Annual bonus payment (Tax question)

haddock_n_chips

Hi All,

I posted earlier in the year about possibly getting a bonus at work.

Well finally the accounts have been finalised and I know I will definitely be getting a bonus this year (First time ever!)

So details are:

Salary: £26,000
Student Loan (older scheme, graduated in 2005)
Currently paying 6% into pension (employer contribution is 2%)
Bonus Payment: £3000

My employer has offered to pay in one lump sum or split it over 3 months (£1k per month)

So, which option would be better?

I'm guessing tax wise i'll end up paying about the same anyway but they were worried if i took it in one lump then it will screw up next months salary and end up overpaying tax for a while until PAYE sorts itself out.

Any help will be greatly appreciated

molerat

Assuming 1150 tax code.
One lump.
On 26K you will not pay any 40% tax in the month so no difference which option you choose. Ni though will be reduced to 2% on any amount over £3750 in the month but in 3 payments you will pay 12% on it all so a saving of £141. I don't think it makes any difference to the student loan.

chrisbur

haddock_n_chips wrote: »

Hi All,

I posted earlier in the year about possibly getting a bonus at work.

Well finally the accounts have been finalised and I know I will definitely be getting a bonus this year (First time ever!)

So details are:

Salary: £26,000
Student Loan (older scheme, graduated in 2005)
Currently paying 6% into pension (employer contribution is 2%)
Bonus Payment: £3000

My employer has offered to pay in one lump sum or split it over 3 months (£1k per month)

So, which option would be better?

I'm guessing tax wise i'll end up paying about the same anyway but they were worried if i took it in one lump then it will screw up next months salary and end up overpaying tax for a while until PAYE sorts itself out.

Any help will be greatly appreciated

Tax will depend on your tax code if you have any taxable benefits etc and when it is paid but whatever happens you will end up paying exactly the same tax however the bonus is paid. As I say without full details cannot say for certain there will not be a bit extra tax which will come back to you in the next month or so. If you are interested in the figures advise month number it will be paid in and your tax code.

The important thing is not tax but national insurance. If paid over three months you will pay 12% NI on all of your bonus. If paid in one lump sum you will pay only 2% on the part of your bonus that takes your monthly pay over £3750. So £5166 less £3750 is £1416 at 2% instead of 12% or about £141 better off.

haddock_n_chips

Thanks for the replies,

Tax Code is 1156L

Looks likely it will be in June Pay check

bowlhead99

You are right that on the tax side of it if you take a big lump it might go a bit messy one month because of it looking like you were on higher pay and being in a high rate 40% tax bracket based on splitting the annual personal allowance and tax bands into 12.

But as you say, this will be fixed as your ongoing cumulative salary is assessed against your tax code allowances each month and the tax side will work itself out. Personal income tax is, at the end of the day, assessed on how much you earn in a whole tax year and as you won't end up earning £45k+ you won't end up being a high rate taxpayer and any temporary overpayment will come out in the wash.

On the student loan side presumably on your current salary you are already paying that down and will have to pay more of it if you earn more money, but the total extra payment shouldn't really be any different whether you get paid an extra £3k or an extra £1k three times.

The thing to look at really is employees national insurance as chrisbur suggests.

If you take it as one lump in a single month, when added to your normal monthly salary that month it will blast you over the upper earnings limit of £3750 a month above which you only pay 2% national insurance on your earnings instead of 12%.

So, more net pay for you to keep, due to the NI permanently saved on the excess that went over £3750 in that month. That's a good thing.

Whereas if you just gradually take an extra grand more earnings for three months in a row, the earnings in any of the the months don't go over £3750 so you are paying the normal 12% NI on every pound of extra cash.

NI is different from income tax because although we mentioned above that tax works on your total income versus total allowances in a tax year, the NI doesn't; it works one pay period at a time, i.e. £3750 is the monthly upper earnings limit or £866 weekly if you're weekly paid.

So, seems to be best to get it all at once due to the NI saving. But even without that- given a choice - if there's no overall tax disadvantage or admin inconvenience, it's far better to have the money in your hand rather than an employer's bank account

As such, it seems sensible to ask for it all in one lump and then try not to blow it all at once

chrisbur

haddock_n_chips wrote: »

Thanks for the replies,

Tax Code is 1156L

Looks likely it will be in June Pay check

Payment between 1 June and 5 June would be month 2 and from 6 June onward month 3. Either way on your tax code you can earn over 3750 each month before 40% tax is due. So for month 2 you will have two times £2167 plus £3000 which is £7334 and can earn over £7500 before 40% tax is due. Month 3 gives you £9501 earnings and £11250 before 40% due. So either way no 40% tax will be due so no adjustment will be needed. All figures slightly simplified.

I am a little surprised your employer even raised this hopefully they are not the ones doing the wages. Anyone who knows about PAYE would have known this would not affect you as far as tax is concerned and even if it did it would not be a problem; but you would loose out on NI if it was split up. A large one off payment can sometimes cause you to go into a higher tax band but PAYE is designed to handle this nothing would be "screwed up"

bowlhead99

Obviously it's to the employer's advantage to take three months to hand over the money if there is a reason the employee may be reluctant to receive it all at once. Perhaps they are just following a precedent used for someone else in the firm or in a different year. The amounts received by other people in the context of their own personal circumstances might lead to a different choice, especially with different dates (e.g. payment in March vs March/ April / May across a tax year end etc). Or if your OH would spend the £2k on a big telly and holiday if received all at once but perhaps not notice if you just received a few hundred quid net extra in a few separate months...

haddock_n_chips

Hi Everyone,

Thank you so much for your replies it has been really useful and helped me understand a lot better.

I will go for the lump sum payment option

agrinnall

haddock_n_chips wrote: »

I will go for the lump sum payment option

[STRIKE]I'm a bit surprised that you have chosen this option as you'll almost certainly lose out on net pay doing this, as explained in several of the posts.[/STRIKE]

Talking nonsense :eek:

isasmurf

agrinnall wrote: »

I'm a bit surprised that you have chosen this option as you'll almost certainly lose out on net pay doing this, as explained in several of the posts.

Read the posts again. He pays less NI this way.

haddock_n_chips

Ok so I have used the trusty website (listontotaxman) to work out as follows:

Standard Monthly:
Gross Pay: 2166
Tax Free Allowance: 959.08
Taxable Pay: 1207.58
Tax Due (20%): 241.52
Student Loan: 63.00
N.I. : 178.36
Pension: 108.33
Total Deductions: 592.00
Net Wage: 1574.67

With FULL bonus payment:
Gross Pay: 5166
Tax Free Allowance: 959.08
Taxable Pay: 4206.92
Tax Due (20%): 558.33
Tax Due (40%): 566.10
Student Loan: 333.00
N.I. : 396.95
Pension: 258.30
Total Deductions: 2113.41
Net Wage: 3052.59 -- (£1477.92 "extra/bonus")

With incremental bonus (£1k p/m)
Gross Pay: 3166
Tax Free Allowance: 959.08
Taxable Pay: 2206.92
Tax Due (20%): 441.38
Student Loan: 153.00
N.I. : 298.28
Pension: 158.30
Total Deductions: 1051.69
Net Wage: 2114.31 -- (£539.64 "extra/bonus" x 3 = £1618.92)


Am i missing something here?

Am i right to make the student loan payment and the pension payment higher in line with the extra money? Or will this stay the same as normal month salary?

In the scenario above it would be better to take 3 payments over 3 months

Tell me where i have gone wrong as cant get my head around it! :beer: