Tax question

Airblower

Hi, not sure if this is a stupid question or not but it's the first time I have been in this position. I have been added to a bonus scheme where a bonus is paid in April based on the company's previous year performance. I currently earn £47700, and in April I will be paid £11k in bonus. I know this will push me in to the 40% rate next year, but when will I start paying that 40% rate? Will it all come at the end of the year, or will the tax man work out what's going on and take it all in month 1? 

Dazed_and_C0nfused

Airblower said:

Hi, not sure if this is a stupid question or not but it's the first time I have been in this position. I have been added to a bonus scheme where a bonus is paid in April based on the company's previous year performance. I currently earn £47700, and in April I will be paid £11k in bonus. I know this will push me in to the 40% rate next year, but when will I start paying that 40% rate? Will it all come at the end of the year, or will the tax man work out what's going on and take it all in month 1? 

You will pay it in April (2024).

Then as your earnings return to normal levels you will pay slightly less tax as the need for 40% tax reduces.

Month 1 = £14,975 so annual earnings = £180k and you will pay some 45% tax as well

Month 2 = £18,950 so annual earnings = £113,700 so you will only need to pay 40% tax and get the benefit of the extra you paid in April

Month 3 = £22,925 so annual earnings £91,700 and so on each month.

Airblower

Thanks, this sounds like a right pain. I assume if I call the tax office after I have been paid my bonus and tell them it was a bonus then they can correct my tax back to what it should be? I find it amazing that they just assume based on one month what my pay is going to be for the year and then help themselves to it.

Penguin_

Airblower said:

Thanks, this sounds like a right pain. I assume if I call the tax office after I have been paid my bonus and tell them it was a bonus then they can correct my tax back to what it should be? I find it amazing that they just assume based on one month what my pay is going to be for the year and then help themselves to it.

Your employers software will calculate it automatically in the next pay run.

Dazed_and_C0nfused

Airblower said:

Thanks, this sounds like a right pain. I assume if I call the tax office after I have been paid my bonus and tell them it was a bonus then they can correct my tax back to what it should be? I find it amazing that they just assume based on one month what my pay is going to be for the year and then help themselves to it.

No, HMRC will do absolutely nothing.

That is how PAYE (Pay As You Earn) works.  You pay the tax based on your earnings each pay day.

The facts are that in month 1 you will be earnings at a rate of £180k so you will be taxed accordingly.

Then in month 2 your earnings will drop and and you will get an adjustment of the tax paid in month 1.  

You might like to use this calculator to see the impact (using month 1 onwards in the current tax year).

http://payecalculator.hmrc.gov.uk/PAYE0.aspx

pavvers

Is there any mileage in asking your employer if they will spread the bonus out over the year? Does seem to have put you at a disadvantage month-to-month.  Well, month 1 you've done OK, but you know what I mean!

Dazed_and_C0nfused

pavvers said:

Is there any mileage in asking your employer if they will spread the bonus out over the year? Does seem to have put you at a disadvantage month-to-month.  Well, month 1 you've done OK, but you know what I mean!

You would pay exactly the same tax though.

chrisbur

pavvers said:

Is there any mileage in asking your employer if they will spread the bonus out over the year? Does seem to have put you at a disadvantage month-to-month.  Well, month 1 you've done OK, but you know what I mean!

This would result in paying more national insurance.

pavvers

Dazed_and_C0nfused said:

You would pay exactly the same tax though.

I know, I just thought it might be beneficial to have it stabilised across the year rather than it tapering off to where it should be by the end of the tax year.  Beneficial in the sense of monthly budgeting rather than financial.

pavvers

chrisbur said:

This would result in paying more national insurance.

Could you explain why please?  I don't understand!

Airblower

Month 2 is what concerns me. Am I right in thinking they will take 40% even though it should be 20% as my monthly pay will be back to normal?

I won't be paying all my bills that month if that's the case.