Tax on bonuses above £120k

superdario

A year or two ago, I was fortunate enough to land a sales job with a base salary of £120k and commission on top. I naively assumed that the deductions that the company made from my monthly income would cover my tax obligations, but it seems that I was mistaken. In fact, because the '£1 for every £2' taper had effectively left me without a tax free allowance at all, I ended up with a nasty tax bill-shaped surprise when I completed my SA return at the end of the year.

The tax office have told me that this will always be the case and I certainly have no issues with paying the right amount of tax - but I don't want to be in a position every year where I have to wait until I complete my tax return to find out the amount I owe. I would sooner be able to work it out each quarter (when commissions are paid) so I can set an appropriate amount aside.

Can anyone suggest either an online calculator that will work this sort of thing out, or an explanation of how it works so that I can build myself a spreadsheet or something?

Darksparkle

http://www.thesalarycalculator.co.uk

HMRC also have an app that's very simple to use.

Example:

1) Income - £100,000 = A
2) A / 2 = B
3) Personal allowance - B = equals new personal allowance.

Stop when you get to zero.

So eg income of £120,000 in 2015/16 would have a personal allowance of £600.

Income of £121,200 would lose all personal allowance.

Note the different allowances based on age/blind person etc

https://www.gov.uk/income-tax-rates/current-rates-and-allowances

superdario

Thanks, Darksparkle. I'm still not sure, though, how to figure out how much extra tax I will end up paying on the commissions, over and above what payroll deducts. I am probably being extremely stupid, but when the guy at the tax office explained it, my head started to spin!

Darksparkle

superdario wrote: »

Thanks, Darksparkle. I'm still not sure, though, how to figure out how much extra tax I will end up paying on the commissions, over and above what payroll deducts. I am probably being extremely stupid, but when the guy at the tax office explained it, my head started to spin!

The rates are in the link I posted, they change each year so you'd need to check them each year (or just use the salary calculator I posted).

Example

Income £120,000
Personal Allowance £600

£120,000 - £600 = £119,400

£31,785 x 20% = £6357
£87,615 x 40% = £35046

Total tax due £41403

Deduct tax already deducted at source and the amount left would be the extra tax due.

ChuckMountain

To be fair though you can have the correct amount taken at source if your tax code is correct and if you haven't got any additional income you shouldn't necessarily owe any more at the end of the year.

Normally HMRC would update tax code each year to reflect it however it may well be incorrect and has not been updated so you need to check.

If you are earning £120k base then you have to take any pension and other salary sacrifice benefits which may take you down to nearer £100k taxable base income depending on the amounts involved in which case your may well be a reasonable deduction. On top of that you have your commission which you don't state how much but lets assume you go back over the £121,200 mark in which case you will lose all your personal allowance.

If had declared your earnings to be over £121,200 to the tax office for a given tax year then if you had no other adjustments (e.g. car) then your tax code would be 0T which means you have no personal allowance. SA should update this so you should get a new tax code anyway.

In this case your payroll dept would deduct the correct amount of tax each month and even if your taxable income went over £150k they would then start deducting 45% on that element. Nothing further to pay at end of the year.

The catch is if you haven't got any bonus for whatever reason you may well have paid too much tax but you won't get that back till you have done your SA.

directdebiter

If the tax office do not think you will earn this amount but you do due to bonuses then yes you lose your personal allowance and get a nasty surprise from the tax man for a £2/3k bill depending on your bonus. As said if the tax office no you will earn this amount every year they will tax at the payroll via your tax code.

ChuckMountain

directdebiter wrote: »

If the tax office do not think you will earn this amount but you do due to bonuses then yes you lose your personal allowance and get a nasty surprise from the tax man for a £2/3k bill depending on your bonus. As said if the tax office no you will earn this amount every year they will tax at the payroll via your tax code.

If you lose the full allowance in 2015/2016 of £10,600 then you would owe 40% (or 45% if you pay additional rate) of that so your additional tax bill would £4,240 (£4,770) :mad: assuming you could not mitigate it in any other way. As PAYE there are limited options e.g. pension contribution, charitable giving.

