Increase and bonus confusion-please help with calculations...

polkadot

Im not sure where to start, so if I leave anything out please prod me...I dont think Ill sleep tonight my DH is THAT worried (so am I by default)

Our family dynamics:Him and I, a 5 year old, a 16 month old and another due in January. He works full time (40 hours a week) and I stay home with the kids.

We've had a letter today saying he will be getting a bonus which will be paid to him in January 2012's payroll-the amount: £6968. He will also be receiving an increase effective from 1 January 2012 taking him to £36233.60 PA.

In addition to this amount, he is being TUPE'd in the new year and due to resource constraints he is left with leave pending so they will pay that out with his December paycheck-he's not sure of the amount but thinks it'll be between £500-£700.

His current salary rate is 2903.33 PCM so I work that out to be £34839.96PA?

He has a pension which is covered through the company so I cant see any info regarding that on his payslip.The payslip states the tax code 747L at a PAYE rate of £456 PCM. He seems to think that this "good fortune" will mean we move from paying this £400odd to over £1000 PCM :eek:.Of course there is just NO WAY we can afford to do this.We have debt at the moment of about £11000 which we've paid down from £15000 odd last year but at the moment we've barely got a little bit left over for snowball.

Please could somone help me with these tax calculations so that we have a better idea of whether this is all a good thing or will leave us worse off?

paddedjohn

Why do you think you will be worse off? he is allowed to earn £622.50 per month before he pays tax, everything over this amount is subject to 20% so if he gets a rise of £1399 per year he will pay £280/year or £23.32/month more tax. Im no expert in this but afaik, this is how it works.

Annisele

I also don't understand why you think he's going to be worse off.

If he gets a payrise, he'll pay more tax and more national insurance - but he'll still overall be better off. There are various salary calculators around; have a play with them and see what the effect is.

It's possible that the January bonus might push him into higher rate tax for that month (not sure; haven't done the sums) - but if it does it should come out in the wash by the end of the tax year.

The effect on tax credits I don't know, but I doubt the net effect of a payrise will be a fall in your total income.

jfh7gwa

Perhaps the OP doesn't realise that the tax on salaries is banded?
(reference)

Looking at the table, you can see that he's now and will be under the £37k mark, so he'll still be earning and paying tax at 20% for most of his salary.

But even if he did earn over the £37k mark.. I don't know, let's say he earns £40k next year... he'd only pay 40% tax on anything over that 37,400 limit. The 40% tax doesn't kick in for you to pay 40% on ALL of your salary, just because you went over the band threshold slightly.

Otherwise there would be no incentive for people to earn 1 or 2 grand over the tax threshold - you'd get people refusing promotions unless it was a 10 grand payrise!

It's amazing how many people don't realise this (I've heard a family member last month talking about how she didn't want to work any overtime as it might push her into the next tax threshold... admittedly she's only been working for 6 months, but she had no idea how the bandings work). Perhaps that's the same misconception in the OP?

polkadot

Thank you...its the bonus he was concerned about...I've just read your responses to him and he's gone "Ah,my clear misunderstanding.He had done the calculation by taking his new £36000 and multiplying THAT by 40%,rather than just the £1600 odd so that does make much more sense-THANK YOU...so now I'll relax and put that money away that we'll need to move house stress free in June.

I can always count on the good folk here to put my mind at ease:beer: I really hated watching him feel like his hard work would punish us.

jfh7gwa

Ah, glad we got that cleared up then polkadot!

You're right - if people did end up punished in such a glaringly obvious way, you'd have people refusing overtime (like my cousin, explained above) perfectly legitimately, because they may well end up earning £500 more that year, but end up taking home less cash to due paying a higher percentage of tax.

The tax system, as unfair or fair as it may be right now, isn't THAT unfair, thankfully!

polkadot

Lol jfh7gwa ,he's worked so hard over the last few years and everytime we think we get a break-something else comes up to bite us. We ttc'd for 3 years for DS2,then planned to have a tubal ligation but didnt for various reasons.

Then when DS2 was about 9 months old we discovered I was pregnant again.Ive spent the last 8 months trying to justify this baby-but after the heartache we went throough to get DS2...well DD1 now really doesnt need justification I dont think.We relied on LHA for a while and then last year he got a bonus of £3000 which the LA included in the LHA calculation which raised a £700 overpayment.Its down to £400 odd now and Ive been getting £25 a fortnight, so this new sum means we can pay that overpayment back and stop the LHA claim as we'll no longer need it :j

I think Ill go to bed now and sleep very well.

jfh7gwa

Sleep well!

lizzielondon

You're forgetting the personal allowance and those are last year's thresholds

jfh7gwa wrote: »

Perhaps the OP doesn't realise that the tax on salaries is banded?
(reference)

Looking at the table, you can see that he's now and will be under the £37k mark, so he'll still be earning and paying tax at 20% for most of his salary.

But even if he did earn over the £37k mark.. I don't know, let's say he earns £40k next year... he'd only pay 40% tax on anything over that 37,400 limit. The 40% tax doesn't kick in for you to pay 40% on ALL of your salary, just because you went over the band threshold slightly.

Otherwise there would be no incentive for people to earn 1 or 2 grand over the tax threshold - you'd get people refusing promotions unless it was a 10 grand payrise!

It's amazing how many people don't realise this (I've heard a family member last month talking about how she didn't want to work any overtime as it might push her into the next tax threshold... admittedly she's only been working for 6 months, but she had no idea how the bandings work). Perhaps that's the same misconception in the OP?

jem16

jfh7gwa wrote: »

But even if he did earn over the £37k mark.. I don't know, let's say he earns £40k next year... he'd only pay 40% tax on anything over that 37,400 limit. The 40% tax doesn't kick in for you to pay 40% on ALL of your salary, just because you went over the band threshold slightly.

You won't pay any 40% tax unless you earn over £42,475. That is the personal allowance of £7475 plus the 20% band of £35,000.

The bonus in January may push him into the 40% bracket that month but over the next couple of months as it recalculates he will get most of that back as he will be very little into the 40% band if at all.

Does he pay into a pension? If so you can deduct that from his gross income and that will leave his taxable income.

jfh7gwa

lizzielondon wrote: »

You're forgetting the personal allowance and those are last year's thresholds

Good point :o