What happens to my tax if I have to repay a clawed-back bonus?

Full answer

Bonus clawback clauses -- increasingly common in financial services, senior executive contracts, and retention or signing bonus agreements -- require an employee to repay some or all of a bonus if certain conditions occur, such as leaving the company early, a restated set of accounts, or a compliance failure discovered after payment. Because the original bonus was taxed in full when paid, repaying it raises a genuine tax complication. **The core problem** When a bonus is paid, the employer deducts Income Tax and employee National Insurance through PAYE and pays these over to HMRC immediately. If the employee later has to repay the bonus (in gross or net terms, depending on the contract), the tax and NI already paid to HMRC does not automatically reverse itself -- there is no simple undo button, because the tax system generally assumes income once paid and taxed is final for that tax year. **Repayment within the same tax year** If the clawback and repayment happen within the same tax year the bonus was originally paid, correcting the position is relatively straightforward: the employer can adjust a subsequent payslip to effectively reverse the earlier payment through the payroll system (sometimes called a negative adjustment), recalculating the employee's year-to-date tax and NI as if the bonus had never been paid, and the employee's tax code and take-home pay adjust accordingly. **Repayment in a later tax year** If the repayment happens after the tax year in which the bonus was paid has already closed, the position is much harder to fix through payroll alone, since the original year's tax return (or PAYE record) is already settled. Depending on how the contract is structured, one of several approaches may apply: the employee may be able to claim tax relief for the repayment via Self Assessment (treating the repaid amount as a deduction against income in the year of repayment, known as "negative earnings" in some circumstances recognised by HMRC and case law), or the employer and employee may agree the repayment on a net basis (i.e. the employee only repays what they actually received after tax, with the employer bearing the loss of the tax and NI already paid over), which avoids the tax reclaim problem entirely but shifts the cost to the employer. **Why clear contract drafting matters** Because of this complexity, well-drafted clawback clauses specify clearly whether repayment is calculated on a gross basis (the full amount before tax) or a net basis (only the amount actually received after tax), since a net-basis clawback avoids most of the tax reclaim difficulty for the employee, while a gross-basis clawback can leave an employee out of pocket if they cannot successfully reclaim the tax already paid. **Practical advice** Anyone facing a bonus clawback, particularly across a tax year boundary, should take advice from an accountant or tax adviser before agreeing repayment terms, since the tax consequences can materially affect how much is actually owed in practice, and HMRC does not offer a simple automatic mechanism to unwind tax on income that has since been repaid. **Worked example** An employee receives a £20,000 signing bonus in March 2026, paying roughly £6,000 in combined Income Tax and NI, and keeping £14,000 net. They resign eight months later, in November 2026 (a new, later tax year), triggering a clawback clause requiring repayment of the full gross £20,000. If the contract requires gross repayment, the employee must find £20,000, despite having only received £14,000 net -- unless they can successfully claim tax relief for the repayment through Self Assessment, or negotiate with the employer to repay only the £14,000 net amount instead.

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