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Navigating Negative Earnings: How to Recover PAYE on a Repaid Bonus
When an employee enjoys a healthy bonus, pays PAYE on it and then leaves before a “claw-back” period ends, the feel-good factor can fade fast. Many firms include contractual rights to reclaim the gross bonus if the employee departs early. Repaying that bonus creates negative earnings, a concept set out in HMRC’s Employment Income Manual (EIM00800) and confirmed by case law such as Martin GOV.UKWestlaw Content.
Below, you will find a plain-English roadmap—free of jargon and full of action words—so you can secure the refund your client deserves.
What do we mean by “negative earnings”?
Earnings normally increase taxable pay. In contrast, negative earnings subtract from it. A repayment of salary, commission or bonus counts as negative earnings if the original payment formed part of taxable employment income. Because PAYE took tax at source, the repayment leaves the employee out of pocket until HMRC adjusts their tax position.
Why does a bonus claw-back trigger negative pay?
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Original position: The employer paid, say, a £10,000 bonus in December. PAYE deducted £4,000 (40 % tax) and £2,000 National Insurance, so the employee received £4,000.
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Departure: The employee resigns in March—still within the claw-back window.
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Repayment: Contract terms require the gross £10,000 to return to the employer. The employee wires back £10,000, not £4,000.
That £10,000 now sits in HMRC’s system as negative taxable pay, ready to set against other earnings in the same or a later tax year.
Two roads to a refund
1. Employer-led payroll correction (same tax year)
If repayment and original bonus fall in one tax year, the employer can run a negative gross line in Real Time Information. That reduces taxable pay and issues a revised P60. HMRC’s computer recalculates PAYE, and the employee receives any over-deducted tax through payroll or a simple PAYE refund after year-end.
2. Employee-led claim (later tax year)
When repayment lands in a different tax year, the employer cannot amend the prior year’s FPS. Instead, the employee:
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Claims a deduction under s. 128 ITEPA 2003 (loss relief for repayments of earnings).
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Offsets the negative figure against other income of the year of repayment.
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Carries any unused balance back one year or, if still unused, forward.
A simple letter or Self Assessment return tells HMRC the figures; HMRC then issues the repayment.
Step-by-Step Action Plan
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Confirm the contract and compute the gross sum due back –
Adviser and client act before any repayment takes place. -
Repay the bonus and keep proof of the bank transfer –
The client acts immediately once the figure is agreed. -
Gather supporting documents – payslips, P45 or P60, the claw-back invoice and the repayment receipt.
The client completes this task within a few weeks of repayment. -
Choose the route: payroll correction or s. 128 claim –
The adviser and employer decide during the same tax year if possible. -
Submit the paperwork – either an amended FPS through payroll or a drafted claim letter / Self-Assessment return.
The employer or adviser files these as soon as practical. -
Track the HMRC refund and check National Insurance adjustments –
The adviser follows up after submission until the refund lands and any NIC issues are settled.
Worked example
Emma earned £50,000 and a £10,000 performance bonus in 2024/25. PAYE took £4,000 tax, leaving her £56,000 net of tax and NIC. She left in July 2025 and, under her contract, repaid the gross £10,000 in August 2025—a new tax year.
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Step 1: Her 2025/26 employment income now shows negative £10,000.
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Step 2: Emma’s only other 2025/26 income is £30,000 salary from a new job.
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Step 3: On her Self-Assessment she deducts £10,000, so taxable employment income is £20,000.
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Step 4: PAYE on £30,000 was £3,486. HMRC recalculates tax on £20,000 (£1,486) and refunds £2,000 to Emma.
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Step 5: Because the deduction absorbed all negative earnings, no carry-back arises.
Common pitfalls and how to avoid them
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Repaying only the net amount. Always repay the gross figure; HMRC will sort the tax.
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Missing the payroll deadline. If the tax year has closed, do not force the employer to reopen it—use s. 128 instead.
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Ignoring National Insurance. A payroll correction automatically adjusts NIC. A s. 128 claim returns only Income Tax; NIC does not refund outside payroll.
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Overlooking loan write-offs. If the employer waives a repayment, it becomes taxable earnings, not negative pay.
Conclusion
Negative earnings sound negative, yet they create a positive outcome: the chance to reclaim over-paid tax or even generate tax-loss relief. Act quickly, gather clear evidence and choose the right route—employer payroll or s.128 claim. By following the action plan above, you turn an unwelcome claw-back into cash back for your client.
If you would like further assistance with this or anything else, please get in touch, contact us for expert assistance.
