HMRC Publishes Guidance on the Tax Treatment of Clawback of Remuneration in the UK

by Dechert LLP

Dechert LLP

Since the financial crisis of 2008 / 2009, swathes of new regulations have been introduced governing various aspects of remuneration in the financial services sector. A key feature of these rules is the compulsory clawback of variable remuneration (typically bonuses) in certain situations. 

Until relatively recently there was significant uncertainty about how the clawback of remuneration should be treated for tax purposes. Historically, HM Revenue & Customs (HMRC) took the view that the clawback of remuneration was not eligible for tax relief but, in 2014, the tax tribunal decided that a bonus repayable by a taxpayer to his employer under a clawback provision in his employment contract constituted “negative taxable earnings” subject to income tax relief (HMRC v Julian Martin). 

HMRC recently published new guidance on negative taxable earnings and the availability of tax relief following a clawback of remuneration. The guidance generally reaffirms the tax tribunal decision in the Julian Martin case and provides additional clarity on certain other scenarios.

What are negative taxable earnings?

Taxable earnings generally arise from payments from an employer to an employee by reason of the employment. In the Julian Martin case, the tax tribunal explained that the reverse situation, where payments are made by the employee to the employer, may, depending on the specific circumstances, be negative taxable earnings.

In determining whether an amount paid by an employee to their employer (or in some cases, a third party) constitutes negative taxable earnings, careful consideration must be given to identifying all the relevant facts. HMRC’s new guidance makes clear that not every payment by an employee to their employer will constitute negative taxable earnings. 

To constitute negative taxable earnings a payment must be made for a reason relating directly to the relevant employment. For example, payments on account of damages for breach of an employment contract (such as breach of a restrictive covenant) will not be treated as negative taxable earnings. Consequently, no tax relief will be available in respect of such payments.

How do negative taxable earnings lead to tax relief?

General earnings are taxable in the year they are “for” (i.e. earned). Similarly, negative taxable earnings are normally “for” the year in which they are paid, rather than the year in which the original sums being repaid were earned. This distinction is critical to the availability of tax relief as it means the original taxable earnings (being the bonus) and the negative taxable earnings arising from the clawback of such bonus will not generally arise in the same tax year and so will often not be capable of set-off against each other (unless clawback happens to occur in the same tax year as the relevant remuneration was paid). 

If negative taxable earnings are paid after the relevant employment has ceased they will be “for” the last tax year in which the employment was held.

Tax relief for negative taxable earnings is given through the employee’s self-assessment tax return. Negative taxable earnings provide relief in the following order: 

  1. Negative taxable earnings are first set against the employee’s positive taxable earnings from the same employment in the same tax year. This may allow the employee to reclaim tax previously deducted from employment income by way of PAYE. 
  2. Any excess negative taxable earnings are then set against the taxpayer’s general income (i.e. such as other employment income, interest and dividend income) for the tax year of clawback or the previous tax year (which may include the original bonus itself if paid in the previous tax year). This may reduce the tax payable in respect of such income in the current year and may generate a repayment of tax in respect of the prior year.
  3. Any remaining excess can then be taken as relief against any capital gains in either the tax year of clawback or the previous tax year.

Excess negative taxable earnings may not be carried forward. Consequently, if negative taxable earnings exceed taxable income in the tax year of clawback and the previous tax year, full relief will not be obtained. 

Practical Considerations

Although HMRC’s guidance provides helpful clarification of the tax treatment of clawback payments, the rules remain complex and present uncertainty for both employers and employees. 

By way of example, employers will naturally want to ensure that they have the right to clawback remuneration on a gross of tax basis, so as to put the employer in substantially the same position they would have been in had the payment never been made (aside from the sunk employers’ NIC cost). However, the ability of employees to obtain full tax relief in respect of the clawback of remuneration relies upon the payment being respected as negative taxable earnings (which will ultimately depend upon the specific circumstances) and the employee having sufficient taxable income in the relevant tax years. As such, employees may be expected to resist gross clawback obligations and to push for net of tax clawback obligations which will not leave the employee out of pocket in the event full tax relief is not obtained. 

In addition, under current law, no tax relief or repayment of employee or employer NICs is available in the event of a clawback of remuneration and no tax relief is available in relation to shares which were the subject of an income tax charge by reason of the employment related security rules and which are subsequently forfeited under a clawback provision. This may have practical consequences for the design of share based deferred remuneration plans.

As regulatory requirements and market practice increasingly require employers to apply clawback, it is to be hoped that HMRC will apply its guidance pragmatically and that the government will ultimately provide greater certainty by introducing specific legislation to govern the position of negative taxable earnings. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.