Q&A: dealing with negative taxable earnings

6 Mar 2018

Croner Taxwise tax adviser Faz Zaheer examines the tax liability for a taxpayer dealing with negative earnings in a single tax year

Q. My client has negative taxable earnings in the tax year. What are the tax implications and are there any reliefs available for the taxpayer?

A. There are circumstances where someone may sustain an employment income loss in any given tax year. For example, this may be due to the clawback of a joining-on fee or a bonus payment if conditions to the payments have not been adhered to.

Example

A Limited offers employment to X for a £40,000 per annum salary and as an incentive to join the business also offers a joining-on fee of £100,000;
the terms of the joining-on fee have clawback provisions included in them if X decides to resign within five years of joining the business; and
X decided the role was not suitable and chooses to leave the business after 12 months, thus failing to meet the conditions of the joining-on fee. X has to repay £80,000 in the year of departure

In the year of departure, X has negative net taxable earnings for the year of minus £40,000 (£40k salary less (£100k x 4/5) = -£40k)

Loss relief may be available under section 128, Income Tax Act 2007 (ITA 2007), to be given by set-off against general income of the current and/or prior tax year.

So for example, if X has rental income of £15,000 and dividends of £10,000, he may use the negative £40,000 to offset against these streams of income for the current and/or prior tax year.

Note that although this may waste the personal allowance, it may still be the favourable option to go with, as any unused loss cannot be carried forward.

There are a number of other factors to consider in such circumstances and each case will need to be looked at on its own merit to determine the best course of action.