Taxation Readers’ Forum: Equality payment

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant David Whiscombe answers a reader’s query concerning tax on a payment to correct discrimination.

‘My client is a woman who was taken on as an employee of a company in a managerial role about four years ago. A colleague of hers is in a very similar managerial position and their duties are, to all intents and purposes, virtually identical. In fact, the two of them were taken on by the company at the same time.

At the end of last year, my client discovered that her colleague is being paid about £15,000 a year more than her. Naturally, she was not happy and took this up with the company directors and the human resources department.

It has been agreed that the company will increase her salary and will pay the £60,000 arrears.

My question is how this should be treated for income tax and National Insurance purposes. If it is paid through PAYE, as I assume it should be, most of this payment will be subject to higher rate income tax, whereas her National Insurance liability will, I imagine, be lower. Is there any provision for spreading the payment over the four years to which it relates to reduce the income tax liability?’ Query 19,530 – Leveller.

David Whiscombe’s reply: Class 1 National Insurance is payable when the earnings are paid

‘Under the Equality Act 2010, the client was always entitled to the earnings.

Under ITEPA 2003, s 15, if earnings are liable to income tax at all (which the £60,000 arrears are, of course) they are treated as employment income of the year in which they are ‘received’. ITEPA 2003, s 18 provides (in the case of an employee) that earnings are treated for these purposes as received at the earlier of (a) when the earnings are actually paid or (b) when the employee becomes entitled to payment of the earnings.

The Equality Act 2010 operates by deeming there to be inserted into every employment contract a ‘non-discrimination’ clause. Thus, the client’s back-pay is (or is deemed to be) a contractual entitlement. That is to say, she is deemed to be (and always to have been) contractually entitled to be paid at the full ‘non-discriminatory’ rate. Therefore, historically, every time she was paid an amount, she was also entitled to be paid a further amount to bring the total up to that rate. It is the aggregation of those further amounts which total the £60,000 arrears. But the point is that the entitlement to those additional amounts did not arise when she made her claim or when the employer agreed it or paid it; it arose on each separate occasion on which she was underpaid.

The date of ‘receipt’ is also the date of ‘payment’ for PAYE purposes. It follows that, in principle, PAYE should have been operated on each underpayment when it arose. This would have been by reference to the client’s PAYE code and cumulative income at the time. So, in principle, the employer should correct the PAYE returns for the historic years, accounting for PAYE on the underpayments at the appropriate rate. In practice, it is more likely that the £60,000 will be put through the payroll and PAYE operated by reference to the date of physical payment. It will however be open to the client to file her self-assessment return on the correct basis and to invite HMRC to refund to her the excess of tax deducted under PAYE over the correct liability for each of the years for which the underpayment arose.

National Insurance is also payable by reference to the time earnings are paid. However, there is no express statutory definition of payment for these purposes; in particular, ITEPA 2003, s 18 has no parallel in the National Insurance code. The leading case on payment of remuneration is Garforth v Newsmith Stainless [1979] STC 129. This was an income tax case which has been superseded in its application to income tax by ITEPA 2003, s 18, but it remains relevant for National Insurance purposes. This case indicates that earnings are paid when they are placed unreservedly at the disposal of the earner, such as being credited to a loan account on which there is an unfettered right to draw. In contradistinction with s 18, it appears unlikely that a mere entitlement to be paid will amount to payment for National Insurance purposes. So it seems likely that, in the client’s case, National Insurance is correctly accounted for at the time of physical payment.’

The article is also available on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


By submitting this form, the data provided will be used to perform your request according to our privacy policy.