If you’ve recently looked at the HMRC‘s tax refund guide, you might have noticed negative income tax refunds.

Especially common in the wage slips of sole traders or full-time employees.

So, what happens when taxable income turns into a negative figure?

Negative Income

If paying employees by an employer is positive income, then employees reimbursing a portion of their wage to the employer is negative income.

Usually, negative income is more likely to occur when there are “clawback provisions” in an employment contract.

Specific scenarios could be: employees receiving bonuses in advance but not completing performance tasks, thus needing to return part of the wage.

Meeting the requirements for negative income tax refunds necessitates proving the direct employment relationship and mutual agreement for reimbursement.

tax refund

Employer’s Guide

For employers, the changes you need to make are minimal.

Generally, employers cannot alter or adjust wage records for the current year.

You should be aware that employees must contact HMRC for further changes and could potentially receive partial refunds.

Employee Negative Income Tax Refunds

If you paid more income tax at the time, you might be eligible for exemptions or refunds when you return some money to your employer.

Check if you qualify

  • The initial income paid by your employer was correct and not due to errors like overpayment.
  • Repayment to your employer or former employer “directly relates to your employment,” meaning your employment contract requires you to reimburse a portion of the income.

If your negative taxable income is less than your taxable income, your overall taxable income will be positive, and you can apply for a tax refund.

Applying for a Tax Refund

When you’ve confirmed that you should receive a tax refund after checking, you should contact HMRC directly.

If you’ve filled out a self-assessment tax return before, you can use self-assessment to do this.

If you haven’t dealt with self-assessment tax returns before, you can write a letter or call HMRC directly.

When writing a letter, make sure to use the title “Tax Relief on Bonus Clawback” and provide details about the amount and date of the reimbursement to the employer.