What Does “Paid in Arrears” Mean?
“Paid in arrears” means making a payment after a good or service has been delivered or after a work period has been completed, rather than paying before the service or work takes place.
The term “arrears” comes from the Old French word ariere, meaning “behind” or “in the rear”. In payment terms, it means you are paying for something that has already happened.
This is different from paying in advance, where payment is made before the goods or services are provided.
Importantly, being paid in arrears does not automatically mean that a payment is late. If your employment contract states that you are paid monthly in arrears and you receive your salary on the agreed payday, the payment is on time.
Paid in Arrears vs Paid in Advance: Key Differences
| Feature | Paid in Arrears | Paid in Advance |
|---|---|---|
| Timing | Payment is made after the work or service is completed | Payment is made before the work or service begins |
| Common examples | Salaries, utility bills, business invoices | Rent, subscriptions, insurance |
| Accuracy | Usually based on actual work or usage | May be based on estimates or agreed amounts |
| Payer’s cash flow | Cash is retained for longer | Cash is paid earlier |
| Recipient’s cash flow | Payment is received later | Payment is received upfront |
| Risk | The supplier or employee waits for payment | The recipient receives payment before providing the service |
Paid in Arrears in UK Payroll
Many UK employees are paid in arrears. For example, a monthly employee may receive their salary at the end of the month for work completed during that month.
Weekly employees may receive their wages at the end of the working week for the week they have just worked.
Why Do Most UK Employers Pay in Arrears?
There are several practical reasons for using an arrears payroll system:
- Accuracy: Employers can calculate actual hours, overtime, sickness and other variable payments.
- Statutory payments: Payments such as Statutory Sick Pay and Statutory Maternity Pay can be calculated using information from the relevant pay period.
- Payroll compliance: Employers can report actual payroll information through HMRC’s Real Time Information system.
- Variable pay: Commissions, bonuses, overtime and variable hours can be calculated after they occur.
- Cash flow: Employers retain cash until the end of the relevant pay period.
What Does Paid in Arrears Mean for New Starters?
A new employee may have to wait until the end of their first payroll period before receiving their first salary.
For example, if you start work on 1 June and your employer pays monthly in arrears:
- 1–30 June: You work your first month.
- End of June: You receive your salary for June.
- You have therefore completed the work before receiving payment.
If you start after the payroll cut-off date, your first payment may be delayed until the following payroll run. This depends on your employer’s payroll schedule and cut-off date.
Paid in Arrears for Different Payment Types
Salaries and Wages
Monthly salaries may be paid at the end of the month for work performed during that month.
Similarly, weekly wages may be paid at the end of the week for the work completed during that week. Fortnightly payroll can cover the two weeks that have just been worked.
Utility Bills
Gas, electricity and water bills are commonly charged in arrears.
You use the service during a period and are then billed for the amount used. A meter reading can help the supplier calculate the actual amount owed.
Mortgage Payments
Mortgage payments are commonly made in arrears, meaning the payment covers interest or other amounts relating to a period that has already passed.
The exact timing depends on the terms of the mortgage agreement.
State Pension
The UK State Pension is normally paid in arrears. Payments are generally made every four weeks and cover the period that has already passed.
Business-to-Business Invoices
In B2B transactions, suppliers commonly provide goods or services before receiving payment.
For example, a supplier may provide services in June, issue an invoice at the end of June and give the customer 30 days to pay. The customer therefore pays in arrears under the agreed payment terms.
Salary Arrears: When Arrears Means Overdue Payment
The term salary arrears can also have a different meaning when wages have not been paid by the agreed payday.
For example, if an employer should have paid an employee £2,000 on 31 July but fails to do so, the unpaid wages may be described as salary arrears.
This is different from ordinary payroll paid in arrears. In normal arrears payroll, the employee is paid on the agreed date. Salary arrears caused by missed or late payment represent an overdue obligation.
Tax Treatment of Arrears Payments
The tax treatment of arrears payments can depend on the circumstances and the relevant PAYE rules.
Where an employer makes a late salary payment, the correct treatment should be determined using HMRC payroll guidance and the circumstances surrounding when the earnings became payable.
Employers should ensure that PAYE Income Tax and National Insurance are reported correctly when arrears are paid.
HMRC RTI and Arrears Payroll
Under HMRC’s Real Time Information system, employers generally submit a Full Payment Submission (FPS) on or before the date employees are paid.
The FPS includes information such as:
- Gross pay
- Income Tax deducted
- National Insurance contributions
- Other relevant payroll information
Employers should ensure that their payroll reporting corresponds with the actual payment date.
Frequently Asked Questions: Paid in Arrears UK
Does Paid in Arrears Mean I Won’t Get Paid for a Month?
Not necessarily.
If you are paid monthly in arrears, you normally receive your first salary after completing your first pay period. After that, payments usually continue according to the employer’s regular payroll schedule.
Is It Legal for an Employer to Pay Weekly in Arrears?
Yes. Paying employees weekly in arrears can be a normal and lawful payroll arrangement.
The employer must still comply with the agreed payment terms and applicable employment and minimum wage requirements.
What Is the Difference Between Paid in Arrears and “In Hand”?
Being paid in arrears means you are paid after completing the relevant work period.
A week in hand or month in hand arrangement can mean that one period’s wages are held back, so the employee works their first period but receives those wages during a later pay period.
Therefore, ordinary payment in arrears does not necessarily mean that an employer is withholding an extra week’s or month’s pay.
Can Mortgage Interest Be Paid in Advance?
Some mortgage products may charge interest in advance, although many standard mortgage arrangements calculate or charge interest in arrears.
The exact arrangement depends on the mortgage product and its terms, so borrowers should check their mortgage agreement.