Unknowing Underpayment of Tax #2

pinkteapot

Just following on from my comment in the other thread. I mentioned that I had an unexpected bill for £2,600 for the year 2010-11.

In that year, I had income from one source - a single PAYE employment. Nothing else as all my savings are in a cash ISA; we're overpaying our mortgage with savings after filling our ISAs each year.

Having spoken to HMRC, I know where the underpayment came from. I got a freak bonus that year that pushed my total gross income slightly over £100k. Above £100k, you lose your personal allowance (didn't know that!). My payroll left my personal allowance in, so the £2,600 is the tax on my allowance.

For the 2011-12 tax year and the current tax year I'm down to a much more normal £40k p.a. so a shock bill for £2,600 is a bit upsetting. Not least because my whole bonus went on a mortgage overpayment, so I can't even use it to pay the tax that should have been paid on it.

Not sure how this happened. The fact I shouldn't have had a personal allowance that year wasn't reflected in my tax code because my basic salary was well under the £100k threshold. Was it my responsibility to tell HMRC that I earned over that threshold? Won't be an issue again, but just out of curiosity!

As I said on the other thread - lesson learned and I won't be trusting payroll/HMRC to get my tax right in the future.

Not complaining or disputing the bill - I owe the tax and you're right that I should have known. Am slightly upset that HMRC can demand £2,600 with six weeks' notice, but on the phone they gave me details of their phoneline for setting up a repayment plan.

System

pinkteapot wrote: »

Just following on from my comment in the other thread. I mentioned that I had an unexpected bill for £2,600 for the year 2010-11.

In that year, I had income from one source - a single PAYE employment. Nothing else as all my savings are in a cash ISA; we're overpaying our mortgage with savings after filling our ISAs each year.

Having spoken to HMRC, I know where the underpayment came from. I got a freak bonus that year that pushed my total gross income slightly over £100k. Above £100k, you lose your personal allowance (didn't know that!). My payroll left my personal allowance in, so the £2,600 is the tax on my allowance.

For the 2011-12 tax year and the current tax year I'm down to a much more normal £40k p.a. so a shock bill for £2,600 is a bit upsetting. Not least because my whole bonus went on a mortgage overpayment, so I can't even use it to pay the tax that should have been paid on it.

Not sure how this happened. The fact I shouldn't have had a personal allowance that year wasn't reflected in my tax code because my basic salary was well under the £100k threshold. Was it my responsibility to tell HMRC that I earned over that threshold? Won't be an issue again, but just out of curiosity!

As I said on the other thread - lesson learned and I won't be trusting payroll/HMRC to get my tax right in the future.

Not complaining or disputing the bill - I owe the tax and you're right that I should have known. Am slightly upset that HMRC can demand £2,600 with six weeks' notice, but on the phone they gave me details of their phoneline for setting up a repayment plan.

If its a P800 calculation rather than Self Assessment then they can't 'demand' but they can ask. Has your PAYE income finished. It's just odd that they are asking for direct payment.

If someone can pay up front then it's sorted there and then. Some people prefer that. If not then HMRC are usually quite flexible with instalment plans for non-Self Assessment underpayments.

pinkteapot

Ah sorry - seems I missed an important point. It was SA. Two months ago, HMRC sent me a 2010-11 return and asked me to fill it in. I don't normally do tax returns. I called and asked if it was necessary as my only income source was PAYE and they said yes. I assumed that they wanted me to do it because at my level of earnings they assumed I had savings and investments.

I sent it back straight away. The letter I received yesterday was an SA calculation and said I had to pay by 31st January 2012! I phoned, first to query the amount and then the date. The woman checked the system and said I'd been given until 24th October to complete the return, and a payment deadline of the same date.

Should be grateful that (1) I completed it straight away - near the deadline I would have had a bigger shock from the payment deadline and (2) they aren't fining me for late payment!

The loss of personal allowance over £100k seems completely at odds with the design of the rest of the income tax system, which is progressive. You're never worse off by earning more. With the sudden loss of the PA, you can be. Income from £100k to about £104k is effectively taxed at 100%. If you earn say £102k, you're worse off than if you'd earned £99,999. Just seems bizarre. I assume it was a new measure introduced by the government as a populist message during their banker bashing phase?

Fortunately I can afford to pay the bill, but it means taking the money out of my ISA and wasting half of this year's allowance which is annoying. I know though - I should have checked my P60 myself at the time and paid the extra then.

pinkteapot

p.s. I did look at my P60 at the time, but I just looked at it and thought "I've paid £36k of tax? I need to make more use of public services to get my moneys' worth".

chrisbur

pinkteapot wrote: »

The loss of personal allowance over £100k seems completely at odds with the design of the rest of the income tax system, which is progressive. You're never worse off by earning more. With the sudden loss of the PA, you can be. Income from £100k to about £104k is effectively taxed at 100%. If you earn say £102k, you're worse off than if you'd earned £99,999. Just seems bizarre. I assume it was a new measure introduced by the government as a populist message during their banker bashing phase?

Of no help to you I am afraid but as information; the loss of the personal allowance does not work in the way you describe. When earnings are over the £100,000 mark you loose 50p from the personal allowance for each £1 that they are over by. This continues untill there is no allowance left. In this way you are allways getting more net pay as your gross pay goes up and you do not get the situation of being better off by having less pay as you describe above.

pinkteapot

Ah OK - not as daft a system as I thought.

grey_gym_sock

it's an effective tax of rate of 60% (since, for every £1 increase in income, you pay 40% tax on £1.50). so the marginal tax rate goes up from 40% to 60% at £100k, and then at c.£116k (when you've lost the whole personal allowance) back down to 40%.

2010-11 was the first tax year this came in, so your timing was unlucky.

if you know you're going to being hitting this, 2 simple ways to avoid it are to make higher pension contributions or to give it away as gift aid. either gives you an effective tax relief of 60% on this band of income.

chrismac1

I have sympathy with the OP here. Sensible employers would have firstly known the rules, then given advice to deal with it properly. For example, a large employer around here which I used to work for adjusted both the timing and amounts of bonuses compared to "business as usual" so staff were hit with the minimum amount of 60% tax.

They also provided advice on mitigation for those likely to be in the £100k to £125k range.

pinkteapot

Thanks for the tips. Sadly, as I said, I was back down to about £40k in the subsequent tax year and will be for this tax year too. I can't see a need to worry about hitting £100k again anytime soon.

Unfortunately I work for a tiny company with very little knowledge of UK employment law/practices, let alone tax issues. Payroll is outsourced to a payroll company; not done in house.