Tax on front-loaded PAYE bonuses

Perelandra

Question on PAYE tax for bonuses paid at the start of the year.

We've received our bonuses for last year with our April monthly pay, but looking at the figures the income tax has been calculated based on:

Annualised figure = 12x April pay (including bonus)
Income Tax estimate for full year based on annualised pay
Income Tax in April = 1/12th of Annual estimate

So the estimated tax due has been calculated based on a full-year estimate that includes receiving the bonus in every month... for many, this pushes people into a higher tax bracket (20% to 40%, or 40% to 45%).

Is this "normal"? It's the first time I've been paid an annual bonus in April, and I was instead expecting my tax to go up by my marginal rate of tax and NI; not the rate in the tax band above my marginal rate. I realise I will probably get it drip-fed back in the balance of the year, as the annual estimate of earnings comes down.

CLAPTON

yes and no

tax isn't actually worked out like that but for the first month (April) in the tqax year, it works out equivalent to that

depending on the actual figures you will get the 'overpaid' tax back next month (or maybe two months)

fortunately you have saved on NI but you won't have that recovered from you,

Perelandra

Thanks Clapton,

My employer has recognised the issue, but we will see if any action will be taken- rather a lot of people will be affected by this, though.

WHA

Perelandra wrote: »

Thanks Clapton,

My employer has recognised the issue, but we will see if any action will be taken- rather a lot of people will be affected by this, though.

Nothing for them to do. It's the way the payroll systems work as required by HMRC rules. It all comes out in the wash as the months pass.

CLAPTON

Perelandra wrote: »

Thanks Clapton,

My employer has recognised the issue, but we will see if any action will be taken- rather a lot of people will be affected by this, though.

As I've already said, the tax will be repaid automatically (without any special actions) in the next month or two depending upon the figures you haven't provided.

zygurat789

WHA wrote: »

Nothing for them to do. It's the way the payroll systems work as required by HMRC rules. It all comes out in the wash as the months pass.

The bonus ciould be paid in the March and all tax would then be instantly correct.

Perelandra

CLAPTON wrote: »

As I've already said, the tax will be repaid automatically (without any special actions) in the next month or two depending upon the figures you haven't provided.

I do understand this- I realise I'll get the tax back, but it does create cashflow problems.

MPH80

I do understand this- I realise I'll get the tax back, but it does create cashflow problems.

How?

You're getting extra money - and the 40% rate will only be charged on the extra ...

You'll only have a cashflow problem if you expect to do something with the full value of the bonus!

Perelandra

MPH80 wrote: »

How?

You're getting extra money - and the 40% rate will only be charged on the extra ...

It's rather higher than that, because the entire first months' pay (including bonus) has been multipled by 12- that's the problem.

MPH80 wrote: »

You'll only have a cashflow problem if you expect to do something with the full value of the bonus!

Correct- well, the full value of the bonus after the correct amount of tax (and NI).

Thanks for the answers though, it seems this isn't all that unexpected judging by the responses above, although it still all seems really odd to me! I wish I really did earn enough to get me into the top rate tax band.

CLAPTON

Perelandra wrote: »

It's rather higher than that, because the entire first months' pay (including bonus) has been multipled by 12- that's the problem.




Correct- well, the full value of the bonus after the correct amount of tax (and NI).

Thanks for the answers though, it seems this isn't all that unexpected judging by the responses above, although it still all seems really odd to me! I wish I really did earn enough to get me into the top rate tax band.

what's 'odd' about your situation is that
your tax works our EXACTLY the same as if the bonus was evenly spread over the whole year,

but your NI is LESS that if the bonus was evenly spread


how would you prefer it to be worked out?

Perelandra

CLAPTON wrote: »

what's 'odd' about your situation is that
your tax works our EXACTLY the same as if the bonus was evenly spread over the whole year,

but your NI is LESS that if the bonus was evenly spread


how would you prefer it to be worked out?

OK,

Here are some exaggerated numbers to demonstrate the point- not my real salary!

Base salary: £80,000
Bonus: £30,000

On this income, I would expect to pay:
£33,818.40 and 5,44.64 NI in the full year. For simplicity assuming not pension contributions or salary sacrifice.

(using http://www.uktaxcalculators.co.uk/)

Without the bonus, each month I would expect to pay:
£1,818.20 Tax and £401.22 NI.

On the bonus itself I expect to pay:
£12,000 tax and £600 NI.

So I would have expected to pay, in April, one month's "regular" tax, and the tax on the bonus- a total of
£13,818.20 tax and £1001.22 NI.

Instead, I have paid:
£14,987.16 Tax and £1001.22 NI. (tax has been effectively calculated by taking the full earnings in April, including bonus, mutiplying by 12 to get estimated full year earnings, calculating the tax on this inflated full year earnings, and then dividing by 12).

So there's no NI saving (based on these numbers, since the normal base pay here is enough to take this earner into the 2% band) but I've paid £1.168.96 more tax than if I'd paid the "normal" monthly tax, on base earnings, and the full tax that I'll ultimately pay on the bonus.

I do understand that I'll get that tax back by the end of the year, so I won't end up paying more tax than I should have done. I can't see where the NI saving is, and I'm certainly worse off from a cashflow point of view.