 of student loan repayment, and the employee takes home £756 more. The employer pays £180 more in employer NI. Student loan deductions are non-cumulative and use the period threshold of £2,448.75 for Plan 2, so the whole excess above it is repaid at 9% in the arrears month [25] [8].
A larger lump sum that crosses the monthly bands
A second employee is paid £4,000 a month. A settlement of £3,000 in arrears is paid in one month, so pay for that month reaches £7,000, above both the monthly Upper Earnings Limit and the monthly basic-rate band.
| Line on the payslip | Normal month | Month with arrears |
|---|---|---|
| Gross pay | £4,000 | £7,000 |
| Income tax | £590.20 | £1,752.06 |
| Employee NI | £236.16 | £307.50 |
| Take-home pay | £3,173.64 | £4,940.44 |
| Employer NI | £537.45 | £987.45 |
Taken as a single month, the example shows income tax rising by £1,161.86 because part of the lump sum is taxed at 40% [27]. Employee NI rises by only £71.34, because most of the arrears sit above the monthly Upper Earnings Limit and attract 2% [9]. Under a cumulative code, part of that higher-rate tax may unwind later in the year; the employer NI increase of £450 does not [5].
Reporting back pay to HMRC
Back pay goes through Real Time Information like any other payment. The employer reports it on the Full Payment Submission sent on or before the day it is paid [28], in the tax period that matches the payment date.
Underpayments corrected in the current tax year
When the arrears come from an earlier mistake in the same tax year, GOV.UK's guidance is to pay the shortfall and correct the year-to-date figures on the next FPS. Where an additional FPS is sent, it must carry the late reporting reason "H - Correction to earlier submission" and the same payment date and pay frequency as the original [10]. For an underpaid employee, the additional FPS goes "on or before the day of this payment" [10].
Under-deducted employee NI can be recovered from later pay, but not at any speed: the employer "cannot recover more than the employee's National Insurance contribution due that month" [10]. Penalties for errors apply only where the employer did not take reasonable care or acted deliberately [11].
Building arrears into the payroll system
A payroll system needs a separate pay element for arrears so that the amount is visible on the payslip and can be traced back to its cause. HMRC-recognised payroll software for SMEs applies the tax code and NI thresholds for the payment period automatically and sends the FPS with the right payment date [28]. Employers fixing a wider batch of past mistakes can follow the Moonworkers guide to correcting payroll errors and the explainer on the Full Payment Submission [11].
Minimum wage arrears
Minimum wage arrears are the one type of back pay with a statutory formula and a penalty regime attached. The rates for workers aged 21 and over, 18 to 20, and under 18 or apprentices are £12.71, £10.85 and £8 an hour for the 2026-27 tax year [16].
How arrears are recalculated at the current rate
Arrears are not simply the shortfall. GOV.UK states that "arrears are calculated according to a formula using the current minimum wage rate": the shortfall is divided by the rate that applied at the time, then multiplied by the current rate [12]. The official example divides a shortfall of £80.40 by the old rate of £11.44 and multiplies the result by £12.21, giving arrears of £85.81 [12].
Payments of minimum wage arrears do not count towards minimum wage pay in the period in which they are paid, because they derive "from a statutory right and not the worker's contract" [15]. The arrears cannot be used to make a later pay period look compliant. Employers checking their exposure can start with the Moonworkers guide to minimum wage obligations for employers [16].
Penalties on a notice of underpayment
When HMRC finds an underpayment, it issues a notice of underpayment covering both the arrears and a penalty. The headline parameters are set out below.
| Element | Rule |
|---|---|
| Penalty | 200% of the arrears for each worker |
| Lowest penalty on a notice | £100 |
| Highest penalty | £20,000 per worker |
| Early compliance | Penalty reduced by 50% if paid within 14 days |
| Appeal | To an employment tribunal within 28 days |
Sources: GOV.UK minimum wage enforcement guidance [12] and the notes on the notice of underpayment [13].
The penalty is assessed by pay reference period, and HMRC's manual sets the rate at 200% for periods from 1 April 2016 [14]. A penalty remains due, at the minimum level, even where the original shortfall was paid but a later rate increase was missed [14]. The notes on the notice explain that penalty collection is suspended while an appeal runs [13].
Back pay and statutory payments
A backdated rise can change statutory pay that has already been paid. Statutory Maternity Pay is 90% of average weekly earnings for the first six weeks, then £194.32 a week or 90% of earnings if lower [19]. Both elements depend on earnings in the relevant period.
Recalculating Statutory Maternity Pay
Where a pay rise is backdated into the relevant period, the employer must recalculate average weekly earnings and pay any extra SMP due. HMRC's Statutory Payments Manual sets the time limits: "six years from when the SMP payments were made" while the employee is still employed, and "six months from the last day she was employed" otherwise [17]. SMP records only need to be kept for three years after the tax year they relate to, which can leave gaps when an older award is settled [17].
