40% tax

daniel.thomas

This year I will stay below the 40% but next year there is a chance I will go over....
Never earning that much before I'm not sure what happens.

I am right in saying that if I reach £35k in taxable income. Everything after that is takes at 40%

Ie: in jan I hit 35k for the year
In feb I will loose 40% of every £1 I make and so on till the start of the next tax year,

lisyloo

I am right in saying that if I reach £35k in taxable income. Everything after that is takes at 40%

Pretty much, (you'll also be paying NI as well).

If you have a pension that is paid out of your NET salary then you can claim back higher rate tax relief, in fact it makes a lot of sense to use this opportunity if you have money you can tie up until retirement.
You can also claim higher rate tax relief on any charity contributions you made that qualified for gift aid.
On the downside you need to pay 40% tax on your savings interest and the bank will only deduct 20%. You want to start making use of ISAs if you haven't already.

Do you have a pension?
How is is paid? By salary sacrifice before you get paid, or from your salary?

CLAPTON

taxable pay is an ambiguous term

in the tax year 2011-12
you start paying 40% tax when your income reaches 7475+35,000 = 42,475 after pension is accounted for so if e.g. you pay 2,000 into a pension then your don't start paying tax at 40% until you earn 44,475

and the tax and allowances are spread evenly throughout the year; so if your salary each month is the same then you pay the same tax each month.

ceeforcat

your don't start paying tax at 40% until you earn 44,475

Yes Clapton - that phrase is such a problem. So many think that, the second you have earned £44475 in any tax year, every single penny you receive for the rest of the year is whacked at 40%. They do not grasp the concept that they get 1/12 of the tax free allowance and basic rate band every month.

whatyadoinsucka

ceeforcat wrote: »

your don't start paying tax at 40% until you earn 44,475

Yes Clapton - that phrase is such a problem. So many think that, the second you have earned £44475 in any tax year, every single penny you receive for the rest of the year is whacked at 40%. They do not grasp the concept that they get 1/12 of the tax free allowance and basic rate band every month.

your tax free allowance is pro rated throughout the year, so in theory if you are earning under the £35k higher rate plus your personal allowance combined, you will pay the standard rate of tax, throughout the year.
At year end (March month end) if you are getting a bonus which will take you over the HR tax bracket, then your bonus will get hammered on tax at 40%, this is why most companies pay bonuses at year end. before 5/6th april

1jim

I think Im probably confused so wonder if you could help. I am likly to earn just over the £35k mark this year, I pay into an NHS pension and a small amount into childcare vouchers, I get an allowance for professional fees and washing uniform at home.
I was under the impression that I would pay 40% tax on anything over £35,001.... but am I now right in thinking that I wont pay 40% tax until I earn £44k? and if this is the case do I continue to pay 20% tax on savings or would I need to pay 40%tax on savings?
thanks

ceeforcat

If you earn £35k this tax year, you will not pay higher rate tax on any of those earnings. If this minus your pension contributions plus your savings interest grossed up (i.e. multiplied by 100/80) is less than £44475, you will not pay any more tax on your savings interest.

chrisbur

1jim wrote: »

I think Im probably confused so wonder if you could help. I am likly to earn just over the £35k mark this year, I pay into an NHS pension and a small amount into childcare vouchers, I get an allowance for professional fees and washing uniform at home.
I was under the impression that I would pay 40% tax on anything over £35,001.... but am I now right in thinking that I wont pay 40% tax until I earn £44k? and if this is the case do I continue to pay 20% tax on savings or would I need to pay 40%tax on savings?
thanks

The point at which you will pay 40% tax is £35001 plus your tax allowance so if getting code of 747L you have £35001 plus £7475 =£42475. If your tax code is different then the figure you start paying 40% tax at will be different. If your pension is deducted before tax you will have two gross figures on your payslip a total gross and a taxable gross that is lower. It is the taxable gross figure that will decide if and when you pay 40% not the total gross.

If your savings interest plus your taxable gross plus any other taxable income you may have takes you into the 40% tax bracket then some extra tax will be due on the savings interest.

Also worth remembering that assuming a code of 747L then at about the point you start paying 40% tax your NI drops to 2%

John_Pierpoint

Just to be pedantic:

If your [Gross ie before tax] savings interest plus your taxable gross plus any other taxable income you may have takes you into the 40% tax bracket then some extra tax will be due on the savings interest.

You also risk getting into a bit of a muddle with share dividend type payments, these show a deduction of only 10% tax, which is in fact your share of the corporation tax that the company will be paying. When you are a standard rate tax payer this tax will be deemed to satisfy your marginal rate of 20% tax BUT when it is put up against your higher rate (40%) tax it does not.

The "Alice in Wonderland" explanation of an early stealth tax is here:

http://www.hmrc.gov.uk/taxon/uk.htm