Tax Advice

mortgageadviceda

Hi all

I am in a very fortunate position at work to have been given a pay increase. This now takes my annual salary to ~£90K. As it is, this would keep my PAYE tax code at 1257L which entitles me to my full personal allowance and appropriate tax rate.

The 'issue' (it's not an issue, it's just a query i have!) is that I am subject to bonus payments annually. This is unpredictable and could be anywhere between £0 and £40K. 

Therefore, this could, or could not push me above £100K meaning I loose some of my personal allowance. And anything above £100K up to £125K is effectively taxed at 60% (they don't make that clear in budgets do they!!!)

As far as I see it, and I'm here to be corrected, I have a couple of options (if I don't want to salary sacrifice to keep below £100K as I want the cash). I could:

1) Remain on my 1257L tax code and then when the bonus is paid, calculate how much above the £100K I am, how much I owe and do a self return at the end of the year. Ie. if I get a 20K bonus, that takes my taxable pay to roughly £110K, meaning i would loose £5K of my personal allowance subject to 40% tax = £2K to return and I could put this aside at the time the bonus is paid and pay in a tax return.

2) I could change my tax code to reflect what my salary might be after bonus - BUT, if i don't get a bonus (which could be likely in today's climate), I have then overpaid each month and I would rather have access to my cash each month.

Have I understood this correctly? 

Option 1 would be my preference as then I am not overpaying each month and on bonus payment it allows me to work out how much over the threshold I am, do a manual calculation and then put aside the extra i need to pay/return. It stings a bit as my bonus is less but still preferable to option 2?

I know I could pay more into my pension to keep below the £100K and it's something I should look in to. But we have just started a family and access to cash is preferable (even if some of it is taxed at 60%!).

How do others deal with this situation?

Thanks in advance!

baser999

Not sure what you mean by changing your tax code? Everyone has a personal allowance which determines your annual coding, you have no say in the matter. If you have two separate sources of earned income, a second job for example, that allowance could be split across the both, though that would have no bearing upon your tax liability

mortgageadviceda

Hi that’s not true. You are able to change tax code on the government gateway website based on projected income.

if you take my base salary and don’t consider a bonus payment, which may or may not happen, my tax code would be the common 1257L.

However if my bonus is paid in a year (ranging between 0 and 40K) it would take me above the threshold to have the full personal allowance. However trying to guess which tax code would be accurate is impossible as it would depend what the bonus payment was.

I had a look and this year at the end of the year I will also be slightly over 100K due to a tax payment. However I’m still on 1257L tax code and will need to do a tax return for the extra above the 100K… ie 40 percent on the small proportion of personal allowance I’m no longer entitled to

Firefly12345

I think your two options are broadly correct. 

As all PAs are frozen till 2028 and inflation is running hot you will soon find yourself sucked well and truly in to the 60% trap and then immediately the 45% rate. 

I know you don't want to do this but you really, really should pay more into your pension. When at saving 60% this is the top 'return' you can get for your money on any 'investment' in the land. If you are under 50 you will soon find that inflation and the freezing of allowances (both tax and pension) make this opportunity limited. I'm speaking from experience. 

Ciao

Moranos

Keeping tax returns and the documents you used to complete them is critical if you’re ever audited. Typically, the IRS has three years to decide whether to audit your return, so keep your records for at least that long. You also should hang onto tax records for three years if you file a claim for a credit or refund after you filed your original return.

Keep records longer in certain cases — if any of these circumstances apply, the IRS has a longer limit on auditing you.

Martico

IRS is the tax authority in the US. For the UK, HMRC requires you to keep documents relating to self assessment claims for five years. There are other time limits that they have

georgehere

Don't change your tax code - that just gives money away now that you can always pay later. Just be aware that a future bill could be coming and discount your expected bonus accordingly. If you used to say to yourself 'I might get £40k in March, but that will be £24k after tax' make the adjustment 'I might get £40k in March, but that will be [can't work it out let's say £20k] after tax'.
Remember, when your company pays your bonus they will pay most of the tax due through your PAYE. The balance, cause by threshold changes etc you can work out and pay later. You can also at the same time, decide that you want to pay more into your pension as a lump sum. No need to pay anything up front or make decisions in advance ... HMRC give you until Jan 2024 to pay your 2023 taxes.