Salary Overpayment in the UK: Recovery, Tax Refunds and Employment Law 2026/27

What Is a Salary Overpayment?

A salary overpayment occurs when an employer pays an employee more than they are contractually or legally entitled to. Common causes include:

• Payroll processing errors (wrong hourly rate, wrong hours entered)
• Failure to process a salary reduction after a change of role
• Continued payment after termination of employment
• Paying holiday pay at the wrong rate
• Bonus or commission paid in error
• Failure to update records after a period of unpaid leave

Overpayments can range from a few pounds to many thousands, and both employer and employee have specific rights and obligations when they occur.

The Net vs Gross Distinction: A Critical Point

The most important principle for employees to understand is that you are only obliged to repay the net amount of any overpayment -- that is, the money you actually received after deductions for income tax and NI.

The gross overpayment figure belongs partly to HMRC (the income tax and NI portion) and partly to the employee (the net pay). Since you never received the tax portion, you cannot logically be expected to repay it.

Example: Emma is overpaid GBP2,000 gross in a month. After income tax at 20% (GBP400) and employee NI at 8% (GBP160), she receives GBP1,440 net. If Emma repays the overpayment, she repays GBP1,440 -- not GBP2,000. Her employer then reclaims the GBP400 income tax and GBP160 NI through the payroll system.

The employer recovers the tax and NI by adjusting the PAYE Real Time Information (RTI) submissions. Depending on the timing, this may involve:

• A negative correction in the current month's Full Payment Submission (FPS)
• An amended Earlier Year Update (EYU) or amended FPS for prior periods
• A direct repayment claim to HMRC where the payroll year has already closed

Employment Law: The Right to Recover an Overpayment

Under section 13 of the Employment Rights Act 1996, employers are generally prohibited from making deductions from wages without the employee's prior written consent or a provision in the employment contract permitting it.

However, section 14(1) of the same Act creates an important exception: a deduction is lawful if it is made to recover an overpayment of wages or expenses. This exception applies even if the employment contract does not mention it.

This means:

• An employer can recover a salary overpayment by deducting it from future wages without the employee's specific agreement
• The deduction does not require a contractual clause permitting it
• The employer does not need to obtain a court order

However, there are important practical limits:

The deduction must not leave the employee below the National Living Wage (NLW) or National Minimum Wage (NMW). For workers aged 21 and over, the NLW is GBP12.71 per hour in 2026/27. If recovering the overpayment in a single pay period would reduce the hourly rate below this level, the recovery must be spread over multiple periods.

The employer must notify the employee in writing before making the deduction. Transparency is both good practice and, in most cases, a legal requirement under the Employment Rights Act.

The amount recovered in each period should be reasonable relative to the employee's earnings. Courts and employment tribunals have found that recovering very large overpayments in a single deduction can amount to unlawful conduct even where the debt itself is lawful.

What If the Employee Disputes the Overpayment?

If an employee believes there has been no overpayment, or disputes the amount, they can raise a formal grievance. They cannot simply refuse to repay without good reason -- if the overpayment is genuine, the employer has a clear legal right to recover it.

However, if the employer deducts more than the actual overpayment, or deducts it in a way that causes financial hardship not covered by the lawful deduction exception, the employee can bring a claim for unlawful deduction from wages in an employment tribunal. The limitation period is three months from the date of the deduction.

Agreeing a Repayment Plan

Where the overpayment is large relative to the employee's normal earnings, it would be unreasonable to recover it all in one go. Employees have a right to negotiate a repayment plan that allows recovery over multiple pay periods.

HMRC's guidance and employment tribunal case law both support the principle that recovery should not cause unreasonable financial hardship. A repayment plan should be agreed in writing before deductions begin, specifying:

• The total amount to be recovered (net figure)
• The monthly deduction amount
• The number of months the plan will run
• What happens if the employee leaves during the recovery period

Cross-Year Overpayments: The Complex Scenario

When a salary overpayment and its recovery span different tax years, the tax treatment becomes more complicated.

