When does your personal allowance drop

CRAIGEMMA

I am in the fortunate position that I received a bonus I lost during covid added to my annual bonus this year.
It has left me with £106,000 taxable YTD (after work pension payments) by end of tax year when I calculate it forward.
I have paid £6000 into my private pension (grossed up from lower net).

Some questions I am unsure of if anyone can assist.

1) will my tax code alter on my payslip as soon it tips over £100k taxable YTD on payslip - this will be Feb payslip or will it continue as normal and I simply do my usual self assessment and that sorts it out
or
2) it drops in feb and I budget accordingly they two months of lower net pay knowing it will return when do return in April.

basically I am just wondering if my net pay will drop in Feb and March or will it stay same and then adjust after tax return is done.

Grumpy_chap

CRAIGEMMA said:

I am in the fortunate position that I received a bonus I lost during covid added to my annual bonus this year.
It has left me with £106,000 taxable YTD (after work pension payments) by end of tax year when I calculate it forward.
I have paid £6000 into my private pension (grossed up from lower net).

Some questions I am unsure of if anyone can assist.

1) will my tax code alter on my payslip as soon it tips over £100k taxable YTD on payslip - this will be Feb payslip or will it continue as normal and I simply do my usual self assessment and that sorts it out
or
2) it drops in feb and I budget accordingly they two months of lower net pay knowing it will return when do return in April.

basically I am just wondering if my net pay will drop in Feb and March or will it stay same and then adjust after tax return is done.

I can't answer your question - I am sure there are contributors here that can.

If I were you, I'd be putting extra into the pension to give a buffer between where I am at and the withdrawal of personal allowance.  That covers the possibility of an error in calculations.

I also suggest it would be worth engaging the services of an Accountant - at your income level an Accountant is likely to be able to save you more tax than the fees charged.

[Deleted User]

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above. You'll also need to do a Self Assessment tax return.

Your tax code won’t be changed by HMRC in the manner that you describe - they have no knowledge of what you may be doing to eliminate this problem! As I have said - you will be required to complete a tax return. It would also be a good idea to inform HMRC in advance of the next tax year if you believe this will be repeated.

kinger101

You might not need to do a tax return (EDIT you will if P60 shows income > £100K)

(a) Phone HMRC.  Tell them you made a gross contribution of £6,000 into a personal pension, and that you'd like your tax code to be adjusted to reflect that.  For amounts under £10,000 they don't ask for proof.

(b) If you get any childcare benefits that are withdrawn at £100K adjusted net income, be absolutely sure you've got your calculations correct.  Earning £1 above the limit will be very expensive if you lose free nursery hours.

CRAIGEMMA

Many thanks everyone for taking the time to reply.

Yes I get mileage , working from home in and private cover out but know that's separate.  My bonus has been paid and no pay rise being given so I know my exact taxable pay for Jan Feb March and have added it to my Dec taxable YTD and it comes to £105900 and have paid in equivalent net to gross up to 6000 so I know that is right.
I agree I will call HMRC next week and ask what process is  "will my tax code change in Feb when I breach 100k as you won't know ive paid into a pension". from there I will know best way to play it I think based on your kind responses.
only thing to work after that is to tell them that bonus is a one off and won't happen again re hitting that income level! 

Dazed_and_C0nfused

Irrespective of whether pension contributions (of Gift Aided charitable payments) reduce your adjusted net income to £100k or less if your P60 shows taxable pay of £100k or more you will need to complete a tax return.

Although they don't reduce your taxable income "relief at source" pension contributions have three separate benefits in this situation.

1.  You get basic rate relief added by the pension company (courtesy of HMRC) i.e. you paid £4,800 and £1,200 is added to make a gross contribution of £6,000

2.  The gross contribution increases your basis rate band by £6,000.  So more income is taxed at 20% and less at 40%.

3.  The gross contribution reduces your adjusted net income meaning you can potentially retain some or all of your Personal Allowance. 

NB.  The High Income Child Benefit Charge is also based on adjusted net income but it's unlikely extra pension contributions will enable you to reduce that given your level of income.

kinger101

Dazed_and_C0nfused said:

Irrespective of whether pension contributions (of Gift Aided charitable payments) reduce your adjusted net income to £100k or less if your P60 shows taxable pay of £100k or more you will need to complete a tax return.

Although they don't reduce your taxable income "relief at source" pension contributions have three separate benefits in this situation.

1.  You get basic rate relief added by the pension company (courtesy of HMRC) i.e. you paid £4,800 and £1,200 is added to make a gross contribution of £6,000

2.  The gross contribution increases your basis rate band by £6,000.  So more income is taxed at 20% and less at 40%.

3.  The gross contribution reduces your adjusted net income meaning you can potentially retain some or all of your Personal Allowance. 

NB.  The High Income Child Benefit Charge is also based on adjusted net income but it's unlikely extra pension contributions will enable you to reduce that given your level of income.

My bad - didn't realise tax return was necessary if P60 > £100K but adjusted net income below.

But I wasn't referring to the HICBC is when I was referring to childcare.  Anyone with ANI over £100K loses tax-free childcare (and I think old childcare tax-credits) which is worth £2,000 a year.  You also lose the entitlement to free nursery hours (which can be 30 hours for 38 weeks of the year).  That's worth about £6K where I am.  

This is much more punitive than tapering of the personal allowance.  It can lead to a marginal rate in excess of 100% if you get it wrong.  So you need to make sure it won't be over £100K using pensions/gift aid.  Luckily if it goes disastrously wrong, I believe one can always elect to have a gift-aid donation treated as if it were made in the previous year.