Tax / bonus help

ShelterfromtheStirm

I have been offered a new role, £40k plus £5K car, with potential bonus each month up to £3k, though sometimes £0k if targets are not achieved. As I have to work 6 months notice o would not start the role until April so handy for working out tax year. My question is how would tax be worked out each month? What would happen if the bonus pushed me into the higher tax bracket - would that and subsequent months be worked out at the higher rate or would total earnings at the end of the year be used to adjust tax code the following year to make up any unpaid tax? 

[Deleted User]

Hi,

you might get more replies on Tax forum HERE.

SiliconChip

Assuming you have a cumulative tax code (eg the standard 1257L) then in month 1, most likely your April pay period, you will pay basic rate tax of 20% on any taxable pay up to £4189 then higher rate of 40% on taxable pay above £4189. In month 2 that figure will become £8378 for the cumulative total of the 2 months, and so on for each succeeding month until the end of the tax year.

So for example if your taxable pay in month 1 is £3750 you'd pay tax on approximately £2702, around £540. If you then got a £3000 bonus in month 2 your cumulative taxable pay would be £10500 with tax paid on £8405, so £8378 at 20% (£1675) and £27 at 40% (£11) for a total of £1686.

All figures rounded and don't take into account any measures to to reduce taxable pay such as pension contributions.

chrisbur

ShelterfromtheStirm said:

 What would happen if the bonus pushed me into the higher tax bracket - would that and subsequent months be worked out at the higher rate or would total earnings at the end of the year be used to adjust tax code the following year to make up any unpaid tax? 

The PAYE system is self adjusting as each pay day is calculated.  
In the example above for month 2 you went into the 40% tax band and paid some tax at 40%.  If we then assume that in month 3 you had a gross of £3750 (The same as month 1) your taxable pay to date would now be below the level at which 40% tax is due so that 40% tax you had paid would be converted to 20% tax and you would pay aprox £5.50 less tax than you did in month 1 
In this way your tax is being corrected month by month so that when month 12 arrives you will have paid the correct tax with no further adjustment needed, unless some other matter has come up.

El_Torro

While I don't disagree with the other posters it's worth mentioning that HMRC often doesn't get it quite right with PAYE employees on variable incomes. At least that's the experience of people I know with monthly bonuses. It should all balance out, with you paying more tax in some months and less in others. It's still worth taking a look at your P60 at the end of the year to make sure you don't need to claim some tax back. 

In my experience HMRC are far more likely to end up overcharging you than undercharging you.  

SiliconChip

El_Torro said:

While I don't disagree with the other posters it's worth mentioning that HMRC often doesn't get it quite right with PAYE employees on variable incomes. At least that's the experience of people I know with monthly bonuses. It should all balance out, with you paying more tax in some months and less in others. It's still worth taking a look at your P60 at the end of the year to make sure you don't need to claim some tax back. 

In my experience HMRC are far more likely to end up overcharging you than undercharging you.  

It's got nothing to do with HMRC, PAYE is operated by the employer so if tax deductions are wrong it's because they have done something incorrect.

Dazed_and_C0nfused

SiliconChip said:

El_Torro said:

While I don't disagree with the other posters it's worth mentioning that HMRC often doesn't get it quite right with PAYE employees on variable incomes. At least that's the experience of people I know with monthly bonuses. It should all balance out, with you paying more tax in some months and less in others. It's still worth taking a look at your P60 at the end of the year to make sure you don't need to claim some tax back. 

In my experience HMRC are far more likely to end up overcharging you than undercharging you.  

It's got nothing to do with HMRC, PAYE is operated by the employer so if tax deductions are wrong it's because they have done something incorrect.

Sometimes though the issue could be at HMRC's end.

For example an employer might be reporting annual earnings above £100k but HMRC don't always update the tax code to reflect any reduction in Personal Allowance.

So the employer might be operating the code they have but it might need updating.