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Glossary · Any country

What are salary arrears?

Salary arrears are pay that was due for a past period but not paid at the time. The most common cause is a backdated raise: the new salary takes effect from an earlier date, the months already paid were paid at the old rate, and the difference for each of those months is owed. Arrears are normally paid as a lump sum with a later salary.

How arrears are worked out

Take each pay period between the effective date and the last run, and subtract what was paid from what would have been paid at the new rate. A raise from 200,000 to 230,000 a month, approved in October and effective from July, leaves arrears of 30,000 for each of July, August and September — 90,000 in all, paid with October’s salary.

Anything calculated on salary follows. Contributions charged on gross pay, and allowances set as a percentage of basic, have their own arrears for the same months, and a correct calculation carries them through rather than adjusting the gross alone.

Arrears and monthly tax

Where tax is withheld on a projection of the year’s income, arrears raise the projection. In Pakistan, section 149 of the Income Tax Ordinance has the employer deduct tax at the employee’s average rate on the estimated salary for the whole tax year, so arrears paid in October raise the estimate and the deduction from that month on. The income tax slab the year’s income lands in can change with them.

Arrears from a salary revision in Ledgr

In Ledgr a raise is a salary revision with an effective date and an approver. Applying it puts the new salary on the pay profile; if the date is in the past, Ledgr computes the arrears for every period already paid and pays them with the next salary, and the revision shows the amount and whether it has been paid. A change made directly on the pay profile computes no arrears; a backdated raise goes through a revision.

Related terms

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Glossary · Salary arrears

More questions about salary arrears

Are salary arrears taxable?

Generally, yes, as salary. Where withholding is a projection of the year, as in Pakistan, the arrears raise the estimated annual salary and the monthly deduction is recalculated from the month they are paid.

What is the difference between arrears and a bonus?

Arrears are pay already earned at a rate that applied to past months but was not paid at the time. A bonus is an additional payment on top of salary. Both are often paid with a regular salary, but arrears are worked out period by period.

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