Bonus vs PAYE

Bluethunder

Hi there,


I'm hoping someone will be able to answer my mildly complex question.


I'm in the 40% income tax bracket, and have this month been paid a rather jammy bonus which, when added to my standard monthly pay, has actually meant one month of 45% tax. There is no question that ultimately, annual salary + bonus will still remain very firmly in the 40% bracket.


I understand this is because PAYE calculates every month's tax in isolation as if you're going to be paid that every month (or at least that's a useful simplification) and this will be corrected going forward, but my question is how this will be done? There are 2 complications:


1. This is end of March 18 so no further opportunities in this tax year to pay less tax each month to balance it out, and
2. I have sold a small but non-negligible amount of employer-issued shares for which I'll need to do a self-assessment tax return.


Will I see a rebate next month? Or will next years tax be adjusted downwards each month even though it's a different tax year? And how does my need to do SA fit in? For example, I assume if I'm not careful there is a chance I could pay less tax in my SA due to my overpayment in the tax year but then pay less PAYE next year as well.


I want to avoid any one-off shocks either now or in a years time! Can anyone help?


Many thanks.

molerat

PAYE does not take each month in isolation it looks at the year to date. The later in the year you are paid a one off lump sum the more accurate the taxation of that sum will be. If you have paid some 45% this month, month 12, then that will be the correct amount of tax for the whole year and no refund will be due unless you happen to be on a non cumulative tax code.

chrisbur

Bluethunder wrote: »

Hi there,


I'm hoping someone will be able to answer my mildly complex question.


I'm in the 40% income tax bracket, and have this month been paid a rather jammy bonus which, when added to my standard monthly pay, has actually meant one month of 45% tax. There is no question that ultimately, annual salary + bonus will still remain very firmly in the 40% bracket.


I understand this is because PAYE calculates every month's tax in isolation as if you're going to be paid that every month (or at least that's a useful simplification) and this will be corrected going forward, but my question is how this will be done? There are 2 complications:


1. This is end of March 18 so no further opportunities in this tax year to pay less tax each month to balance it out, and
2. I have sold a small but non-negligible amount of employer-issued shares for which I'll need to do a self-assessment tax return.


Will I see a rebate next month? Or will next years tax be adjusted downwards each month even though it's a different tax year? And how does my need to do SA fit in? For example, I assume if I'm not careful there is a chance I could pay less tax in my SA due to my overpayment in the tax year but then pay less PAYE next year as well.


I want to avoid any one-off shocks either now or in a years time! Can anyone help?


Many thanks.

Under normal circumstances PAYE does not calculate tax as if what you earn one month is being paid every month. If you are on the correct tax code and it is being applied on a cumulative basis the tax you pay for this month will be the correct tax due as at the year end.
Occasionally tax codes are applied on a non-cumulative basis and this can result in the wrong tax being paid but this is not usually the case.

If you want the figures checking you need to give your tax code, taxable pay to date and tax paid to date.

Bluethunder

Well, I wouldn't mind getting this checked out then, if that's OK. My guess would be that I'm on a non-cumulative code but I'm happy to be corrected.

My taxable pay in YTD, after March paycheck, is £79453.73. My tax paid is £21266.91. NI is £5109.68. My tax code is S1111L and I live in Scotland (thresholds slightly different).

molerat

I make the YTD tax on that £21033.60. Your tax code should have M1 or X after it if non cumulative. What are your figures for this pay packet ?

chrisbur

I agree that tax is about £230.00 higher than would be expected for code of S1111L, so this would indicate that your code is being applied on a non-cumulative basis. Judging by your NI figure you look as if you have worked at your current employment for all of this tax year so most likely reason for a non-cumulative code is that HMRC reduced your tax code during the year. Did you get a notice of tax code change during the tax year? Have you got your old payslips to check your code at the start of the tax year?

Bluethunder

Thanks for the help so far. Yes, although my salary hasnt changed all year, I did have a tax change, which I think was related to changing over to the new Scottish income tax rates too late. The previous code was 1100L, it changed in July. Upon checking my HMRC account I was told I had underpaid so this was being redressed through the rest of the year. Thanks, SNP.

Gross for tax this month was £21815.72, PAYE was 8250.05 and NI 729.70.

molerat

Spot on tax deduction for S1111L M1 code.

chrisbur

Bluethunder wrote: »

Thanks for the help so far. Yes, although my salary hasnt changed all year, I did have a tax change, which I think was related to changing over to the new Scottish income tax rates too late. The previous code was 1100L, it changed in July. Upon checking my HMRC account I was told I had underpaid so this was being redressed through the rest of the year. Thanks, SNP.

Gross for tax this month was £21815.72, PAYE was 8250.05 and NI 729.70.

Are you sure that your code changed from 1100L to 1111L? Have you checked your payslips for the start of the tax year?

To add a bit more detail to my rather late post last night.
The normal code that everyone starts off with before adjustments was 1100L for 2016/2017 and 1150L for 2017/2018. Is it possible that the code you remember as 1100L was your code for 2016/2017 which would have been automatically increased to 1150L for the start of 2017/2018. If this was the case then being om 1150L instead of S1150L you would be under-paying tax and would explain the new code of S1111L which would then be an adjustment code to correct this under-payment. This would suggest that your correct code for the year should be S1150L and is why I asked you to check back on your payslips for the tax code in use at the start of the year.

00ec25

Bluethunder wrote: »

Thanks for the help so far. Yes, although my salary hasnt changed all year, I did have a tax change, which I think was related to changing over to the new Scottish income tax rates too late. The previous code was 1100L, it changed in July. Upon checking my HMRC account I was told I had underpaid so this was being redressed through the rest of the year. Thanks, SNP.

if you had underpaid tax then your code would have reduced below 1100, not increased to 1111.

as mentioned by others, it appears you are on a non cumulative code (eg it says M1 after it). On that basis when you do pop into 45% band you won't get it adjusted thorough PAYE as each month is treated in isolation.

Bluethunder

I did check my payslip, so that chance is correct. I wonder if you're forgetting that the SNP did not bring in the raise to the 40% threshold last year, it remained at £43k, so even though my tax-free allowance went up, I should have still been paying more tax than if I lived in England or Wales.


The code on my payslip definitely does not say M1.


Am I right in assuming this would be checked when doing SA for the share sell-off anyway?