Retrospective Pay Tax Explained

Press, Volume CVI, Issue 31115, 19 July 1966, Page 3

Retrospective Pay Tax Explained

Retrospective pay is taxable in one sum in the year of receipt, and P.A.Y.E. tax is deductible at a flat rate of 4s 3d in the £, says the District Commissioner of Taxes (Mr T. M. Hunt) in reply to a letter to the editor of “The Press” signed “Thinking” asking why retrospective pay is taxed at secondary employment rates.

Mr Hunt says the same flat rate applies to other lump sum receipts from employment, such as an annual bonus, and also to secondary employment income. The correspondent writes: “Perhaps through the columns of your paper the Inland Revenue Department might care to explain why retrospective pay is taxed at secondary employment rates. It would appear to me that the Government receives an excellent revenue on interest alone if between £2 and £3 is withheld from each taxpayer —and this, I suggest, is below an average assessment of the amount withheld.” Mr Hunt says: “The reason for fixing a general flat rate is that, by and large, income received over and above normal wages or salary attracts social security tax (Is 6d in the £) plus at least the lowest rate of income tax (3s in the £ less 10 per cent). In combination, these two rates give approximately 4s 3d in the £. “However, where allowable exemptions are not fully absorbed by normal salary or wage payments received weekly, or at other regular intervals, the 4s 3d rate can be too high. In general, this is adjusted by refund from the department on sending in a tax return after the end of the year. “However, there is provision for the department to

issue special tax codes on application, the effect of which is to instruct the employer to deduct at a lower rate. For practical reasons special tax codes are not normally sought or issued for isolated payments such as back pay or annual bonuses, but they are frequently issued in cases where combined pay from primary and secondary employment is not sufficient to absorb allowable exemptions. In such a case the employee may obtain a certificate from the department instructing his employer to deduct only Is 6d in the £ from the secondary employment.”