Taxed at higher rate on one off holiday pay - how/when is it reimbursed?

2016housebuyer

I'm currently in a civilian post with the Police and will hopefully be joining up as an officer. I have a large amount of rest day in lieu accrued (20 days), having worked as a civilian for close to 20 years, and there won't be time to take this leave in my notice period if I'm going to make any progression with my current workload. The Police force I work for have already indicated that they will pay any annual leave that hasn't been taken so I'm hoping they'll do the same for RDIL.

20 days is equivalent to almost a months salary (5 days on 2 off pattern) so if I receive this in one month, along with my normal pay, I'm assuming it'll be taxed at the 40% rate.

At present I earn 34k per year, with this additional one off payment it wouldn't take me into the 40% tax bracket if it was averaged out monthly but obviously my pay for that month will be much higher and if that was a true monthly wage then it would be over the 40% bracket.

So my assumption is that I'll be taxed at the higher rate for that month - if that's the case does anybody know how/when I would be reimbursed? Do they wait until the next tax year (the pay will be after April 2022 so I'd be waiting a whole year in that case) or is it paid back sooner?

Thank you for any input.

Dazed_and_C0nfused

I suspect you're overlooking a crucial element of the PAYE tax system.

Which tax month do you expect this payment to be made?  Tax months run from the 6th of one month to the 5th of the following month i.e. 6 March to 5 April.

Are you currently on a cumulative tax code and what is your tax code?  Most people are on 1257L (sometimes known as the emergency tax code).

2016housebuyer

Dazed_and_C0nfused said:

I suspect you're overlooking a crucial element of the PAYE tax system.

Which tax month do you expect this payment to be made?  Tax months run from the 6th of one month to the 5th of the following month i.e. 6 March to 5 April.

Are you currently on a cumulative tax code and what is your tax code?  Most people are on 1257L (sometimes known as the emergency tax code).

Thanks - it's very possible I am overlooking a crucial element of the PAYE system, mainly as I have zero knowledge of it!

My leaving date would be 29th May (start date for the training is 30th May) so I'm guessing the extra 'pay' will be paid in May which is then paid on the last working day in June - not sure what, if any, difference this might make as I was thinking of tax years rather than tax months.

I don't have a formal offer yet, hence why I'm not just using the leave up now as I still have certain elements to pass before the formal offer and I really don't want to use the leave if I'm not going to be leaving as it's a reassuring back up in the leave bank in case of emergencey.

My current tax code is 1294L

Dazed_and_C0nfused

Your comments about pay days don't make much sense to me but if we assume your final one is correct

which is then paid on the last working day in June

Then this is a guide to what will happen.

Firstly, your tax code may drop to 1263L from April if you have been claiming Covid-19 WFH allowance.  But that will not make any difference.

You are likely to be on a cumulative tax code early in the year and at the end of April will have earned £2833, paying basic rate tax only.

At the end of May of will be £5666, again paying basic rate tax only.

At the end of June you would have earned approx £11,333 (£2833.33 x 3 + £2833 for the rest days).  That is the equivalent to £45,332 annually so you would be nowhere near paying higher rate tax.

All of the above assumes your taxable pay is £34k.  If it isn't actually that much (usually because of net pay pension contributions) you will be even further away from paying any higher rate tax.

2016housebuyer

Thank you so much - I looked at the gov.uk site which said the higher tax band was "40% on annual earnings from £37,701 to £150,000" whereas it seems that this figure of £37,701 is anything earned over and above the standard tax free £12,570 per year, so the cut off for paying highter tax rate is actually £50,270 - meaning I am nowhere near that bracket.

For some reason I thought that PAYE paid tax monthly but that the monthly wage was extrapolated to a yearly wage and a double wage month could cause the system to think I was going to be on 68k per year?! No idea why I had this in my head and I'm glad it turned out to be nonsense!

Dazed_and_C0nfused

You are on the right lines but by month 3 have built up plenty of unused basic rate tax band.

If you were to be paid £5666 in month 1 of the tax year then that is £68k annual rate and you would have paid some 40% tax.

If month 2 added £2833 then you would be earning £51k/year and would get some of the 40% tax back via reduced PAYE tax that month.

Another £2833 in month 3 drops your annual earnings to £45,328 so you would only be paying 20% tax.