Reducing tax caused by BR tax code

JMC_4

Hi,
At the beginning of this tax year I transitions into a normal salary role, and stupidly I haven't been checking my tax code on my payslip. It appears that I've been under the basic BR tax code for the year and I've been underpaying tax (based on my calculation from https://www.uktaxcalculators.co.uk/) by around £2000 a month. This potentially means I'm going to have a 20k+ tax bill coming my way when the tax code gets resolved. Is there any way I can resolve this so I can retrospectively put that money in my pension rather than paying tax on all the income?
I'll also try and speak with HMRC to get the tax code resolved.

Thanks

Dazed_and_C0nfused

You cant change history but you still have over two months to contribute to a pension in the current tax year.

For that level of underpayment you must be earning a lot so there may be other implications (benefits) of pension contributions on top of minimizing the amount of 40% tax payable.

To start with once the tax year ends your tax code is irrelevant, that was just a provisional attempt to collect the correct tax.  You may be in the area where your Personal Allowance gets reduced due to high income and pension contributions can help prevent that.

What method will you be using to contribute to a pension?  Relief at source is most likely but each method works slightly differently so it is important to understand exactly what you are doing.  Relief at source contributions do not reduce your taxable income but they do mean more income can be taxed at 20% and less at 40%.

From what you have posted you will be probably be required to complete a Self Assessment return for 2020:21 even if you haven't previously had to complete them.

JMC_4

Hi,
Thanks for the response. My income is based on a day rate, but I'd expect to take home around £135,000 a year, so I'll be doing a self assessment return.

My initial thought is to pay the remainder of my salary for this tax year into my pension which should result in just over £30000 of payments. I just need to get the relevant paperwork sorted between the employer and SIPP provider.

I've also realised that my calculations on https://www.uktaxcalculators.co.uk/ were for BR vs non tax code rather than 1250L which meant my tax free allowance wasn't being included in the calculation. Hopefully this means my current liability is only £14500 rather than £20000 as previously thought.

Dazed_and_C0nfused

You won't be due any Personal Allowance without some pension contributions.

Do you mean you will personally contribute £30,000 or is that £30,000 with the basic rate tax relief included or is it an employer contribution?

JMC_4

Dazed_and_C0nfused said:

You won't be due any Personal Allowance without some pension contributions.

Do you mean you will personally contribute £30,000 or is that £30,000 with the basic rate tax relief included or is it an employer contribution?

It would be an employer contribution, i.e. through salary sacrifice

Dazed_and_C0nfused

It's not clear what you mean by "take home around £135,000".

If that is genuinely your take home pay then you are still going to lose your Personal Allowance.

If it is your taxable pay and you sacrifice £30,000 of it you will still likely lose at least £2,500 of your Personal Allowance (£105k - £100k = £5,000 ÷ 2 = £2,500).

But in reality the £105k in that calculation is based on "adjusted net income" so any other taxable income or relevant deductions (Gift Aid for example) will alter the figures.

Note you cannot deduct salary sacrifice pension contributions when calculating your ANI as these are employer contributions.  They are reflected in your lower salary, deducting them again would be double counting.

JMC_4

Sorry, you are correct, I said the wrong thing - 135 isn't my take home page. My gross salary is around £135,000 a year.

Dazed_and_C0nfused

JMC_4 said:

Sorry, you are correct, I said the wrong thing - 135 isn't my take home page. My gross salary is around £135,000 a year.

So reducing that to £105k will probably allow you to keep most of your Personal Allowance but you will be paying an effective tax rate of 60% on £5k.

Probably with having a read up on adjusted net income.

JMC_4

Dazed_and_C0nfused said:

Probably with having a read up on adjusted net income.

Yeah, I wasn't aware of adjusted net income and the affect that has on your tax allowance.
Thanks for all the help. This is a lesson learnt on checking my payslips properly!