How can I avoid 40% tax on backpay?

reddevil_5

I work for the health service and we are having a massive pay review at the moment. It has taken since October 2004 to sort it all out. The new figure that I will be earning will be back dated until October 2004.

The problem is the amount owed to me is going to be paid in one lump sum in next months pay. This will attract a hefty 40% income tax deduction.

This year my salary will just push me into 40% tax on it's own but last year I never reached the higher tax bracket. As some of this money that is owed is to me technically was earned in a year when I wasn't paying 40% tax, is there anyway I can get the money back off the taxman?

Thanks for your help.

sneekymum

You can reduce your income down to the 22% tax bracket by making a big pension contribution - depending on the percentage of salary allowed at your age. You can do this to count for the last tax year but you must act before Jan 31st 2006 and you must tell your pension provider before you make the payment.

irs101

I'm not aware of anything you can do to get the income taxed as if you earned it last year. Income tax works on a receipts basis (rather than accruals) - so they tax you according to when you receive the money, not when you earned it. That's why you don't have to worry about the few days at the end of each tax year when you work in one tax year but pay day isn't until the following tax year.

All you can do is make pension contributions, as sneekymum says, and make sure that you claim all your gift aided charitable donations (I think it's an extra 23% on the amount you donated - 18% of the grossed up figure).

irs

Stonk

Perhaps your employer will be sympathetic to your plight if you mentioned it to them? The fact that they are giving you a backdated pay rise says they don't want you to feel you're losing out as a result of it having taken so long so decide on a settlement, but then a side-effect is that you have ended up losing out in another more subtle way. Ask them if they will increase the backpay lump-sum by just enough to cover the extra tax you will have to pay.

Debt_Free_Chick

Tax is due on what you receive each tax year ... not what you might have recieved, if the amounts had been paid at different times.

Unfortunately, there is nothing you nor your employer can do. I doubt that your employer will agree to pay even more, to cover the tax. This is likely to be a Union negotiated pay deal, so what is done for one, is done for all. If they pay your tax, they'll have to pay everyone's tax!

isasmurf

On the plus side you might end up paying less National Insurance then you would have done if you had been paid on time.

Stonk

If they pay your tax, they'll have to pay everyone's tax!

No, you misunderstand me. I don't suggest they should pay *all* the tax - only the extra tax that is due purely as a result of it having taken so long to thrash out the agreement. For many people it will be nothing, as it will only affect those whose backpay causes them to cross into a higher tax band.

Or, count yourself lucky you're having a backdated pay rise in the first place ;o) I've never had that!

Debt_Free_Chick

Stonk wrote:

No, you misunderstand me. I don't suggest they should pay *all* the tax - only the extra tax that is due purely as a result of it having taken so long to thrash out the agreement. For many people it will be nothing, as it will only affect those whose backpay causes them to cross into a higher tax band.

Or, count yourself lucky you're having a backdated pay rise in the first place ;o) I've never had that!

Sorry, I did understand what you meant, but I meant that the employer would have to do the same, for everyone in the same position. And as it's the health service, it'll be a non-starter

Imagine what the tabloids would make of that, as it's effectively tax payers money