Confusion about 40% Tax

WLewer98

Hello all,

I will be a higher rate 40% tax payer for the first time ever this 2024/25 financial year, predicting to earn approximately £53000 gross.

I'm paid via PAYE and my tax code is 1257L.

From what I understand, I will be taxed @ 40% on my earnings from £50,271 to £53000. 

How will the additional 20% tax be collected on these higher rate earnings? I presume HMRC will adjust my tax code? If that is the case, will my tax code be adjusted the moment I exceed £50,271, or will it be changed next tax year?

Also, in regards to pension contributions, I understand that I could claim an extra 20% relief on my contributions. Is this relief limited by the amount I have exceeded the £50,271 higher rate threshold?

TIA

molerat

40% tax will be levied on anything above £4189.93 per month on a cumulative basis so at December anything over a total year to date of £37709.34.  If you have been on the same regular pay since April with no bonuses - 1/12th of that £53K - you will already be paying 40% tax, PAYE takes care of it automatically, no code alterations are needed.  On what basis is your pension deducted, sal sac / net pay (deducted before tax) or relief at source (deducted from net pay and pension co add 25%)?  If the former the tax will already be taken care of, the latter you will need to inform HMRC of the total gross amount paid into the pension (your payments + the tax uplift).

penners324

Your tax code wont change. Your employer's payroll software will calculate the correct amount 

WLewer98

molerat said:

40% tax will be levied on anything above £4189.93 per month on a cumulative basis so at December anything over a total year to date of £37709.34.  If you have been on the same regular pay since April with no bonuses - 1/12th of that £53K - you will already be paying 40% tax, PAYE takes care of it automatically, no code alterations are needed.  On what basis is your pension deducted, sal sac / net pay (deducted before tax) or relief at source (deducted from net pay and pension co add 25%)?  If the former the tax will already be taken care of, the latter you will need to inform HMRC of the total gross amount paid into the pension (your payments + the tax uplift).

Thank you molerat, that makes sense to me now.

I contribute to a workplace pension via salary sacrifice before tax, so the tax relief for that will be taken care of then.

I'm looking to potentially open and start funding a SIPP, so I would need to claim the additional 20% tax relief from HMRC for this.

Would the relief I can claim for the SIPP be limited by the amount I have exceeded the £50,270 higher rate threshold? (so relief limited to 20% of £2730, as £53K minus £50270 = £2730).

Nomunnofun1

WLewer98 said:

molerat said:

40% tax will be levied on anything above £4189.93 per month on a cumulative basis so at December anything over a total year to date of £37709.34.  If you have been on the same regular pay since April with no bonuses - 1/12th of that £53K - you will already be paying 40% tax, PAYE takes care of it automatically, no code alterations are needed.  On what basis is your pension deducted, sal sac / net pay (deducted before tax) or relief at source (deducted from net pay and pension co add 25%)?  If the former the tax will already be taken care of, the latter you will need to inform HMRC of the total gross amount paid into the pension (your payments + the tax uplift).

Thank you molerat, that makes sense to me now.

I contribute to a workplace pension via salary sacrifice before tax, so the tax relief for that will be taken care of then.

I'm looking to potentially open and start funding a SIPP, so I would need to claim the additional 20% tax relief from HMRC for this.

Would the relief I can claim for the SIPP be limited by the amount I have exceeded the £50,270 higher rate threshold? (so relief limited to 20% of £2730, as £53K minus £50270 = £2730).

In this case you contribute £2184 to a SIPP. This is grossed up to £2730 - that’s your basic rate tax relief as 80% (100 -20) of £2730 is £2184. 

You can claim an additional 20% of £2730 as this is the amount upon which you paid 40% tax. This will reduce your income tax by £546 after informing HMRC of same.

Altior

If it's £53K pre SalSac then there will likely only be 20% relief (25% of the net contribution) to be reclaimed on a SIPP. Via SIPP that's automated by the platform provider.

The OP can simply deduct the percentage they are sacrificing from their gross salary, and put the net amount into an income tax calculator to identify the tax and NI they are actually paying.  

Albermarle

How much do you salary sacrifice now ?
If your gross salary ( before salsac) is £53K and you already sal sac £2K ( for example) your taxable salary is only £51K.
IN this example it would be far better/easier just to increase your salsac so you do not pay any 40% tax at all.
Not much point opening a separate SIPP, as with salsac you also pay less NI.