The "quirk of £100k-£123k Threshold"

Tiptop79

Hi All,

Just wondering what your thoughts might be on me declaring to the tax office that I will sit within this band for 2018/2019 to save all the heartache of tax code constantly changing as earnings change. Will they give me a refund the following year or simply adjust my tax code?

Fast approaching the end of the tax year, I received the payrise I asked for (more than I asked for, and they also backdated to 1st Jan - last year they gave me it in April) I also have an unexpected bonus due in Feb (approx £9,500k) which means I will have earned more money than I ever dreamed of. Tax office have changed my code monthly and this month I took home less money than I did when I earned £46k a year which left me considerably worse off. Called the tax office, they agreed it was "hasty" of them to take over £3,300 off me this month and could have adjusted my code next year but there is nothing they can do about it now.

My earnings so far this year ar £95k with another 2 pay cheques to go before year-end (PAYE) I have decided to forego 100% of my salary in Feb to salary sacrifice it to my pension instead, so I will just get taxed on my bonus instead. If I don't do this, I run the risk of owing the tax office more money than the pay rise, which makes it pointless! I am on a K tax code now and I predict I will be on £110k by year end.

So naive to think that earning more money means you take home more money. I doubt next year I will earn the bonus I have this year and fully intend to sacrifice as much as I can to keep me below the £100k threshold, but will now owe for underpayments in this tax year.

Has anyone else experienced this?

Dazed_and_confused

Just wondering what your thoughts might be on me declaring to the tax office that I will sit within this band for 2018/2019 to save all the heartache of tax code constantly changing as earnings change. Will they give me a refund the following year or simply adjust my tax code?

Given your comments wouldn't you be better giving HMRC an estimate over £123,700 (the new £123k figure for 2018:19) and then your code won't need any Personal Allowance adjustments.

After the tax year has finished you would just complete your tax return and if you are actually entitled to any Personal Allowance it will be included in your Self Assessment calculation and you will get any refund due (or reduction in other tax payable) that way.

You cannot the Personal Allowance for one year included in your tax code for a later year.

Do you know the Personal Allowance isn't based on your taxable income, it is something called adjusted net income which is slightly different. Google it for more details.

Tiptop79

Thank you for your reply, that is most helpful.

I haven't completed a self-assessment before and have approached an accountant to help me with this to ensure I get this correct.

Will have a look at adjusted net income and see what that means to me and my circumstances. Thanks for helping out.

Dazed_and_confused

You might find it beneficial to get the self assessment completed fairly quickly (certainly by 30 December at the very latest) as this can help you in these ways.

1. If there are any unexpected liabilities you can get your tax code sorted ASAP to prevent them happening (or building up as much) again.

3. If you owe less than £3,000 from your 2017:18 self assessment return you can have it collected through your 2019:20 tax code. Bit like an interest free loan spread over 12 months.

Tiptop79

The tax office seem to be recovering as much as they can in this financial year for underpayment in this period, so hoping there won't be too much to carry over next year.
I have just found out about other things I have never claimed for that I should have done, and only found this out as I felt I should explore more where my money is going. I have only ever been paid 11p per mile for my fuel for last 2 years (company car) so can claim the difference from 11p-45p. Also gave my company car back in September and yet to see the benefit of no longer having it!

I have been going round in circles for advice (happy to pay for it but just not getting anywhere) Went to an IFA who advised an accountant, went to my accountant who advised pension provider and pension provider to IFA. How hard can it be to get help with what to do with your money!

Thank you. I will ensure my accountant does my return in December.

Dazed_and_confused

You cannot "claim the difference" you can only claim tax relief on the difference.

But 45p refers to your own car not company cars. 11p seems about right for a company car.

badmemory

Well this may not seem like particularly good news, but with a K code they cannot take more than half your income. Have you received a breakdown on how the K code is calculated? Is it actually correct? Don't assume it is. Always, if they give you figures rather than the other way round, assume that their figures are incorrect & then prove to yourself how they are incorrect.

schuey87

Can someone explain to me if my thinking is wrong on tax between 100-123k. I understand you lose £1 of your personal allowance for every £2 over 100k. So essentially you get taxed 50% of this. Are you still also paying 40% tax on that 23k as well as losing the personal allowance?

If so for that 23k earned you pay 40%x23k = £9200 and lose £11500 that was tax free so you are essentially paying another 40% tax on that £11500 so £4600 therefore you pay £13800 tax equivalent to 60% tax for that 23k right?

What happens if your tax free allowance is more than £11,500 due to professional subscriptions etc? Do you lose more than 11500 if say you had an allowance of 12500 and earnt 125k?

Does this loss of personal allowance change if you are self employed or work the same way?

Pennywise

schuey87 wrote: »

tax equivalent to 60% tax for that 23k right?

Yep, 60% marginal tax rate on the portion of taxable income between £100k-£123k. Plus a further 2% national insurance. So total "deductions" are 62%.

[Deleted User]

schuey87 wrote: »

Can someone explain to me if my thinking is wrong on tax between 100-123k. I understand you lose £1 of your personal allowance for every £2 over 100k. So essentially you get taxed 50% of this. Are you still also paying 40% tax on that 23k as well as losing the personal allowance?

If so for that 23k earned you pay 40%x23k = £9200 and lose £11500 that was tax free so you are essentially paying another 40% tax on that £11500 so £4600 therefore you pay £13800 tax equivalent to 60% tax for that 23k right?

What happens if your tax free allowance is more than £11,500 due to professional subscriptions etc? Do you lose more than 11500 if say you had an allowance of 12500 and earnt 125k?

No - it is only your personal allowance that is restricted. Your professional subscriptions are an expense upon which you are able to claim tax relief. While the amount is added to the amount before which you pay tax it is not an increase in your personal allowance.

[Deleted User]

Pennywise wrote: »

Yep, 60% marginal tax rate on the portion of taxable income between £100k-£123k. Plus a further 2% national insurance. So total "deductions" are 62%.

Yes - so an amount that is free of tax, followed by some at 20%, some at 40%, some at 60%, some more at 40% and the rest at 45%.

All very logical.