How backdated pay awards are taxed

Backdated pay is taxed in the month you are paid it, through PAYE, as part of that month’s earnings. On a normal cumulative tax code the income tax on the arrears works out at roughly the rate you pay on the rest of your salary, even if the payslip makes it look higher. National Insurance and student loan deductions are different: they are worked out for each pay period on its own, so the lump is charged at that month’s thresholds. Pension contributions are usually taken on the arrears as well.

Why arrears arrive in one go

Public sector pay awards are often agreed after the date they apply from. For 2026/27, for example:

• the NJC award for council and school support staff (3.3 per cent from 1 April 2026) was agreed later in the year and backdated
• the teachers’ award in England (3.5 per cent from 1 September 2026) cannot be paid by maintained schools until the 2026 pay document is in force, expected around early November 2026, and will then be backdated
• armed forces pay rose 3.6 per cent, backdated to 1 April 2026
• national Clinical Impact Awards for consultants were increased with effect from 1 April 2025.

The NHS Agenda for Change award in England was paid on time in April salaries, so most NHS staff had no arrears this year. Pay award backdating covers how employers calculate what you are owed.

How PAYE taxes the lump

A cumulative code such as 1257L compares your total pay for the tax year so far with the allowance and bands built up so far. By month 8 (November) you have eight-twelfths of the £12,570 allowance and eight-twelfths of the £37,700 basic rate band to set against your pay.

Say you are a teaching assistant in England earning around £24,000 for the year, and you receive £600 of arrears in November. Your pay to date is well inside the year-to-date basic rate band, so the £600 is taxed at 20 per cent: £120. That is what you would have paid had the money come monthly.

It looks different near the threshold. If your pay to date is already close to the year-to-date basic rate band, the arrears can spill over it and that month’s tax comes out at 40 per cent on part of the lump. In later months your band keeps growing while your monthly pay stays the same, so payroll takes less tax and the overcharge unwinds by the end of the year, provided your total income stays under £50,270. The payslips in between will show unusually low tax for a while.

If you are on a non-cumulative code (one ending W1, M1 or X), there is no catch-up. The arrears are taxed against one month’s allowance and band only, and any excess comes back after the year ends. See Month 1 and Week 1 tax codes.

National Insurance on arrears

Employee National Insurance (category A) is 8 per cent of earnings between £1,048 and £4,189 in a monthly pay period, and 2 per cent above £4,189. Each period stands alone. A big arrears payment can push one month’s earnings above £4,189, and the part above it is charged at 2 per cent. So large arrears can mean slightly less NI than if the same money had been spread out. For most people the arrears are small enough that the 8 per cent rate applies to all of it.

Student loan deductions

Student loan repayments also use per-period thresholds. On Plan 2 the monthly threshold is £2,448.75, and 9 per cent is taken on pay above it. If your usual monthly pay is just below the threshold, an arrears month can trigger a repayment you would not normally make. If your income for the whole tax year ends up below the annual threshold, you can ask the Student Loans Company for a refund of deductions taken that year. Student loan repayments from salary has the thresholds for every plan.

Arrears from an earlier tax year

Employment income is taxed in the year it is received. Arrears covering 2025/26 but paid after 6 April 2026 count as 2026/27 income and go through 2026/27 PAYE. Usually this makes little difference. It can matter if the extra income pushes your 2026/27 total over a line such as £50,270 (higher rate tax), £60,000 (where the High Income Child Benefit Charge starts) or £100,000 (where the Personal Allowance taper and the childcare limits start).

Universal Credit counts earnings in the assessment period in which you are paid, so a month with arrears can reduce that month’s award. Universal Credit while working explains how earnings are assessed.

Pension on backdated pay

In the main public sector schemes, pay award arrears are normally pensionable. Your contribution is deducted from the arrears at your tier rate, and because these are net pay arrangements it comes off before tax. The award may also move your pensionable pay into a higher contribution tier. Teachers’ Pension Scheme tiers, for instance, are set by your annual salary rate, so a rise that crosses £36,199 moves you from 7.4 per cent to 8.9 per cent. Check the pensionable pay line on your payslip in the arrears month, and if your pension record looks wrong afterwards, contact your scheme administrator.