Are Annual Bonuses Taxed?

CLAPTON

frothy-coffee wrote: »

I'm not that daft! I do realise you can't do that. People were doing a similar thing to that a few years ago to avoid stamp duty with house purchases.

But if tax is payable on bankers bonuses, why are politicians and others, calling for a bankers bonus tax?

the previous 'bankers bonus' tax was in fact a tax on the banks and not actually on the individual bankers

Andy_L

frothy-coffee wrote: »

I'm not that daft! I do realise you can't do that. People were doing a similar thing to that a few years ago to avoid stamp duty with house purchases.

But if tax is payable on bankers bonuses, why are politicians and others, calling for a bankers bonus tax?

I suspect they mean an extra "windfall" tax like the extra tax imposed on the utility companies a few years ago

Andy_L

frothy-coffee wrote: »

Hmmmm,
The reason I ask is because I've heard conflicting reports as to whether bankers bonuses are taxed or not?

Some say yes, and some say no!

They are taxed, however they may be:

1. grossed up to make them appear tax-free
2. payed to a self-employed company so they can play around with business rather than personal tax allowances
3. payed as share options which I believe are treated differently to PAYE
4. Payed into a pension to avoid tax

thenudeone

Mikeyorks wrote: »

Indeed they're taxed. The rate depends on your current marginal rate (20% / 40% / 50%)

This isn't true, although I understand what you were getting at.

There is a difference between the amount of tax finally due and the amount deducted by the PAYE system.

The PAYE system spreads your allowances evenly through the year and assumes that the average pay per month so far will continue for the rest of the year. Each month it re-calculates and adjusts the tax so that the cumulative position is correct.

Say your salary was £42k (and assume that the bands for tax were £7k at -0% and £35k at 20% = £42k maximum for basic rate tax)

You would be paid £3.5k a month and the top £2.916k (£35k/12) would be taxed at 20%.

If you were paid a bonus of, say, £10k, in any month, all of the extra bonus would be taxed at 40%. This would be the same regardless of which month you were paid.

If your salary was only £32k, then each month you would get salary of £2.666k. your marginal rate is 20%.

If you were paid a £10k bonus in April, the PAYE system would tax the first £0.583k (£7k/12) at 0%, the next £2.916k at 20% and the rest (£10k+2.666-0.583-2.916=£9.167) at 40% in that month.
BUT every month from then it would constantly re-calculate the tax so that by March, the total tax paid in the year on the total income of £42k will only be 20% of £35k; and none of the income will have been taxed at 40%.

zygurat789

thenudeone wrote: »

This isn't true, although I understand what you were getting at.

There is a difference between the amount of tax finally due and the amount deducted by the PAYE system.

The PAYE system spreads your allowances evenly through the year and assumes that the average pay per month so far will continue for the rest of the year. Each month it re-calculates and adjusts the tax so that the cumulative position is correct.

Say your salary was £42k (and assume that the bands for tax were £7k at -0% and £35k at 20% = £42k maximum for basic rate tax)

You would be paid £3.5k a month and the top £2.916k (£35k/12) would be taxed at 20%.

If you were paid a bonus of, say, £10k, in any month, all of the extra bonus would be taxed at 40%. This would be the same regardless of which month you were paid.

If your salary was only £32k, then each month you would get salary of £2.666k. your marginal rate is 20%.

If you were paid a £10k bonus in April, the PAYE system would tax the first £0.583k (£7k/12) at 0%, the next £2.916k at 20% and the rest (£10k+2.666-0.583-2.916=£9.167) at 40% in that month.
BUT every month from then it would constantly re-calculate the tax so that by March, the total tax paid in the year on the total income of £42k will only be 20% of £35k; and none of the income will have been taxed at 40%.

But all a little irrelevant to bankers. The boni are being talked about now and will be paid in march, month 12, when the tax will be correct in that month and there will be no further adjustments because April is a new year.
We already have a tax for these boni, the 50% rate, however, Gideon does insist that this is temporary. We're all in it together but some for longer than others it would seem.

zygurat789

Andy_L wrote: »

They are taxed, however they may be:

1. grossed up to make them appear tax-free
2. payed to a self-employed company so they can play around with business rather than personal tax allowances
3. payed as share options which I believe are treated differently to PAYE
4. Payed into a pension to avoid tax

Were these typos or did you mean taxed under PAYE?

Mikeyorks

thenudeone wrote: »

the total tax paid in the year on the total income of £42k will only be 20% of £35k; and none of the income will have been taxed at 40%.

Exactly.

So in what way (and look at the context of my reply to a rather bald post #1) is my statement that it's taxed on your current (year) marginal rate inaccurate? The marginal rate - in this case - being 20%.

The fact that you may have a transient charge at 40% does not affect the definition of 'marginal rate'. Which is your final rate of tax for the year.

Andy_L

zygurat789 wrote: »

Were these typos or did you mean taxed under PAYE?

not a typo, homophone trouble. I mean "paid" into

zygurat789

Andy_L wrote: »

not a typo, homophone trouble. I mean "paid" into

They're butt four the graze of god....

frothy-coffee_2

Andy_L wrote: »

They are taxed, however they may be:

1. grossed up to make them appear tax-free
2. payed to a self-employed company so they can play around with business rather than personal tax allowances
3. payed as share options which I believe are treated differently to PAYE
4. Payed into a pension to avoid tax

Thanks, I wondered whether it was something like that