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Tax on front-loaded PAYE bonuses

2

Comments

  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    reread my post #2 and #5


    I specifically said it all depended by the details WHICH YOU DID NOT CHOOSE TO GIVE


    in the absence of specific figures one makes 'reasonable' assumptions which are generally true for 'normal ' people

    what's your point?
  • Perelandra
    Perelandra Posts: 1,060 Forumite
    edited 20 April 2013 at 11:23PM
    My point, is that in month 1 I appear to have paid significantly more tax than I would have expected to pay, if I'd paid my normal monthly tax, plus full tax on my bonus. :)

    (I can't post my real details on here, unfortunately, since my employer is identifiable based on other posts I've made, and I know that I'm identifiable on here by colleagues at work- sorry). The figures above don't represent my salary, but the nature of the outcome would be appropriate.

    If this is normal- then fine. As I've said, it seems odd to me, that my tax would be calculated on the basis of my being a 45% taxpayer, when I'm not even close to that. Thank you for your time.
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Perelandra wrote: »
    My point, is that in month 1 I appear to have paid significantly more tax than I would have expected to pay, if I'd paid my normal monthly tax, plus full tax on my bonus. :)

    The HMRC has no idea what you may be paid in the remainder of the tax year. So the established system works very well from all aspects.
  • John_Pierpoint
    John_Pierpoint Posts: 8,401 Forumite
    Part of the Furniture 1,000 Posts
    Well I suppose if this had happened to you this time last year, then you would have found yourself in the 50% tax bracket and the "cash flow" problem would have been even worse?
  • Perelandra
    Perelandra Posts: 1,060 Forumite
    Well I suppose if this had happened to you this time last year, then you would have found yourself in the 50% tax bracket and the "cash flow" problem would have been even worse?

    Previously my employer has paid bonuses in March, rather than April, but yes you're right if they had paid bonuses in April 2012 the cashflow impact would have been significant.

    HMRC might not be able to estimat emy full year's earnings, but my employer can.
  • jem16
    jem16 Posts: 19,724 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Perelandra wrote: »
    HMRC might not be able to estimat emy full year's earnings, but my employer can.

    They don't have the option to do that though. Tax is worked out on monthly tax tables which your employer must follow.

    You may have income which your employer doesn't know about.
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    Perelandra wrote: »
    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.


    briefly I will tell you how the tax system actually works


    your allowances although yearly are actually allocated on a cumulative monthly basis

    so for month 1 (april ) some-one earning less than 100,000/12 that month will have
    9440/12 tax free
    32010/12 at 20%
    the rest at 40%

    your payroll systems makes absolutely NO assumption about what you will earn in the future

    for the next and subsequent months is does the following

    look at your 'total pay to date'

    gives you a tax free allowance of 9440/(number of months)
    charge 20% tax on 32010/(number of months)
    charges 40% on the rest.

    then looks at what tax you have already paid and charges you the difference (this could to a refund in some circumstances)

    this is based solely on what you have earned to date and

    again your payroll system makes NO assumption about any future earnings

    you will see the system is self correcting and in March 2014 your tax will be exactly correct for the year.


    some notes:

    by varying your tax code HMRC does sometimes guess some of your income but this tends income for things like savings/divi or allowances for personal pensions)

    if you earn more than £100,000/(13 - number of months to date) then that actual calculation will be more complicated.


    presumably your bonus was delayed from March to April to avoid 50% tax rate
  • getmore4less
    getmore4less Posts: 46,882 Forumite
    Part of the Furniture 10,000 Posts Name Dropper I've helped Parliament
    edited 21 April 2013 at 11:12AM
    I canot see the cash flow problem other than if you expect to spend all the money in the same month you get it.

    Your total take home pay is still more that you would have got without the bonus.

    It also helps to check the tax calculations I get the following.

    Your estimated tax on the bonus is wrong due to the reduction in the personal allowance.

    http://www.listentotaxman.com/index.php
    £80k net £53363
    mnthly....tax.....ni
    £6667....1818....401 annual 21822 4815
    +30k bonus net 68763 ( + 15400 on 80k)
    £9167 2985 451 annual 35822 5415

    so the bonus gets around £14000 in tax

    month 1
    36666 15341 1001

    normal tax was 1818 so taxed extra £13523 which is less than the annual amount due.

    Due to the way some income is taxed an effective rate of 60% having the bonus paid in one month makes you slightly better off.


    please check my calculations.
  • jimmo
    jimmo Posts: 2,287 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    The cold fact is that because the bonus was paid in April more tax was deducted than the OP had anticipated. That’s a cashflow problem but whose fault is it?

    Is it HMRC/ the government for imposing the PAYE system?

    Is it the employer for paying bonuses in April rather than March?

    Is it the OP for not understanding the system and not correctly anticipating how much the PAYE deductions would be?

    As to what can be done about it I fear the answer in nothing and, as others have said, the OP will recover the excessive deductions as the year rolls on.

    That is the system and, quite frankly, it is not going to be changed overnight or any time soon.

    Speaking as a former taxman, I have to say that when the OP said in post # 16 that previously bonuses were normally paid in March and this year they were paid in April that started alarm bells ringing. If the payment of bonuses was put back a month by the employer as a tax saving exercise that’s the kind of thing that Employer Compliance Units love to get their teeth into. Here is the principle.

    http://www.hmrc.gov.uk/manuals/eimanual/EIM42290.htm
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    jimmo wrote: »
    The cold fact is that because the bonus was paid in April more tax was deducted than the OP had anticipated. That’s a cashflow problem but whose fault is it?

    Is it HMRC/ the government for imposing the PAYE system?

    Is it the employer for paying bonuses in April rather than March?

    Is it the OP for not understanding the system and not correctly anticipating how much the PAYE deductions would be?

    As to what can be done about it I fear the answer in nothing and, as others have said, the OP will recover the excessive deductions as the year rolls on.

    That is the system and, quite frankly, it is not going to be changed overnight or any time soon.

    Speaking as a former taxman, I have to say that when the OP said in post # 16 that previously bonuses were normally paid in March and this year they were paid in April that started alarm bells ringing. If the payment of bonuses was put back a month by the employer as a tax saving exercise that’s the kind of thing that Employer Compliance Units love to get their teeth into. Here is the principle.

    http://www.hmrc.gov.uk/manuals/eimanual/EIM42290.htm

    It would seem inconceivable that, when Brown announced the 50% tax band six months in advance, that bonuses etc. weren't paid in the March to avoid the 50% tax in April

    and it would seem inconceivable that when Osbourne announced the reduction nicely in advance that bonuses haven't been delayed until April this year.

    I'm not expecting many HMRC prosecutions but I am expecting lots of politicians explaining how this proves Laffer's conjecture.
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