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For example, I do some work for my employer in the 2016-2017 tax year, but they take a while to pay me and I only actually get paid in the 2017-2018 tax year.

In which tax year should that income be included - the year when the work was done, or the year it was paid for?

  • 2
    See also Personal Finance & Money for related questions about UK tax (use [united-kingdom] and [income-taxes]), though I don't see this exact question there. – Joe Jul 17 '18 at 17:47
  • Is employer a UK entity and, if so, in which tax year did they pay PAYE on this income? – Eric Towers Jul 17 '18 at 18:57
  • @EricTowers the employer is a UK registered charity, and it looks like they have not paid PAYE at all. – walrus Jul 17 '18 at 21:18
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It depends on whether your tax accounting is on an accrual basis or cash basis. The UK government (at least) refers to the former as traditional accounting.

In that method of accounting, whatever it's called, you book the income when you invoice the work (that is, when it accrues). If you're paid in the next year, your balance sheet will show the outstanding balance in accounts receivable. Similarly, you book expenses when you incur them, not when you pay them. So if you bought a new computer for your business with a deferred payment plan, you book the entire expense at the time of the purchase, not the time of payment.

Cash accounting is simpler. You can only use it if your total turnover from all of your businesses is less than £150,000 annually. You also cannot use cash accounting if your business is a limited company or limited liability partnership, or is on a list of certain types of businesses:

  • Lloyd’s underwriters
  • farming businesses with a current herd basis election
  • farming and creative businesses with a section 221 ITTOIA profit averaging election
  • businesses that have claimed business premises renovation allowance
  • businesses that carry on a mineral extraction trade
  • businesses that have claimed research and development allowance
  • dealers in securities
  • relief for mineral royalties
  • lease premiums
  • ministers of religion
  • pool betting duty
  • intermediaries treated as making employment payments
  • managed service companies
  • waste disposal
  • cemeteries and crematoria

For more information about traditional accounting, see https://www.gov.uk/government/publications/how-to-calculate-your-taxable-profits-hs222-self-assessment-helpsheet.

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    @walrus if I recall correctly, in the US wage and salary income is always taxed on a cash basis, but I don't know whether the UK has a similar provision. What I saw on gov.uk seems to imply it, but I didn't see anything explicit. From the phrase "take a while to pay me," though, I wonder whether this question concerns employment wages or a contract rate or even piece work. – phoog Jul 17 '18 at 16:25
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    @phoog I've never heard of anyone actually doing it, but technically US individuals can elect an accrual method. – chrylis Jul 17 '18 at 18:40
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    Practically speaking, in accrual accounting the work is considered done when it is invoiced not when it is done, but I'm sure if you let an exceptionally large amount of work pile up without invoicing there would be issues with the tax people. An invoice with a date a single day after fiscal year end goes in the next fiscal year even if the work was done over the previous month. Expenses work similarly though there are more checks on that since they reduce taxes (the item invoiced must be available for use, for example. and not an empty box). – Spehro Pefhany Jul 17 '18 at 20:46
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    @phoog In the US, you can use cash, accrual, or more complex methods. For individual taxpayers, cash basis is the default, but you can select to use other methods, if used consistently, and you keep records using that method. Almost all individuals will be on a cash basis. – Makyen Jul 17 '18 at 21:43
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    @SpehroPefhany thanks, I've edited the answer to reflect that. – phoog Jul 18 '18 at 14:53
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I am not a chartered accountant; trusting tax advice from random strangers on the Internet is not a winning strategy. The following is a summary of information from the Charity Tax Group's page on PAYE.

As an employee, the pay should have occurred during or around the time the work was performed. Perhaps the term "employee" is not correct for your situation -- perhaps you are a contract worker -- in which case, the following does not apply.

HMRC requires charities to collect Income Tax and NICs from empoyees' pay as it is earned. The charity pays these collections to HMRC under Real Time Information (RTI), except in very specific circumstances. A charity must operate PAYE on an employee if that employee's earnings reach the National Lower Earnings Limit (LEL). There are several specific limits, for example GBP 486 in a month.

If PAYE or PAYE:RTI is (or would have been in the normal course of reporting even if not reporting was legal) provided to HMRC on your earnings in the 2016-2017 tax year, that income is included in that tax year. However, you have no visibility into this process, so how do you know in what year the charity engaged in required reporting? At the end of each tax year, the charity must provide a Form P60 detailing income tax, NICs, and other deductions, even if these are zero. Thus, for each tax year, you have direct information from the charity. This information should match the pay stubs you receive from the charity for each payment of wages (and other forms of remuneration).

  • This is the right answer for an employee: Use the P60 issued by the employer. – Martin Bonner Jul 18 '18 at 15:31
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This is not a legal opinion, but a common sense one. You are not being taxed on the work you perform. You are being taxed on the money you receive.

If you didn't get the money in a particular year, you would not claim it as income. Consider that some employers may "neglect" to pay, especially if the company is having financial difficulties.

You would not want to (or have to) pay taxes on money you've not received.

  • This is generally true for personal income tax, at least in the (few) jurisdictions I'm familiar with, but it is not universally true; in some cases it's necessary to use accrual accounting, in which income and expenses are booked at the moment of accrual, creating assets and liabilities in the form of accounts receivable and payable. – phoog Jul 17 '18 at 15:02
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    Common sense is not particularly valuable in this kind of question (particularly on law). Accountants make a lot of money in part because a lot of accounting is not common sense, or at least is not everyone's common sense. – Joe Jul 17 '18 at 17:43
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    As a counter example, companies generally have to pay VAT based on the invoice date, regardless if they have been paid (Sollversteuerung in German). Though there are exceptions for very small companies where tax is based on payments (Istversteuerung), and there are mechanisms to get back tax money after it becomes clear that the customer won't pay at all (Einzelwertberichtigung und Abschreibung von Forderungen). – CodesInChaos Jul 17 '18 at 17:58

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