An employer that already paid wages on top of SMP may offset the extra SMP against them [17]. The Moonworkers guide to statutory maternity pay covers the base calculation in more detail [19].
Other family payments and recovery
The same principle applies to adoption, paternity, parental bereavement and neonatal care pay. Where the entitlement was below the standard rate, "the employer must re-calculate the employee's AWE and pay the extra SP due", and an employee previously found ineligible is checked again [18].
Any extra statutory pay is recoverable in the same way as the original payment. Employers recover 92% of qualifying statutory payments, or 109% under Small Employers' Relief where Class 1 NI in the previous tax year was £45,000 or less [29].
Pensions, student loans and employee claims
Arrears also flow into deductions and rights beyond PAYE and National Insurance. Three areas tend to catch payroll teams out.
Auto-enrolment and annual allowance
For auto-enrolment, qualifying earnings for a monthly pay reference period sit between £520 and £4,189 for the 2026-27 tax year [23]. Arrears paid in one month count in that month's assessment, so a large lump sum can be partly lost above the upper limit for a scheme on a qualifying earnings basis, and can also trigger eligibility for a worker who is normally below the £833 monthly trigger [23].
For the annual allowance, HMRC's Pensions Tax Manual states that a backdated rise is "included in the current pension input period and not in the previous pension input period" [24]. The previous period's pension input amount is not recalculated [24].
Student loan deductions
Student loan repayments are calculated on pay in each period, not cumulatively, so arrears increase the deduction in the month they are paid [25]. GOV.UK's correction guidance adds that no action is needed for previous years where the employee under-repaid or the final FPS for the year has been sent [10].
Time limits on employee claims
An employee who has not received back pay can bring an unlawful deductions claim. Acas notes a limit of "3 months minus 1 day from the date of the deduction", and a claim can reach "up to 2 years back" only where the deductions form a series [20]. The right itself sits in section 23 of the Employment Rights Act 1996 [22], and the two-year backstop comes from the Deduction from Wages (Limitation) Regulations 2014 [21].
Back pay at scale: bureaux and platforms
Back pay rarely comes alone. A late pay settlement for a workforce produces hundreds of arrears lines in a single payrun, each with its own tax, NI, loan and pension consequences [5] [10].
Accountants running arrears for several clients usually rely on a multi-client payroll dashboard that flags affected employees and recalculates statutory pay where the relevant period is touched. Platforms that embed payroll can call an HMRC-recognised payroll API to post arrears as a separate pay element, with each endpoint documented in the API documentation. The employer keeps control of the decision; the engine handles the period thresholds and the FPS [28].
Model the payslip impact of back pay
Before agreeing a lump-sum settlement, an employer can model the month with arrears in the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross pay figure.
£ per month
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S = Scotland · C = Wales · W1/M1 = non-cumulative
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category. If in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Back pay looks like an extra line on a payslip, but each deduction reads it differently. National Insurance and student loans take the arrears in the month they are paid, income tax collects in that month while the liability belongs to the year of entitlement, and statutory pay may need to be recalculated from scratch. Minimum wage arrears carry their own uplift formula and a penalty that can be twice the shortfall.
The common thread is traceability. An employer that records why each arrears payment arose, which period it relates to and how it was reported can answer a relate-back request, a statutory pay recalculation or an HMRC review without rebuilding the history. As pay awards and enforcement activity continue, that audit trail becomes as important as the calculation itself.
Frequently asked questions
Is back pay taxed at a higher rate?
Back pay is not subject to a special tax rate. It is added to the pay for the period in which it is paid, and PAYE is worked out on the total using the employee's tax code. A large lump sum can push that period into a higher band, and the employee can ask HMRC to relate the arrears back to the year in which they were earned [3] [4].
How is National Insurance calculated on back pay?
National Insurance is calculated in the earnings period in which the arrears are paid, not spread over the earlier months. The arrears are added to the period's normal pay and assessed against that period's thresholds. Above the Upper Earnings Limit, employee contributions fall to 2%, while employer contributions stay at 15% [5] [9].
Does back pay need to be reported on the FPS?
Yes. Back pay is reported on the Full Payment Submission for the period in which it is paid, on or before the payment date. Where it corrects an error from earlier in the same tax year, the year-to-date figures are updated on the next FPS, and an additional FPS uses the late reporting reason H [10] [28].
How far back can an employee claim unpaid wages?
An unlawful deductions claim must normally be brought within 3 months minus 1 day of the last deduction. Where the deductions form a series, the claim can cover up to 2 years in England, Wales and Scotland. Minimum wage arrears enforced by HMRC follow a separate route and are recalculated at the current rate [20] [12].
