If you've been accidentally overpaid at work by your employer, it may seem like a lucky bonus, but don't assume you can keep the money! Here we look at overpayments for employees and freelancers / sole traders.

But, what if you've been underpaid? See our articles here about the National Minimum Wage and also about pay cuts/unauthorised deductions from your pay.

For employees

If you're staring at your bank balance in disbelief because your work has paid you more than you expected, we'd encourage you to hold off the celebrations. Overpayments are fairly common and you can't just keep the money.

Similarly, if you're an employer and you accidentally overpay – don't panic, you are entitled to request the money back provided you follow these rules…

If your employer has made an accidental overpayment of wages/salary or expenses (including holiday pay) to an employee, the employer can legally recover this overpayment. This can be done by deducting the overpaid amount from future wages or salary (or any money due to the employee if they leave).

The situations where an employer can make deductions from your wages are limited, but this is one situation that's allowed by legislation (see our full article about authorised and unauthorised deductions from wages). It's important to note that according to HMRC guidance, recovering an accidental wage overpayment does not reduce a worker's pay for National Minimum Wage purposes.

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For employers

If an employer makes an overpayment in one pay period (monthly or weekly paid), it should be relatively straightforward for them to deduct this from the employee's salary in the following pay period.

If things have been going wrong for a long period of time, however, it's a little more complex. You can't just demand an employee repay large amounts of money – you need to come to an arrangement that works for both parties. Otherwise, the employee can pursue grievances or court action.

Creating repayment arrangements

Where a large overpayment is discovered, we'd advise employers and employees to meet and try to agree on a programme of repayment over a period of time. There is no minimum or maximum period of time, so you need to be mindful of the impact repayments can have on your life.

If an employee can't come to an arrangement with their employer about the repayment programme, they should use the internal grievance procedure to try and resolve the matter. For general advice on employment rights, you can also contact the Acas helpline, which operates from 8 am to 6 pm, Monday to Friday. Ultimately, employees can choose to sue their employer in a Civil Court if they felt the employer was being unfair and unreasonable in recovering the repayment.

The employee's defence would be that they were led to believe that they had an entitlement to the money, it wasn't their fault, and that, in good faith, they had "changed [their] position" and become reliant on the money (which usually means they've spent the overpayment!).

However, if a repayment arrangement cannot be agreed, the employer can take the employee to a Civil Court to recover the money. Clearly, at this point the employment relationship between the employee and employer will have almost certainly broken down.

In both cases, the judge will consider whether the 'injustice' of requiring an employee to repay the money is greater than the 'injustice' to the employer of not receiving the overpayment back.

They'll also consider what the employee has done with the money and how much effort the employee made to initially report the overpayment. They will also check whether the employee had received payslips. Under the Employment Rights Act 1996, it is one of your employment rights that you should receive an itemised payslip detailing gross pay, all deductions, and net pay. In making a decision, the court may ask the employee to repay some, all or none of the money and will consider how easily the employee could achieve the employer's repayment requirements.

In some cases, it might be practical for the employer to consider writing off part of the overpayment rather than become involved in legal proceedings to recover the full amount.

What if the employee no longer works for the employer who has overpaid them?

If the employee has now left the employer where the overpayment occurred, you're in a trickier situation since the employer can't deduct payments from wages. However, there are still ways to resolve things.

An employer can write to an employee to let them know about overpayments and to request the money. You'll need to check your employment contract to see whether overpayments are covered. In most contracts, there will be a stipulation that any monies owed to an employer which can't be recovered from final wages become a civil debt. If there is no such wording, an employer will have a far harder time trying to recover it.

Regardless of whether you have that wording in your old contract or not, it's best to obtain expert advice from an organisation providing support in legal or employment matters.

For freelancers

Although overpayments for freelancers/sole traders may seem unlikely, they do happen. Ironically, you're far more likely to have to deal with late payments. Recent data shows just how widespread this issue is, with 32% of freelancers experiencing late payments in the year leading up to Q1 2024. The average amount owed was a staggering £5,140, forcing many to use savings or credit to cover costs. This has a significant impact, with 48% of affected freelancers reporting increased stress and anxiety.

If you are overpaid by a client, common sense says you should let them know about the overpayment and make arrangements to repay it to ensure you keep a good relationship and secure future work.

It's always advisable that your work with the client is covered by a form of contract that should specify when and how much you'll get paid, which can be referred to by both parties.

Overpayments for freelancers can be made more complicated due to tax/VAT/accountancy requirements or implications, and it's something you may want to take advice from your own accountant about.

The most common way to deal with overpayments with a client you have a good relationship with is to simply deduct the overpayment amount from a future invoice. However, if it's likely to be the last invoice to that client, you can send them a credit note referring to the invoice number.

We suggest you speak to your client and your own accountant if this happens to you, to find the best possible way of sorting this out.

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What if you’ve overpaid tax?

Employees and self-employed people alike sometimes end up overpaying tax. For a self-employed person, this can happen if you make payments on account based on last year's earnings but then earn less in the current year, leaving you due a refund.

Keeping accurate, up-to-date records is key to avoiding this. This is becoming even more critical with the rollout of Making Tax Digital for Income Tax Self Assessment (MTD ITSA). This new system will be mandatory for self-employed individuals and landlords with gross income over £50,000 from April 2026, over £30,000 from April 2027, and over £20,000 from April 2028.

In most cases, HMRC notices overpayments themselves and will issue a tax calculation letter (a P800). Sometimes, however, you may spot an overpayment yourself by using a tool such as Crunch that tracks your finances. If you need help getting your tax affairs in order, our expert accountants can prepare and file your Self Assessment for you. 

If you believe you've overpaid, you should get in touch with HMRC as soon as possible to resolve it. Visit HMRC's page here to learn more about tax overpayments and underpayments.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.

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