Same Tax Year

If the overpayment and recovery both occur within the same tax year (6 April to 5 April), the employer simply corrects the payroll figures in the RTI submission. The net effect is that the employee's annual P60 reflects the correct earnings figure, and no tax refund is needed beyond the normal payroll adjustment.

Different Tax Years

If the overpayment occurred in a previous tax year and is discovered later, the employer cannot simply offset it against current year earnings for tax purposes. The tax treatment in each year must be correct separately.

The employer should:

1. Calculate the net overpayment (gross minus the tax and NI already deducted)
2. Recover only the net amount from the employee
3. Submit an amended prior year RTI return (or EYU) to reclaim the overpaid tax and NI from HMRC
4. Issue an amended P60 or P11 to the employee if necessary

If the employee has already filed a self assessment return for the prior year including the overpaid amount, they may need to amend that return. HMRC's online self assessment service allows amendments within 12 months of the original filing deadline (so amendments to a 2024/25 return must generally be made by 31 January 2027).

Practical Example: Cross-Year Overpayment

James was overpaid GBP3,600 gross during 2024/25 due to a payroll error. The overpayment is discovered in September 2026. The net overpayment (after 20% tax and 8% NI) was GBP2,592.

• James repays GBP2,592 to his employer in 2026/27
• His employer submits an amended RTI return for 2024/25 reducing James's earnings by GBP3,600
• HMRC refunds the GBP720 income tax and GBP288 NI to the employer
• James has no further liability -- he has repaid what he received

If James had filed a self assessment return for 2024/25, his accountant or adviser should review whether an amendment is needed.

Tax Relief on Repayments: The "Negative Earnings" Rule

There is a specific tax provision that applies where an employee repays earnings that have been taxed. Under section 11 ITEPA 2003, a repayment of taxed earnings is treated as "negative earnings" in the year of repayment. This can give rise to a tax refund in the year of repayment if the employer does not handle the cross-year adjustment through RTI.

In practice, the employer's amended RTI return usually handles this automatically. Where it does not, the employee can make a claim directly to HMRC using their personal tax account or by writing to their HMRC tax office.

Employers: Best Practice Checklist

To minimise disputes and tax complications when a salary overpayment occurs:

• Notify the employee promptly and in writing as soon as the overpayment is identified
• Clearly state the gross overpayment, the net amount to be recovered, and the period involved
• Offer a reasonable repayment plan if the amount is large
• Confirm the plan in writing with both parties signing
• Submit the corrected RTI return promptly -- do not delay, as HMRC may have already applied the overpaid figures to the employee's tax code
• Issue an amended payslip or P60 correction if needed
• Do not recover more than the net amount -- the gross figure is not the employee's liability

Employees: Protecting Your Position

If your employer tells you that you have been overpaid:

• Ask for a written breakdown showing the gross overpayment, the tax and NI deducted, and the net amount they are seeking to recover
• Verify the figures independently by checking your payslips for the relevant period
• If the amount is large, negotiate a repayment plan before deductions begin
• Keep a copy of any repayment agreement
• Check whether an amended P60 or self assessment amendment may be needed
• If you have repaid the net amount and later receive an unexpected tax bill related to the overpaid earnings, contact HMRC directly -- this is likely an RTI correction issue on the employer's side

Key Statutory References

For those who need to go to the source material:

• Employment Rights Act 1996, section 13: general prohibition on unlawful deductions
• Employment Rights Act 1996, section 14(1): exception for overpayment recovery
• Income Tax (Earnings and Pensions) Act 2003, section 11: negative earnings on repayment
• National Minimum Wage Act 1998: NLW floor during recovery periods

Salary overpayments are one of the less dramatic but practically important areas of employment and payroll tax law. Handled correctly, they are straightforward to resolve; handled poorly, they can generate employment tribunal claims, HMRC corrections and significant administrative burden for both parties.