Avoiding paying higher rate tax

civil12345

Hi, hoping for some advice on the best way to avoid paying higher rate tax.

So far this year I've been working with a salary of around £33,000 per year. From now until January it will be around £50,000. After that it will go back to £33,000 (most likely, small chance of it remaining at the higher level). In the tax year I will earn less than the higher rate threshold of £45,000.

Is there any way I can avoid paying the higher rate tax over the next few months? Or is my only option to pay it and reclaim after the end of the tax year? How would I do that?

Thanks in advance

Dazed_and_confused

Is your tax code being used in a cumulative basis or an emergency (week1/month1) basis?

Emergency basis commonly shows on payslips as an X at the end e.g. 875LX or 875L (X).

If you are on a cumulative code (and don't live in Scotland) then it should be sorted automatically through your pay each month but as tax is essentially re-calculated every month (when on a cumulative code) are you sure you will ever actually get to the higher rate threshold?

What do you think your taxable pay is going to be because
£33000 x 4/12
Plus
£50000 x 8/12
Is less than £45,000

civil12345

Hi, I'm on a cumulative code (1150L) and don't live in Scotland. I assumed it was calculated monthly. So as I'll earn more than the threshold (£45,000/12) in this month I would pay higher rate tax.

Is this not correct?

Dazed_and_confused

No

On a cumulative tax code your tax is effectively calculated by working out what your annual salary is at the point you are paid and then comparing what tax you have paid so far with what needs to be paid after your latest pay.

So if you were paid at a rate of £33,000 taxable salary for the first 4 months of the year that is £11,000 actual pay.

In month 5 (month to 5 September) you are paid at a taxable rate of £50,000 which is £4167.

So after 5 months you have actually earned £15,167 (11000 + 4167)

£15,167 after 5 months is an annual equivalent of £36,401 so nowhere near the 40% tax limit (for someone with 1150L cumulative tax code).

Move on to Christmas which is month 9 in the tax year, earning taxable annual salary of £50,000 and you now have £11,000 plus 5 months at £4,167 so total pay is £31,835.

£31,835 after 9 months is annual equivalent of £42,446 so still no higher rate tax needs to be paid if still on a cumulative tax code.

civil12345

Dazed that is excellent thank you for the detailed and very clear response. I'm sure I'll come back closer to the end of the month with another question after I've seen my payslip!

Thank you

Dazed_and_confused

Most likely complication to happen would be if you went onto an emergency tax basis, if that happens all the headroom you've built up when earning £33,000 is lost temporarily and you are taxed on a month by month basis so on £50,000 you would pay a little 40% tax.

But most likely that won't be an issue for you.