Negative tax free amount

btcp

I earned over 100k last year, submitted my self assessment and actually got £1300 back. Now I received a letter from HMRC saying that my tax code is OTX and my total tax free amount is £-2. I am not sure I understand what it means for me.

They also listed personal pension relief of £2500 - I paid this amount last tax year, why do they include it in this year calculation?

Do all people who earn more than 100k get zero tax free amount at the start of the year and then claim back tax via self assessment in case they made contribution such as pension?

Dazed_and_confused

Now I received a letter from HMRC saying that my tax code is OTX and my total tax free amount is £-2. I am not sure I understand what it means for me.

Your tax code is a provisional attempt to ensure the correct amount of tax is collected. 0TX means your employer will use tax code 0T on a non cumulative basis from your next pay day i.e. ignoring what you have been paid in the previous month's of this tax year.

0T is typically a tax code with no allowances or deductions i.e. Personal Allowance reduced to 0 and that's it but as you have discovered it can be made up of a combination of things.

You can use a payroll tax calculator such as listentotaxman or one on gov.uk to see the impact on your taxable pay next payday.

They also listed personal pension relief of £2500 - I paid this amount last tax year, why do they include it in this year calculation?

You will have received any tax relief due for 2018:19 through your 2018:19 Self Assessment calculation. The entry in your tax code is HMRC assuming you will make a similar payment again in the current tax year. If this is not going to be the case you would be best off asking HMRC to remove the entry from your 2019:20 tax code as otherwise you will end up having to pay the tax relief back through your next Self Assessment.

Do all people who earn more than 100k get zero tax free amount at the start of the year and then claim back tax via self assessment in case they made contribution such as pension?

No. Your Personal Allowance is not based on "income", it is "adjusted net income" which determines your Personal Allowance. Your tax code is only ever an estimate. If you don't think it is a very good estimate you can get it updated and aim to pay roughly the correct amount during the year.

EdSwippet

btcp wrote: »

Do all people who earn more than 100k get zero tax free amount at the start of the year and then claim back tax via self assessment in case they made contribution such as pension?

Worse. Some people get a negative tax free amount, where the code starts with 'K'.

https://www.gov.uk/employee-tax-codes/letters

Example
An employee with tax code K475 and a salary of £27,000 has taxable income of £31,750 (£27,000 plus £4,750).

As mentioned above already though, this whole tax code thing is really just HMRC's guesstimate of what PAYE tax withholding setting is needed to get it to roughly match your actual tax liability for the year.

btcp

Dazed_and_confused wrote: »

You will have received any tax relief due for 2018:19 through your 2018:19 Self Assessment calculation. The entry in your tax code is HMRC assuming you will make a similar payment again in the current tax year. If this is not going to be the case you would be best off asking HMRC to remove the entry from your 2019:20 tax code as otherwise you will end up having to pay the tax relief back through your next Self Assessment .

I actually increased the % for my pension through salary sacrifice from April, and in total it will be more than additional £2500 I paid last year. Do HMRC still adds £2500 into an assumption calculation or it’s total pension contribution that matters, despite the channel I pay it through?

Dazed_and_confused

You cannot claim tax relief on salary sacrifice pension contributions. For two reasons.

One, you haven't paid the pension contribution, your employer has.

Two, you have already received the maximum possible benefit by your taxable income being reduced i.e. salary £80k, you sacrifice £20k. Your employer contributes £20k to your pension fund. You are taxed on £60k and the £60k is what appears on your P60. You also only pay National Insurance on £60k not £80k.

btcp

Ok it sound like if I am confident I can afford to increase my salary sacrifice, ie. reduce my monthly net pay then I should do that and call HMRC saying I will not be contributing to pension personally this year. If I decide I’d better take home more now and end up with extra savings by the end of tax year, then I can make pension contribution and claim tax back. End result should be the same, right?

Dazed_and_confused

Salary sacrifice reduces your gross pay/salary.

Which in turn reduces your net take home pay.

If you currently don't plan to contribute yourself to a SIPP or personal pension type arrangement then yes it would be sensible to ask for your tax code for 2019:20 to be updated to remove the pension tax relief entry.

If you do subsequently contribute to a relief at source scheme the pension company will automatically add the basic rate tax relief to the pension fund i.e. you pay £4,000 and they (courtesy of HMRC) add £1,000 giving you £5,000 in the pension.

You don't need to contact HMRC separately to claim anything back, just include £5k in the relevant box on your Self Assessment return and it is automatically taken into account when calculating your 2019:20 tax liability. And you will probably also get an updated 2020:21 tax code on the basis you will contribute (say) £5k again.

btcp

If pension company gives me £1,000 as a curtesy of HMRC in the pension, why do I add £5,000 to self assessment? If the relief already paid, what does it do via self assessment, do I get extra tax relief or why they need to know?

Dazed_and_confused

The £1,000 is the basic rate tax relief.

In your original post you mentioned filing a Self Assessment return so assuming you file one for 2019:20 in due course then you have to include the pension contribution. When you complete a return you fill in anything applicable. If you have made a relief at source pension contribution then it must be shown on the return.

A relief at source contribution increases the amount of basic rate tax payable so for some people there will be no additional tax relief due. But for others that increase to the basic rate band will mean more income is taxed at 20/21% and less at 40/41%.

And it will also reduce your "adjusted net income". Which is what determines the amount of Personal Allowance due. So it can also limit the reduction in the Personal Allowance if your adjusted net income exceeds £100k.

Ultimately, in an extremely simple scenario a £4,000 contribution can actually save you £2,000 in personal income tax so you end up with £5,000 in your pension fund for a net outlay of £2,000.

btcp

Thanks for taking time explaining. What about the following scenario?

Gross salary is 100k, pension salary sacrifice 15% so I have 15k in pension, and 85k taxed. If I wanted to increase pension and reduce tax, I am considering 2 options.
1) I can increase salary sacrifice to 20% and have 20k in pension and 80k taxed. With 20% sacrifice I will have less money in hand monthly, which I am not too sure if I can afford.
2) I can continue with 15%, and if by the end of the tax years I ended up with extra 5k, I can add it to the same pension fund and get a tax relief on this money through my self assessment.

So the end result should be the same for me, I will still pay the same amount of tax on 80k. there should be no difference between 2 options at the end of tax year, is that right?

Dazed_and_confused

They are two totally different types of pension contributions so the outcome will differ.

Option 1). Salary sacrifice means there is no pension tax relief (due to your employer making the pension contribution) but you will not then be paying any tax or National Insurance on the additional 5k income you have sacrificed. So you have an extra £5k in your pension fund but your take home pay will have only reduced by £2,900, the other £2,100 would have been deducted in tax and National Insurance.

Option 2). You cannot end up with an extra £5k purely by choosing this option. Yes your taxable salary will be £5k more but you will have 40% tax to pay on it plus 2% National Insurance.
So maybe £2,900 net. If you contribute that £2,900 to a relief at source pension then the pension company will add £725 basic rate tax relief giving you £3,625 in the pension fund. This will then give you an £3,625 basic rate band saving you £725 in ax (£3,625 more will be taxed at 20% instead of being taxed at 40%). Overall result is you have £3,625 extra in your pension fund which potentially only cost you £2,175.

You might be best having a play with a calculator like listentotaxman to get a better understanding of how the salary sacrifice will impact your take home pay.