Tax Query on back pay

mustbemad68

I have just heard that after years of negotiating and appeals that I have won a pay award
I should receive around £11,000 in back pay in one month and I have been told that this will push me into the high tax bracket and I will pay 50% tax on some of it. Even with this back pay my annual salary will only be around £33,000 this year so how does this work? do they tax me a lot on my back pay and then give me it back or will I have to claim it back in some way?
thanks for any help you can give ( hope this is in the right area of the forums)

paddedjohn

You could ask them to pay half now and half next tax year.

Evilm

The month they will pay it you will pay more tax on it that you would have if it was spread through the year (Its to do with the system that assumes this months pay will id indicative of what you will get paid the rest of the year). At the end of the year you would need to ask HMRC for a recalculation and they would be able to send you a refund of the overage. Its possible it might happen before the year end and you would get some back on the next months payslip or the month after that.

If it is properly going to take you over the 50% band for the year then as John says you could ask them to pay some now and some in May so that it doesn't trigger the 50% band.

chrisbur

If you are on a cumulative tax code then your tax will correct itself as it goes along so any overpayment in a high month will come back to you in the following month or months and you will have paid the correct tax for your tax code at the year end. Any overpayment is only going to be into the 40% band not the 50% band, and will allmost certainly be refunded before the year end. I cannot be more precise without knowing full details.

If you are on a month 1 code then there will be no automatic correction and tax will be higher on the bonus. It would be best to sort out your tax code and get onto a cumulative code as soon as possible rather than wait for the year end and claim a refund.

agrinnall

I believe I've read on here that in some circumstances back-dated pay can be taxed as if it was paid in the previous year(s) it would have applied to. However, I don't know if this is the case here, and I suspect it's unlikely to make any difference in the tax paid as it's likely to all be taxed at 20% anyway. You will have a big NI hit when you are paid but again I don't think it will matter in the long run as you'd either have to pay it in one go or gradually.

chrisbur

NI will be a lot lower with this payment than it would have been if it had been paid bit by bit; as the upper earnings limit for monthly NI is £3540 so anything over this will have only 2% NI deducted.

mustbemad68

Thanks everyone. I will wait to see what happens when I get my back pay and then see if my tax is corrected the next month.

agrinnall

chrisbur wrote: »

NI will be a lot lower with this payment than it would have been if it had been paid bit by bit; as the upper earnings limit for monthly NI is £3540 so anything over this will have only 2% NI deducted.

Ah, good point, I was only thinking about lower limits and forgot the upper one, that's a good saving. Maybe we should all get paid at the lower end of the scale for 11 months then take the balance of salary in March to take advantage of that.