Tax Codes and Bonuses

know_nothing_2

Hi guys

I'm trying to get my head round something and I wondered if anyone could help me!

I start a new job next month. Factoring in the personal allowance, my annual salary brings me just within the basic rate of 20%. However I will also receive a quarterly bonus; this is performance related so the exact amount isn't known but I understand that this will push me up into the higher 40% rate when my income is viewed annually (fair enough!)

My question is: how will my employers determine my PAYE code? Will I be taxed on my monthly salary at the higher rate in anticipation of my bonus, or will this only kick in once I pass the threshold (or something similar)?

Sorry, I'm a dunce at this stuff! Any help would be appreciated as I'm getting married next year and we're trying to figure out the old finances!

Cheers,
Chris

Poolie

Your employer will take the 40% tax in the month that this occurs. The tax system will then see a lower amount and will balance itself out correctly over the year.

Your PAYE Code (ie tax free) won't change through the year for different income levels

CLAPTON

your employer doesn't determine your tax code... that's HMRC's job
your tax code doesn't change because your salary or bonus changes

you tax is worked out on a cumulative basis; that means you are taxed on your earning from april to the present month
you are allowed your tax free allowance (6,475) pro-rata-ed to the present month
you are allowed the 20% allowance (37,400) pro ratated to the present month

depending upon when your bonus is paid you may pay too much tax that month but by the end of march your total tax will be correct as the overpaid tax will automatically be repaid.

System

Clapton is totally correct assuming your new employer operates your code on a cumulative basis.
However since you are just starting the job near the end of the current tax year and you might find yourself on a non-cumulative week1 month1 code and any bonus you receive in this tax year may mean you will pay too much and will have to claim it back from HMRC after the end of the tax year.

know_nothing_2

Cheers guys!

Pam: my first bonus would probably be payable at the end of Q1 FY11/12 so that should be OK.

So if I'm understanding this all correctly the likely outcome is that I'll be taxed at 20% for the first couple of months preceding my bonus. I'll be taxed at 40% on everything I'm paid on months when my bonus is received, and then taxed at a rate slightly lower than 20% to make up the difference in the intervening months.

Does this sound about right do you reckon?

Edit: or is the correction likely to come as a rebate at the end of the FY?

CLAPTON

know_nothing wrote: »

Cheers guys!

Pam: my first bonus would probably be payable at the end of Q1 FY11/12 so that should be OK.

So if I'm understanding this all correctly the likely outcome is that I'll be taxed at 20% for the first couple of months preceding my bonus. I'll be taxed at 40% on everything I'm paid on months when my bonus is received, and then taxed at a rate slightly lower than 20% to make up the difference in the intervening months.

Does this sound about right do you reckon?

Edit: or is the correction likely to come as a rebate at the end of the FY?

Basically NO


reread my post.. if you don't understand it then ask questions

if you want to post up approximate numbers then we can show you how it works

know_nothing_2

Thanks Clapton, your help is much appreciated!

OK so I think I'm starting to understand how this works. Tell me if I'm talking rubbish here. I'm going to assume I start in April here and use next year's allowances for the sake of the example:

My personal allowance will be £7,475 which pro-rata-ed over the year is £622.92 per month. This amount will be untaxed (if that's a word)
The 20% allowance will be £35,000 which pro-rata-ed over the year is £2,916.67 per month. This amount will be taxed at 20%.
Assuming an annual salary of £43k this leaves £43.75 of monthly income which will be taxed at 40%.

In that example this would appear to me (and please correct me if I'm wrong) to give net monthly income of £2,982.50

Let's assume that in the third month a bonus of 50% is paid; so £5,375. What I'm having trouble with is the idea that I may pay too much tax in that month:

If the allowances are pro-rata-ed, wouldn't I just pay 40% on £5,418.75 of what I would receive that month?
Wouldn't intervening 'non-bonus' months simply be identical to the first 2 months of the year?

(I know NI starts to factor as well at this point, but I'm happy to leave that out for the sake of clarity)

CLAPTON

in your example then yes the tax will work as you describe (although I get the arthmetic to be a little different to you)
but this is because you are already paying 40% on your 'normal' monthly salary so everything earned as a bonus is then taxed at 40%

your original post seemed to suggest that your normal salary was a little less than the 40% band... in that case you would automatically get a little rebate in july

and by the way if you contribute to a company pension scheme then this is tax free if paid at source and might take you out of 40% for your normal salary

NI curreently kicks in at monthly salary of 476 at either 11% or 9.4% and then at 1% over 844 (this will be changing after april however to 12% and 2%)