BIK charge for creeping into 40% tax band

SamDude

Hello all,

I am in the 40% tax band, but have dragged myself into the 20% band by increasing my pension contributions.
I also have private medical (PMI) which I have taken into consideration as 'earnings'.

I think I've either made a mistake, or been given the wrong information by a previous employer which will affect my actual tax position and keep me in the 40% bracket. I changed jobs earlier this year, so some calculations are pro-rata.

Some numbers:
Basic salary £52,000
PMI value £1900 (*but I thought it was lower, see further down)
Total gross income: £53900

My personal tax code is 1304M (this is the standard 1185L, with 10% Marriage Allowance added). To bring my salary to just below £47540 (within the 20% band), I have paid £6600 into my pension. This is £240 below the limit so I have some headway (or so I thought).

*Based on my current employers PMI calculation, the value of the PMI is £1900. I understood from my previous employer that it was around £1200 but I do not have this in writing.
I am waiting for my previous employers HR rep to return my call - perhaps they had a different PMI charge and it was the lower amount?

If my P11D later this year shows the BIK (pro-rata'd) is £1900 or more across the two employments, I have two problems:
-my income will be in the 40% band (not by a lot, so not really an issue)
-my BIK charge for the PMI will not be taxed at 20% but 40% of £1900 (and extra £380).

I hope I've explained it correctly, and would be grateful if someone more qualified than me can confirm or correct me if I'm wrong?

If I don't get an answer from my previous employer before this Friday, are there any options to reduce my income further for this tax year?
I have made a few small value charity donations over the year (approx £50). If I were to make a charity donation of around £300 before the end of this tax year (Friday?), will I be able to advise HMRC and ensure my income is adjusted so it does not creep into the 40% band?

BoGoF

Not sure I follow your figures but only the part of the BIK that falls into the 40% tax bracket will be taxed at that rate.

BoGoF

Oh...and you do realise you are not entitled to the marriage allowance if you are liable at 40%?

SamDude

BoGoF wrote: »

Not sure I follow your figures but only the part of the BIK that falls into the 40% tax bracket will be taxed at that rate.

Thank you for correcting me - I thought the entire BIK charge would be taxed at the marginal 40% rate, so this is good to understand if it's just the amount above the 20% band.

BoGoF wrote: »

Oh...and you do realise you are not entitled to the marriage allowance if you are liable at 40%?

Yes I did realise it but it wasn't at the front of my mind...
Removing it means an extra £230/460 is taxed - so can I either donate approx £300 to charity to reduce my taxable amount?

Either way I'm not seeing the money, so I'd rather it go to a good cause....

BoGoF

When you say you have paid £6600 into your pension - how was this paid? What type of scheme?

Also you have made an error in your calculations above. Although tax relief for marriage allowance is given in your tax code, when it comes to the year end you do not deduct this amount from your tax code as the relief is given as a tax adjustment to your tax bill. This means that when calculating if you are higher rate you only deduct your personal allowance from your income.

SamDude

My pension contribution was via salary-sacrifice, so no reporting/claiming to do with HMRC.

My tax code is 1304M which includes the MA adjustment.
As you've reminded me, I do understand about my tax code being revised back to 1185L and the difference in tax will be payable to HMRC.

BoGoF

SamDude wrote: »

My pension contribution was via salary-sacrifice, so no reporting/claiming to do with HMRC.

My tax code is 1304M which includes the MA adjustment.
As you've reminded me, I do understand about my tax code being revised back to 1185L and the difference in tax will be payable to HMRC.

Ok, so in that case your final payslip should show taxable earnings of £45,400 (52,000 - 6600)?

Can you confirm this or provide exact figure....and the tax deducted.

SamDude

Taxable earnings are around £45400, total tax deducted approx £6500 - so pension salary-sacrifice is accounted for.

If I add the £1900 (BIK value), my earnings are (45400+1900)=£47300.

At the 1304M code, £47300 would be within the 20% band (salary up to £47540 is 'safe').
But at 1185L:, it is higher than the £46350 maximum income, so pushes me into the 40% band.

BoGoF

It would be better if you had precise figures but based on figs you have provided your 18/19 liability will be

Taxable income £47,300
minus PA £11,850

Leaves £34,540 of which £34,500 @ 20% and £950 @ 40% which gives a total of £7280 due.

You would need to make gift aid qualifying payments of around £760 (which would be grossed up) to take yourself out of higher rates and qualify for the Marriage allowance tax credit of £238.

You would be best erring on the side of caution and paying more to make sure.

SamDude

Thanks so much.
I'm going to get the exact figures when I get home this evening and work it out accurately. I'll also wait for my previous employer to confirm the BIK, just in case I was worrying over nothing all along...

SamDude

So, to wrap up this thread - I checked with my previous employer and they had a much more generous PMI scheme than I thought, and my BIK value was closer to £600 as I was only signed up for part of the year.

This means my overall income with the accurate BIK charge included is well within the 20% tax band and my panic to reduce my income further is over.

I did check with my workplace pension provider and they said I could make a one-off contribution to reduce my tax position. If anyone wants to do this, make sure the payment is applied the same day (not 3 working days otherwise you miss the 5th April deadline).