Paying correct tax with bonus when income exceeds £100k

n987654321

I was hoping to get some advice on my current tax situation.

I am currently on a salary of £70,000, with a potential bonus of £50,000 (paid out in July). This bonus is performance-based, is not guaranteed, and could be given in part (e.g. I could recieve £10k). 
My current Tax Code (250T) is based on the combination of my salary and full bonus, £120,000, which is essentially my on-target earnings. 
I understand that as you go over £100,000 you start to lose your Personal Allowance. Based on a £120,000 income my Personal Allowance is £2,500.

I'm quite confused if I am on the correct tax code and if anything needs to be changed, as I am being taxed quite heavily on a monthly basis.  I'm essentially being taxed at a £120,000 gross income, with a significantly reduced Personal Allowance, even though my monthly gross pay is based on a £70,000 salary. My PAYE contributions per month are therefore a lot higher than if my Tax Code was based on my base salary. Without knowing 100% if I will receive a £50,000 bonus, or if it will be a portion of this, it seems odd to be overpaying this amount of tax and having a reduced Personal Allowance when the bonus isn't guaranteed.

Any advice or guidance would be greatly appreciated. 
Thanks

MattMattMattUK

n987654321 said:

I was hoping to get some advice on my current tax situation.

I am currently on a salary of £70,000, with a potential bonus of £50,000 (paid out in July). This bonus is performance-based, is not guaranteed, and could be given in part (e.g. I could recieve £10k). 
My current Tax Code (250T) is based on the combination of my salary and full bonus, £120,000, which is essentially my on-target earnings. 
I understand that as you go over £100,000 you start to lose your Personal Allowance. Based on a £120,000 income my Personal Allowance is £2,500.

I'm quite confused if I am on the correct tax code and if anything needs to be changed, as I am being taxed quite heavily on a monthly basis.  I'm essentially being taxed at a £120,000 gross income, with a significantly reduced Personal Allowance, even though my monthly gross pay is based on a £70,000 salary. My PAYE contributions per month are therefore a lot higher than if my Tax Code was based on my base salary. Without knowing 100% if I will receive a £50,000 bonus, or if it will be a portion of this, it seems odd to be overpaying this amount of tax and having a reduced Personal Allowance when the bonus isn't guaranteed.

Any advice or guidance would be greatly appreciated. 
Thanks

It is slightly odd, but it will be based on your predicted (or previous year's) earnings at the time your employer applied for a tax code. If your earnings end up being lower than £100,000 per tax year then you would receive a rebate, either via your PAYE or as a cheque from HMRC. If you end up earning more than £100,000 per tax year then you are required to complete a Self Assessment Tax Return and you would have to pay any balance due, or receive a rebate if you had already overpaid tax. 
https://www.gov.uk/income-tax-rates/income-over-100000

You could have a chat with your work's payroll department, however the issue there is you could open yourself up to a significant tax liability at the year end, with having to pay 40% on the £50,000 bonus, 20% on the personal allowance lost and the NI on top. 

DoctorStrange

I'm not quite clear what the issue is - is it the monthly cash flow?

PAYE is essentially a form of payment on account, so you contribute towards your annual tax bill on a monthly basis. Any over or under payments will be sorted during the SA process, so if you're overpaying now you'll get a refund,  or if you've underpaid you'll get a bill. 

So, if the issue is the monthly cash flow (instead of questioning if you're paying the correct amount) you could maybe update HMRC with your predicted income and adjust the tax code. This might help on a monthly basis but be aware if your actual income is greater than predicted you'll still have more tax to pay. 

n987654321

Thanks both. 

Yes, it is largely a cash flow issue, as the difference that I would be over or underpaying is quite substantial. The way I understand it, and please do correct me if I'm wrong, is that my two options are:
1. Overpay throughout the year and receive a tax refund if I do not receive the bonus
2. Underpay throughout the year and get hit with a large tax bill if I do receive the bonus.

One more question. If I don't receive the bonus and my yearly gross income remains at £70,000, but I have overpaid tax, will my Personal Allowance will be reinstated in full through a refund? 

[Deleted User]

n987654321 said:

Thanks both. 

Yes, it is largely a cash flow issue, as the difference that I would be over or underpaying is quite substantial. The way I understand it, and please do correct me if I'm wrong, is that my two options are:
1. Overpay throughout the year and receive a tax refund if I do not receive the bonus
2. Underpay throughout the year and get hit with a large tax bill if I do receive the bonus.

One more question. If I don't receive the bonus and my yearly gross income remains at £70,000, but I have overpaid tax, will my Personal Allowance will be reinstated in full through a refund? 

You could access your online account and change your estimated PAYE income to £70000 or anything under 100000 actually.

tim_london

What about pension contribution?

If you do get full payout and have a salary of £120,000, then the most tax efficient way to save is to put £20,000 into pension.  This means your taxable income is £100,000 and you do not lose your personal allowance.  Your tax code is therefore 1250L (or whatever the full allowance code is) so it means you were paying too much tax and you'll get a check from HMRC next April/May 2022 if you do nothing.

