Bonus Payment and 40% tax bracket

SpeedSouth

Hi Folks,

I'm sure someone can help me work this out.

My gross salary is £40,000 p/a, and I will receive a bonus paid this month (April) of £5,100, so pushing me over the 40% bracket meaning I won't see much of that £5,100

I currently pay £333 per month into my company pension (not as salary sacrifice). I've read that this in effect reduces my earnings by £3996 per month, but looking at my payslips it still says the Gross pay for tax is £3333.33 rather than £3000.33 if this is the case.

My allowance is usually £600 less than the base due to various benefits.

With the bracket sitting at £42,386, I'd guess mine will be £41,700 (ish) when I get my new tax code.

So the simple option I guess is I put £3,400 into my pension this month, but that still brings this months salary to £5,000 so not sure what happens there with regards to taxing that??

Is this correct? I need to tell HR today if I want to adjust my pension for the month.

purdyoaten

If the reason for putting an extra £5100 into your pension is to obtain higher rate relief/ avoid paying higher rate tax - I wouldn't. Reason - you are not a higher rate taxpayer.

Your income for this year will be £45100. You pay £3996 into a pension plan out of, it would appear, your net salary which is grossed up to £4995 by HMRC. The effect of this is that you are liable to pay tax as follows:

10600 at 0% (personal allowance)
up to 36095 at 20% (31100 plus gross pension contribution)
So, you are a basic rate taxpayer.

The problem is that the PAYE system will apply tax to the income of £45100 which will mean some paid at 40%. (most of the bonus will be at 40% initially as paid in April and the system will assume similar income throughout the rest of the tax year - but this will even out over the tax year). You have two alternatives:

1) Make a claim at the end of the year.

2) Contact HMRC and inform them of your salary and pension contribution (£4995) - they should be able to make an adjustment to your code to keep you from paying higher rate tax on your earnings - thereby avoiding the need for option 1.

SpeedSouth

Yeah my reason was to avoid paying the 40% tax on it nothing else.

OK, so what I read about the pension contributions is correct in effect I just misunderstood it a bit. With my pension contributions I can in effect earn up to £46695 and remain a base rate tax payer?

purdyoaten

adam81 wrote: »

Yeah my reason was to avoid paying the 40% tax on it nothing else.

OK, so what I read about the pension contributions is correct in effect I just misunderstood it a bit. With my pension contributions I can in effect earn up to £46695 and remain a base rate tax payer?

Yes, if one includes the restriction for benefits that you mention.

The problem is that HMRC do not know about your pension contributions which are taken from your net salary. Until they do, you will pay around £2700 at 40% over this tax year, approximately £540 too much in tax.

SpeedSouth

Well I just spoke to HMRC, not sure I got the result you suggested from him. (He put me on hold to speak to someone else so wasn't really sure I guess)

He basically said I'll be taxed heavily in April (obviously) due to the bonus, but then it would even out over the year. When I mentioned my pension contributions he just started talking about tax relief??

purdyoaten

I would love to say that is surprising. You need to tell them that

a) you will earn £45100 in ths tax year

b) you pay personal pension contributions of £4995 gross

c) you would like a coding adjustment to prevent HR tax over the year by incorporating the additional tax relief on the pension contributions.

It should be 1350 as 40% of this is £540.

The issue of tax on the bonus is unavoidable. You will pay 40% on most of it as the system will assume that your earnings in April (salary plus bonus) will be repeated evry month hence. This will rectify itself as your salary averages out but you want, by the end of the year, to have paid no HR tax.

Good Luck!

dano17439

what if your bonus can be paid straight into your pension as an employer payment, meaning you do not pay any tax on it and your company save on employers NIC. Worth an ask!

SpeedSouth

dano17439 wrote: »

what if your bonus can be paid straight into your pension as an employer payment, meaning you do not pay any tax on it and your company save on employers NIC. Worth an ask!

Thanks,
This occurred to me last night so I've asked them the question.

I figure I'll stick some in in the pension anyway.