Wrong annual taxable income reported by company

Jeremy535897

I don't understand why there is a large amount of income not noticed by HMRC, but if you put in her next monthly salary and the code into a tax calculator, it will tell you the impact of the code on her tax deduction.

Notnewnotold

foreveralone said:

Notnewnotold said:

foreveralone said:

Notnewnotold said:

By the way, if HMRC really do think that earnings are 105k then your wife probably has an even less favourable K code to come once they have the right information

What do you mean exactly by that?

I mean that if they think she's only earning 105k, then they would not have removed all her personal allowance (and then pushed her into negative territory with a K code) on the basis of her salary/bonus. So once her actual income position is reported, that K code could get worse because they'll realise that she shouldn't have any personal allowance, in addition to whatever they are already clawing back from her...

In that case, how do you deal when receiving bonuses that take your payslip to the no personal allowance wage band?

I'm not the best person to ask as my basic salary already eliminates any PA before bonus comes into it. But if I were in that situation, I'd be doing my best to mitigate through increased pension contributions, including prior year carryover if possible. It's far and away the most tax efficient option if you can get adjusted income to just below the 100k mark

Ultimately though, Self Assessment should sort out over or underpaid tax at the end of the year, given that tax codes can struggle to keep up from month to month where income is variable.

foreveralone

Jeremy535897 said:

I don't understand why there is a large amount of income not noticed by HMRC

Yeah, no idea why that happened, to be honest. Aren't they checking the taxable income so and then?

Dazed_and_C0nfused

On her Personal Tax Account you should be able to see the monthly Real Time Information details the employer has submitted so far in 2020:21 and compare these to her payslips.

Are you certain her P60 will show taxable pay of around £180,000?

foreveralone

Dazed_and_C0nfused said:

On her Personal Tax Account you should be able to see the monthly Real Time Information details the employer has submitted so far in 2020:21 and compare these to her payslips.

In those monthly statements from Personal Tax Account, I can see that sum is greater than what the company was reporting.
It looked something like the following:
- Month1 X
- Month2 X + bonus
- Month3 X
- Month4 X + bonus
....
Total: >150k

The company has reported the annual taxable income is 105k.

Seeing that total, and what the company reported, we decided to update those number manually.

Pennywise

Employers don't report expected or forecast earnings.  They just report the wages paid each pay period.  HMRC may well be extrapolating from the wages to date figures and those extrapolations/estimates are what you can change via the personal tax account.  If the actual year to date earnings reported by the employer to HMRC don't tally with the payslips, then you have a problem.

foreveralone

foreveralone said:

After updating the annual taxable income value, her tax code changed to something like K1055X and the website reported the following:
Your tax-free amount

The income you can have, taking into account any adjustments, before paying tax.

The amount is

−£10,000

Would opening a SIPP or via a direct pension contribution help mitigate part of this problem?

MattMattMattUK

The personal is eroded once you earn more than £100k pa and is entirely gone by the time your income exceeds £125k pa, I expect that the £-10k is something to do with that (eg it had been claimed on a monthly basis, but HMRC are adjusting as the income will obviously be over the threshold and so the allowance lost).

Also, once you earn more than £100k pa you will need to submit a self-assessment tax return, did your wife earn more than £100k in 19/20 and was that tax return submitted to HMRC?

https://www.gov.uk/income-tax-rates/income-over-100000

foreveralone

MattMattMattUK said:

The personal is eroded once you earn more than £100k pa and is entirely gone by the time your income exceeds £125k pa, I expect that the £-10k is something to do with that (eg it had been claimed on a monthly basis, but HMRC are adjusting as the income will obviously be over the threshold and so the allowance lost).

Also, once you earn more than £100k pa you will need to submit a self-assessment tax return, did your wife earn more than £100k in 19/20 and was that tax return submitted to HMRC?

Yes, as far as I remember she did it for 19/20.
So, looks like there's no other way than waiting for the next self-assessment and pay a big lump sum...
How can she prevent this from happening next financial year? 

MattMattMattUK

foreveralone said:

MattMattMattUK said:

The personal is eroded once you earn more than £100k pa and is entirely gone by the time your income exceeds £125k pa, I expect that the £-10k is something to do with that (eg it had been claimed on a monthly basis, but HMRC are adjusting as the income will obviously be over the threshold and so the allowance lost).

Also, once you earn more than £100k pa you will need to submit a self-assessment tax return, did your wife earn more than £100k in 19/20 and was that tax return submitted to HMRC?

Yes, as far as I remember she did it for 19/20.
So, looks like there's no other way than waiting for the next self-assessment and pay a big lump sum...
How can she prevent this from happening next financial year? 

There should not be a big lump sum as such, she will have paid tax throughout the year based on her PAYE income, that deduction at source should have been in line with her earnings so in most cases, barring slight variances and fluctuations the tax paid on PAYE should cover the tax due. If the loss of the personal allowance had not been accounted for via PAYE then whilst the personal allowance is £12,500 pa the difference would only be the tax due on that, so at most £5,625, making the assumption that the amount would be charged at the Additional Rate (45%) in a worst case scenario. 

Are your wife's bonuses paid via PAYE? If so then do her payslips show the correct taxation for that amount and are the rolling yearly totals correct, or roughly correct? Does she have any other significant sources of income other than her PAYE salary? A little bit of interest will not likely make much difference, but if she has another source such as rental income etc. then that can have an impact.

All in all she is unlikely to get hit with a big tax bill, especially not in relation to a £180k pa income, however at that level of income you should also be engaging an independent financial planner to make the most of her income, pension contributions are a much more efficient way of extracting her income for example a SIPP might be best, but depending on the contributions the company makes to their scheme the company scheme might be a better option. The company may offer share options, certain benefits in kind (a company car for example) do not generally make much sense at that level of income (higher rate or additional rate income taxation) so it might well be worth using this as a springboard to look at some serious financial planning.