In my experience companies with bonus schemes usually have option for you come bonus payout time to allow you split payment into cash salary or put into pension instead.  So in your case depending how much you get you should say £30k as salary and anything above that as pension contribution.  

Of course, you can opt to put more into pension which is sensible given the tax relief you'll get.  You can put up to £40k or even more if you did not use up your £40k allowance in the last 3 years.

Because your bonus is paid in July you can use the HMRC has portal for you to update your predicted annual income at https://www.tax.service.gov.uk/account.  Remember when HMRC ask you for 'predicted income', that number they are looking for is after salary sacrifice.  So if you pay £20,000 from £120,000 salary+bonus then your income in HMRC view is £100,000.  Once you updated this number your next payslip should see an updated tax code.   They will take less tax in the next few payslips to make up for the 'overpayment' you've paid.

MattMattMattUK

n987654321 said:

Thanks both. 

Yes, it is largely a cash flow issue, as the difference that I would be over or underpaying is quite substantial. The way I understand it, and please do correct me if I'm wrong, is that my two options are:
1. Overpay throughout the year and receive a tax refund if I do not receive the bonus
2. Underpay throughout the year and get hit with a large tax bill if I do receive the bonus.

One more question. If I don't receive the bonus and my yearly gross income remains at £70,000, but I have overpaid tax, will my Personal Allowance will be reinstated in full through a refund? 

You will not lose out over the whole year regardless of if you get no bonus, partial bonus, full bonus, or somehow double bonus, HMRC will recalculate at the end of the financial year, either via PAYE if you stay under the threshold, or Self Assessment if you go over £100k and need to submit one. 

If I were you and with that level of income and bonus I would go and speak to an IFA, your effective tax rate on the bonus would be very high due to the combined effect of it being fully in the 40% higher rate (+2% NI) and the loss of the personal allowance.

Personally I would be making sizeable pension contributions, possibly the entirety of anything over £100k. If you pay Tax and NI on £120k the combined total deductions would be £45,756, meaning your net income would be £74,244 with nothing extra in your pension pot. With the same total income of £120k pa, but paying £20k into your pension pot you would only pay £25,756 in total deductions, with £20,000 put into a pension, meaning your net income would be £74,244, but you would have £20k in your pension pot. So you can see why some serious wealth planning might be a good idea.

[Deleted User]

MattMattMattUK said:

n987654321 said:

Thanks both. 

Yes, it is largely a cash flow issue, as the difference that I would be over or underpaying is quite substantial. The way I understand it, and please do correct me if I'm wrong, is that my two options are:
1. Overpay throughout the year and receive a tax refund if I do not receive the bonus
2. Underpay throughout the year and get hit with a large tax bill if I do receive the bonus.

One more question. If I don't receive the bonus and my yearly gross income remains at £70,000, but I have overpaid tax, will my Personal Allowance will be reinstated in full through a refund? 

You will not lose out over the whole year regardless of if you get no bonus, partial bonus, full bonus, or somehow double bonus, HMRC will recalculate at the end of the financial year, either via PAYE if you stay under the threshold, or Self Assessment if you go over £100k and need to submit one. 

If I were you and with that level of income and bonus I would go and speak to an IFA, your effective tax rate on the bonus would be very high due to the combined effect of it being fully in the 40% higher rate (+2% NI) and the loss of the personal allowance.

Personally I would be making sizeable pension contributions, possibly the entirety of anything over £100k. If you pay Tax and NI on £120k the combined total deductions would be £45,756, meaning your net income would be £74,244 with nothing extra in your pension pot. With the same total income of £120k pa, but paying £20k into your pension pot you would only pay £25,756 in total deductions, with £20,000 put into a pension, meaning your net income would be £74,244, but you would have £20k in your pension pot. So you can see why some serious wealth planning might be a good idea.

Are you sure about the second figure for total deductions at £25756?

On a reduced salary of £100000 I make it £27500 tax and £5860 NIC.

Mick70

 are you meant to inform hmrc if all earnings will be over 100k ?  Or does it just come out in the wash when do your tax return ?

[Deleted User]

Mick70 said:

 are you meant to inform hmrc if all earnings will be over 100k ?  Or does it just come out in the wash when do your tax return ?

Yes you do. And you need to complete a self-assessment return! It’s all here - just two questions in!

https://www.gov.uk/check-if-you-need-tax-return/y/no/more-than-100-000

Mick70

[Deleted User] said:

Mick70 said:

 are you meant to inform hmrc if all earnings will be over 100k ?  Or does it just come out in the wash when do your tax return ?

Yes you do. And you need to complete a self-assessment return! It’s all here - just two questions in!

https://www.gov.uk/check-if-you-need-tax-return/y/no/more-than-100-000

Yes but if you already so self assessment anyway was what I meant ? Sorry