100K threshold question.

Dukexxx79

Hi there, sorry if this has been asked already, but I scrolled through 10 pages of this forum looking for something similar and couldn't find!
I'm fortunate enough to be a position where this year it looks like I might go through the 100k barrier (due to a large bonus which took me to 86K gross in total and I still have 16k gross to come over the next 3 paydays) I have also have health care benefits etc worth approx 3k. So, it total I'll be approx 5k over the 'limit' as such. This is a one off, and shall not happen again (unfortunatley) My question is two fold. One, as I understand it i'll lose 2.5k of tax free allowance - would this then mean that my tax code will be adjusted to take 42% of this 2.5k? I.e a reduction in wage of £87.50 a month for the next tax year? The 2nd question - is it legal to delay my last pay till after the 5th of April? (so in effect I'll only have 11pay days this tax year and '13' next year) - this would keep me under '100k' this Tax year. Thank you.

nomunnofun

In principle that would be a way out.

However, do not delay the last pay of the tax year. If you do not receive a payment in month 12 you will not get your personal allowance for that month and not be availing of the basic rate band also for that month. Accordingly you will have overpaid tax and have to claim a refund.

I would suggest that you take pay of a nominal amount in March to enable 'the system' to calculate your tax correctly for the whole tax year.

Also remember that, if you effectively take two salaries in April, you will pay a sizeable amount in tax that month as 'the system' will be assuming that salary for the rest of the year. It will all even out over the remainder of the tax year.

grey_gym_sock

if your income is £105k, you "only" pay an extra 40% of £2.5k, since this affects income tax but not NI. i.e. the marginal tax rate is 60%.

i don't know whether delaying some salary until next tax year is regarded as valid.

2 simple ways of avoiding the 60% rate that are valid are to make pension contributions or donate as gift aid with any income over £100k.

John_Pierpoint

How flexible can your payroll departments be ?

I used to work for company with a fairly big payroll and a minimal number of payroll staff - "March Games" used to drive then mad and had to be very clearly laid out to make them effective.

paulus

The effective tax rate of 60% on pay over £100k can be mitigated by deferring payment. Bear in mind though that tax is due when payment is "received" as defined in tax legislation. "Received" is the earliest of getting the payment or being entitled to the payment (and added definition if you are a director) so simply asking payroll to defer wont be enough. Terms and conditions will need amending to avoid entitlement in this tax year. In line with comments above it would be cleaner to have some salary in month 12 so perhaps consider % reduction in month 11 and 12 deferred to the new tax year. Also, have you looked at whether you have any tax reliefs (use of car?) that could help?

anselld

Why not just put 5k in your pension?

nomunnofun

While paulus is absolutely correct in his post regarding timing and entitlement, particularly with directorships,it can be fair to say that sometimes it requires just a little imagination to optimise a situation while remaining compliant.

For example, in the situation of the op, would it be possible to consider two or three weeks unpaid leave in February or March to achieve the same result? One can always work additional hours in the following tax year in order to assist the employer for his previous flexibility. Any tax saving would, of course, be entirely coincidental.

Dukexxx79

Thank you all for your help here!

Daniel_Elkington

You may be setting yourself up, if you defer payment and get an even bigger bonus next year then you will have a very large tax bill you cannot mitgate next year.

This discussion is all a bit short sighted. You could look at tax-relievable investments and I don't mean just the packaged ones. I would suggest you find a proper independent wealth manager (rare) who can talk you through the options.

I know it's nice to have extra money in hand, but if you invest it in something for a few years...

A pension is the easy option but you are effectively surrendering access unless you are doing something exciting with it that is beyond the scope of a forum post to explain.

grey_gym_sock

it's a good point that you don't want just to defer the problem to next year. the OP will have a better idea than the rest of us how likely he is to be over £100k again next year.

but it's a bit strange to suggest going to a wealth manager to discuss £5k.

Daniel_Elkington

I'm assuming that someone with that income has some assets, which could be redeployed to cut tax.

I'm also assuming that they would have disposable income and other issues.

I'm unsure that there would just be the £5K to discuss.

I'm basically saying if you have money then you're not going to be short on options and your normal GP adviser / accountant is less likely to have the 'tools' to be able to deal with Dukexxx79 in an effective manner. Just make sure they are independent.