Dodging 40% tax rate

Zammo76

Hi

I'm due a retention bonus of around £4600 in August from my current employer, which has been paid to me so I stay at the company until a certain date. I'm also due my regular wage plus a fair amount of Over Time, which amounts to around £3247. My problem is that the two amounts added together £7847 will put me well into the 40% income tax bracket, which I believe is anything over £3539. I've asked my finance dept to pay my wages and retention bonus seperately so I won't incur 40% tax and by my reckonings I will be about £536 better off. I know if I wasn't to do this I'd eventually claw back the £536 by paying less tax on future pay, but i'd rather have the extra cash in the short term. The finance dept from my company seems to think there will be no difference being paid in two seperate amounts and the guy I emailed regarding it just spoke about how I'd be better off with regards NI payments.

My questions are:

1. Is it possible for my company to make two seperate payments in a month and me not get charged 40% tax or will they have to stagger the payments by a month, so in August I get my wage & OT and September my retention bonus?
2. Will I definately be better off splitting the amounts as detailed above?
3. Just to muddy the water a bit more I will be starting a new job mid August, so will I get taxed as having two jobs if I was to be paid my Retention bonus in September?

Any help really appreciated!

payless

tax advantage / disadvantage will balance out if all payments are within same tax yr.

Yes NI better to pay larger sums in one go

jem16

Zammo76 wrote: »

The finance dept from my company seems to think there will be no difference being paid in two seperate amounts and the guy I emailed regarding it just spoke about how I'd be better off with regards NI payments.

He's right with that. Paid separately your NI will total £683.48. Paid together NI will be £434.86.

Is it possible for my company to make two seperate payments in a month and me not get charged 40% tax or will they have to stagger the payments by a month, so in August I get my wage & OT and September my retention bonus?

If both payments are in the same tax month, you would be taxed as if it was one amount as there is no extra personal allowance as there would be one month apart.

2. Will I definately be better off splitting the amounts as detailed above?

In the very short term perhaps a little. In the long run you will be worse off with the higher NI.

3. Just to muddy the water a bit more I will be starting a new job mid August, so will I get taxed as having two jobs if I was to be paid my Retention bonus in September?

Any help really appreciated!

Tax is taken over a whole year. What will end up happening is a possible overlap where you will have your personal allowance twice and end up underpaying tax which will then be clawed back later. This has just happened with my son and he had to pay an extra £140 in tax this month when they caught up with his tax.

As you'll pay around £210 extra in NI by splitting the payments over 2 months I'd take the payment in one.

chrisbur

Zammo76 wrote: »

Hi

I'm due a retention bonus of around £4600 in August from my current employer, which has been paid to me so I stay at the company until a certain date. I'm also due my regular wage plus a fair amount of Over Time, which amounts to around £3247. My problem is that the two amounts added together £7847 will put me well into the 40% income tax bracket, which I believe is anything over £3539. I've asked my finance dept to pay my wages and retention bonus seperately so I won't incur 40% tax and by my reckonings I will be about £536 better off. I know if I wasn't to do this I'd eventually claw back the £536 by paying less tax on future pay, but i'd rather have the extra cash in the short term. The finance dept from my company seems to think there will be no difference being paid in two seperate amounts and the guy I emailed regarding it just spoke about how I'd be better off with regards NI payments.

My questions are:

1. Is it possible for my company to make two seperate payments in a month and me not get charged 40% tax or will they have to stagger the payments by a month, so in August I get my wage & OT and September my retention bonus?
2. Will I definately be better off splitting the amounts as detailed above?
3. Just to muddy the water a bit more I will be starting a new job mid August, so will I get taxed as having two jobs if I was to be paid my Retention bonus in September?

Any help really appreciated!

I think that you may be slightly mis-understanding how tax works. You say you will pay 40% tax on your pay over £3539 but if your August pay falls in month 5 by then you will have 5 times £3539 to set against your total earnings so far this tax year, that is almost £17700. That part of your total earnings as at month 5 that falls above this figure will be taxed at 40% and as you say if your earnings are then lower this will come back to you in the following month(s).
To answer your spcific questions
1 You only get one NI allowance per month so any payments that fall in the same month will be treated as being as one single payment.
2 No you will proberbly be worse off. There is an upper earnings limit for NI of £3540, above this NI deductions fall from 12% to 2% (if contracted out the figures are different but there is a similar fall) so by splitting the bonus between months more of it is likely to fall into the 12% rather than the 2%.
3 Tax is worked out on your total earnings at the year end. The amount due is the same however many jobs you may have had. However overlapping jobs may make your tax figures look a bit strange month by month for a while but any over or under deducted tax will eventually be corrected when your full pay and tax details are known, though sometimes in this sort of case it may not be untill the tax year end.

getmore4less

The simple way to look at this is when you hit 40% tax NI drops by 10%. so the difference is only 10% on the extra.

You get the 20% extra tax back if your running total is below the limit so end up better off

maninthestreet

As it's only August (as from tomorrow), and the tax years ends on April 5th 2013, how will paying your wages and bonus separately help you dodge 40% income tax???

Zammo76

Because by my understanding I'd go into the 40% bracket for just August where I'm earning £7847. So I'm going to be taxed 40% on anything over £3539 for that month only. I thought by splitting the retention and wage up, I'd only incur the 40% bracket on the retention portion and then only a small amount as the total would be £4600 which means only £1061 goes above the 40% tax bracket threshold. When I've then inputted this into an online tax calculator (which also included NI payments) I would be paid £536 more, which is better than saving £210 on NI by combining the payments.

But to be honest I'm not sure if the above assumption is correct, would I be put into the 40% tax bracket for just August or would I just be taxed using my standard tax code, which is 810L?

jem16

Zammo76 wrote: »

But to be honest I'm not sure if the above assumption is correct, would I be put into the 40% tax bracket for just August or would I just be taxed using my standard tax code, which is 810L?

You would still be taxed on your normal 810L code and depending on amounts so far, you may or may not be in the 40% tax bracket for some or all of that payment.

As chrisbur says when you are on a cumulative tax code, each month is not worked in isolation but worked on what has gone on before. So with Month 5 you are entitled to £3377.08 tax free and the next £14,320.83 at 20%. You have probably used up all of your tax-free allowances but may still have some of the 20% bracket spare.

If you did cross into higher rate for any of it, next month it would adjust again and you would get some/all of it back again. Eventually by year end you will pay no more tax than you should provided you stayed with the one job. However changing jobs complicates it a bit and may need sorting at the end of the tax year.

Providing figures of what has gone on before will give you a more exact answer.

Zammo76

Thanks for all the replies everyone, I think I'm starting to get an understanding of my situation.

I've done some calculations and have worked out by month 5 will have earned around £19598.76 inc. retention payment. This means I'll go over the tax free and also 20% income tax brackets by £1900.93.

So I guess it doesn't matter if I split the payments then as there's no avoiding this as its all worked out cumulatively?

jem16

Zammo76 wrote: »

So I guess it doesn't matter if I split the payments then as there's no avoiding this as its all worked out cumulatively?

Correct. All it will mean is that you will pay more NI.