High earner tax - confused!

njlj1992

Hi all, 

I’ve had a number of promotions over the last few years and lucky to have experienced a significant increase in my earnings - I am extremely grateful but also getting increasingly confused by what this means in terms of tax implications! 

I noticed my tax code is due to change from 1257L to 335T next month. I received a notice from HMRC in august last year to advise I owed an additional £2,140 in tax, which they would automatically deduct from April this year (all fine so far) 

When I check the tax estimate on the HMRC app it says -£5,352 in deductions for the upcoming tax year - would this linked to (in part) to the underpayment from last, or in addition to the amount that is currently underpaid (so £7,492 in total?). 

Their estimate is based on me earning £109k next year however pay is likely to be around £135k+ due to recent promotion - I’ve amended this on the app to hopefully avoid any further underpayments, I am assuming that the adjustment is due to a combination of higher earnings and underpayments, but I’m not really clear on what tax code I SHOULD be on to ensure I don’t end up owing money again next tax year?

On a related note, if there’s any tax advisors anyone can recommend and connect me with to help me better manage this minefield moving forwards it’d be much appreciated!

Thanks in advance 

Dazed_and_C0nfused

njlj1992 said:

Hi all, 

I’ve had a number of promotions over the last few years and lucky to have experienced a significant increase in my earnings - I am extremely grateful but also getting increasingly confused by what this means in terms of tax implications! 

I noticed my tax code is due to change from 1257L to 335T next month. I received a notice from HMRC in august last year to advise I owed an additional £2,140 in tax, which they would automatically deduct from April this year (all fine so far) 

When I check the tax estimate on the HMRC app it says -£5,352 in deductions for the upcoming tax year - would this linked to (in part) to the underpayment from last, or in addition to the amount that is currently underpaid (so £7,492 in total?). 

Their estimate is based on me earning £109k next year however pay is likely to be around £135k+ due to recent promotion - I’ve amended this on the app to hopefully avoid any further underpayments, I am assuming that the adjustment is due to a combination of higher earnings and underpayments, but I’m not really clear on what tax code I SHOULD be on to ensure I don’t end up owing money again next tax year?

On a related note, if there’s any tax advisors anyone can recommend and connect me with to help me better manage this minefield moving forwards it’d be much appreciated!

Thanks in advance 

You have completely misunderstood that.

As a 40% taxpayer the tax code deduction of £5,352 is intended to collect the tax of £2,140 (5352 x 40% = 2140.80).

You are far better placed than HMRC to know your expected earnings so updating them is a good idea, especially when you are in tapered Personal Allowance territory.

As you have an effective 60% tax rate on £25,140 of your income have you considered making some pension contributions to reduce either your taxable income (or adjusted net income).  They are incredibly tax efficient at your level of income.

I suspect you don't really need an advisor, you just need to do a bit of reading.  Google 60% tax trap or tapered Personal Allowance to see what you are suffering from.

njlj1992

Dazed_and_C0nfused said:

njlj1992 said:

Hi all, 

I’ve had a number of promotions over the last few years and lucky to have experienced a significant increase in my earnings - I am extremely grateful but also getting increasingly confused by what this means in terms of tax implications! 

I noticed my tax code is due to change from 1257L to 335T next month. I received a notice from HMRC in august last year to advise I owed an additional £2,140 in tax, which they would automatically deduct from April this year (all fine so far) 

When I check the tax estimate on the HMRC app it says -£5,352 in deductions for the upcoming tax year - would this linked to (in part) to the underpayment from last, or in addition to the amount that is currently underpaid (so £7,492 in total?). 

Their estimate is based on me earning £109k next year however pay is likely to be around £135k+ due to recent promotion - I’ve amended this on the app to hopefully avoid any further underpayments, I am assuming that the adjustment is due to a combination of higher earnings and underpayments, but I’m not really clear on what tax code I SHOULD be on to ensure I don’t end up owing money again next tax year?

On a related note, if there’s any tax advisors anyone can recommend and connect me with to help me better manage this minefield moving forwards it’d be much appreciated!

Thanks in advance 

You have completely misunderstood that.

As a 40% taxpayer the tax code deduction of £5,352 is intended to collect the tax of £2,140 (5352 x 40% = 2140.80).

You are far better placed than HMRC to know your expected earnings so updating them is a good idea, especially when you are in tapered Personal Allowance territory.

As you have an effective 60% tax rate on £25,140 of your income have you considered making some pension contributions to reduce either your taxable income (or adjusted net income).  They are incredibly tax efficient at your level of income.

I suspect you don't really need an advisor, you just need to do a bit of reading.  Google 60% tax trap or tapered Personal Allowance to see what you are suffering from.

Ok - this now makes a lot more sense 😅 thank you so much, yes I am contributing 5% but I will be looking to up contributions this year for sure!