Back pay is an amount that relates to a past pay period but is only paid in a later one. It typically arises when a salary increase or a new rate is agreed with effect from an earlier date.
What it means
If an increase is backdated three months, the employee is owed the difference for those months, paid as a lump in the current period. Although it is paid now, it was earned earlier, which matters for how it is taxed - SARS rules govern whether back pay is taxed in the period paid or related back to the periods it covers.
Where it fits in
Back pay is an earnings component added in the period it is paid, increasing that period's gross remuneration. Because it can be a sizeable once-off amount, payroll treats it carefully for PAYE so the employee is not over-taxed, and it is reported under the appropriate IRP5 source code.
Key rules
- Pay for a prior period, settled in a later one.
- Commonly from a backdated increase or rate change.
- Taxed under SARS rules for amounts accruing to earlier periods.
- Added to gross remuneration in the period paid.