You end up paying an effective 60% tax on the amount you earn between 100,000 and 121,200 in 15/16, which if you have a standard tax code gets missed. (Plus if you have kids you have already paid a similar rate on the 50-60k when the child benefit is reduced\removed)

I personally don't think the additional burden is fair and was something that was introduced in the dying days of the Labour government, but equally the Tories have not scrapped it yet because as you can imagine it generates a reasonable amount of tax income. There are according to National Statistics nearly 700,000 people earning over £100k and 300,000 earning over £150k so thats roughly an additional £3 billion in tax.

Its one thing paying a higher rate tax but when more money goes to the government than an individual takes home it sucks

[Deleted User]

Indeed, but is it worse than the marginal loss of income above £10600 for those on Working Tax Credits. 12% Nic plus 20% tax plus 41p withdrawal of tax credit on each additional pound - 73%?

I think the current government wanted to increase that to 79% until recently.

Darksparkle

[Deleted User] wrote:

Indeed, but is it worse than the marginal loss of income above £10600 for those on Working Tax Credits. 12% Nic plus 20% tax plus 41p withdrawal of tax credit on each additional pound - 73%?

I think the current government wanted to increase that to 79% until recently.

They wanted to reduce the threshold where tax credits begin to reduce from £6420 to £3850 and increase the taper rate from 41 to 48%,.

ChuckMountain

[Deleted User] wrote:

Indeed, but is it worse than the marginal loss of income above £10600 for those on Working Tax Credits. 12% Nic plus 20% tax plus 41p withdrawal of tax credit on each additional pound - 73%?

I think the current government wanted to increase that to 79% until recently.

This could be can of worms territory and its not meant to be

Not sure haven't done the maths.

I don't disagree with you but for me the issue is that the tax system is very complicated. I don't think either are necessarily right but with the tax credits at some point you need to stop unless it becomes a universal benefit like Child Benefit. Oh wait hang on that isn't any more

The tax free allowance should be a universal benefit imo. Or at least allow it to be household based if a spouse doesn't work for example. Two people earning £60k will combined pay a lot less tax than one person earning £120k

This additional complexity costs us the tax payer more money to physically implement. We then have the various loop holes that can be used which again is much harder if you are just on PAYE and don't use an accountant.

Is it fair for example that Facebook pays £4k roughly the same amount of tax that every single person earning over £120k pays as a result of a taper.

Runs and ducks for cover :eek:

grey_gym_sock

sorry to extend the off-topic discussion, but i think it's worth adding that (IMHO) the best way to reduce complexity and eliminate all the clawbacks (which lead to effective marginal rates seesawing up and down as your income rises) is a basic income.

that means: pay everybody - initially, let's consider ppl aged 25+ but under state pension age - a basic income of £X per week. this is unconditional, tax-free, and never clawed back. it replaces all of:
1) JSA, income support, etc, for ppl out of work;
2) most kinds of tax credits, for ppl in work;
3) the personal allowance - i.e. instead of getting your first £10k+ of earnings free of income tax, you'd get a basic income whether or not you have earnings, but you'd start paying tax on your first £ of earnings (or maybe there'd be a much smaller personal allowance) - but no clawback in additional to tax. (the basic income would be worth a similar amount to having a personal allowance.)

the actual tax rates on income would rise as income rises. that doesn't mean you'd be paying less overall on £100k - you might be paying more - but at least the rates would be more logical, and the system easier to understand and administer. ppl with low earnings would gain, because the lowest income tax rates would be less than the current clawbacks of tax credits.

child benefit would be made universal and tax-free again; and it also would be increased, with the increase replacing child tax credits, which would also be abolished, eliminating another clawback.

under-25s would perhaps get a lower basic income than over-25s, reflecting the currently lower benefits which they get.

over SPA, there would be a significantly higher basic income, replacing both state pension and pension credits.

various kinds of disability benefits would still exist, as top-ups to basic income.

housing benefit is tricky. it might need to stay as it is. ideally, you'd pay a high enough basic income that housing benefit became unnecessary, at least except in high-rent areas.