Becoming higher rate taxpayer - complex?

newfoundglory

In September I got a mini promotion at work and due to lengthly reasons I am not going to go into this has taken my salary from about £27,000 to just over £33,000 per year.

I have been saving as much as I can since I left university 6 years ago, and combined with some inheritance, I have saved over £150,000. I have been looking for somewhere to buy/live for the last year, but not sure when I might buy.

I also have some shares in a dealing account worth about 2 or 3 thousand, and get some dividend income from that. I also have a shares ISA fund, which might be worth between 1 or 2 thousand.

There are also things on my payslip which I do not understand the (tax) impact of - including my pension contributions, student loan repayments and train season ticket loan.

How can I work out if I need to do anything THIS year, and what I should do for next year?

jem16

newfoundglory wrote: »

In September I got a mini promotion at work and due to lengthly reasons I am not going to go into this has taken my salary from about £27,000 to just over £33,000 per year.

At the moment you still have at least another £9,000 till you reach the higher rate tax bracket.

There are also things on my payslip which I do not understand the (tax) impact of - including my pension contributions, student loan repayments and train season ticket loan.

Any pension contributions will reduce your taxable pay. The season ticket may increase it - depends on whether or not it is seen as a taxable benefit. Student loan deductions have no effect on your taxable pay.

How can I work out if I need to do anything THIS year, and what I should do for next year?

You need to add up your gross taxable income. This is gross salary plus gross savings interest plus dividend payments plus possibly the season ticket and any other taxable benefits such as car or medical insurance. Then take off gross pension payments. If all of that comes to more than £42,475 then you are a higher rate taxpayer and must inform HMRC. If less no need for anything.

You don't appear to be that close to higher rate tax - what are you worrying about?

newfoundglory

I thought 40% started at £35,000 this year and is going down next year?

CLAPTON

newfoundglory wrote: »

I thought 40% started at £35,000 this year and is going down next year?

you have tax free allowance of 7475 and then the 20% tax band is 35,000

so you don't pay 40% tax until relevant income is 42,475

relevant income is gross salary
plus saving interest (grossed up but exclude ISA)
plus dividends (grossed up but excluding ISAs)
plus benefits in kind
less pension payment

newfoundglory

So i should be okay for this year.

I also forgot to include overtime.

And next year I have to do some shift work for 6 months which depending on hours worked is going to create an additional allowance of between 10% to 40% of salary for that month.

So I guess it will be close then!

grizzly1911

newfoundglory wrote: »

So i should be okay for this year.

I also forgot to include overtime.

And next year I have to do some shift work for 6 months which depending on hours worked is going to create an additional allowance of between 10% to 40% of salary for that month.

So I guess it will be close then!

If the shift payment/allowances are not guaranteed or are variable don't worry until they are banked as it were.

If you do go over the top at the last minute worry about it then. The HMRC will simply recover it.

When I went into the higher rate tax paying pleasure my tax code, the fact I was PAYE picked up the bulk of it anyway, including pension allowances and BIK.

Once over the threshold non exempt savings income (e.g not ISA) will be taxable at the higher rate and you will need to declared on an annual tax return.

CLAPTON

newfoundglory wrote: »

So i should be okay for this year.

I also forgot to include overtime.

And next year I have to do some shift work for 6 months which depending on hours worked is going to create an additional allowance of between 10% to 40% of salary for that month.

So I guess it will be close then!

maybe; it will depend also on how much you contribute to your pension and how much of your savings interest and dividends are in ISAs
in any event there is no need to do anything until you know the figures after tax year end

newfoundglory

I have managed to put about 45 grand in cash ISAs, but thats only about £1,300/year from what I can see.

The shift work is guaranteed - i was only trying to work out if doing shifts was worth it financially.

If I just leave it, would HMRC work all this out automatically at the end of the relevant year and adjust the tax code if I owe anything during the following year?

Is there anything else I should do to reduce tax?

jem16

newfoundglory wrote: »

If I just leave it, would HMRC work all this out automatically at the end of the relevant year and adjust the tax code if I owe anything during the following year?

Tax on your salary will all be worked out automatically with no need to adjust the tax code.

However what cannot be worked out is where your interest/dividend income takes you into higher rate tax. You have to inform HMRC of that and give them the figures.

Is there anything else I should do to reduce tax?

Increase pension payments, use up ISA allowance each year, Gift Aid.

grizzly1911

jem16 wrote: »

However what cannot be worked out is where your interest/dividend income takes you into higher rate tax. You have to inform HMRC of that and give them the figures.



Increase pension payments, use up ISA allowance each year, Gift Aid.

They won't just accept your interest figures you will have to complete a full tax return the first time and most likley short form tax returns after that. You do not need to include details for your ISAs.

If you can't increase your pension payments AVCs offer the same advantage just slightly different. Only thing to remember is that locking away too much money in a pension just to avoid tax might not always be the best option especially if you might be swapping jobs/pension providers.

somethingcorporate

Even if you move into HR tax the overtime will always be worth it as you only get taxed incrementally. Of course you will pay more tax on a certain element but you will still get more money (just at a declining rate per pound).

It is somewhat disheartening to see a decent sized bonus halved by HR tax and student loan! but the more you earn the quicker this latter will be paid off and then think of the happy days when you no longer have that.

Well done on saving such a monumental amount of cash in such a quick time - I've no idea how you have done that in 6 years since your net income (at £27k pa gross) without any pension payments is ~£20k pa and multiplied by the 6 years since you left uni plus a bit of interest means you would have not spent much in your six years (I am sure there is more to this story ).