60% Tax Trap

Painter23

Hi guys, I've been s bit naive with my finances and realised that I'm likely to fall perfectly into the 60% tax trap this year.

My base salary plus a cash bonus and the sale of deferred bonus shares from three years previously (which are treated as income for tax purposes) has meant my total annual taxable income is £124,400.

I only realised this 60% situation existed between £100-125k when HMRC emailed me this morning to confirm my tax code for the next tax year would be K20 and I would have zero personal allowance (actually a negative -£216 personal allowance). Until then I had no idea that there was an erosion of the personal allowance before £125k.

I won't necessarily have the same level of bonuses next year so although my income may exceed £100k in total it won't be much higher. So, I've changed my estimated income next year to £100,000 which is slightly more than my base salary but knowing that if I do tip over that based on a bonus payment it'll be only slightly.

What I wanted to check is whether HMRC will claim the c.£4500 missing tax I owe through a different tax code next year or whether they'll ask for a lump sum payment - and when this might be?

Isthisforreal99

You still have time to pay extra into your pension to bring your adjusted net income down.

DRS1

Presumably you don't do self assessment?

Have you considered some increased pension contributions? Gross contributions of £24,400 would help you out of the trap (assuming the £124,400 figure is your total taxable income for this tax year).

I don't know about tax codes but when I got a K tax code it was because of untaxed interest. Do you have any of that?

eskbanker

What I wanted to check is whether HMRC will claim the c.£4500 missing tax I owe through a different tax code next year or whether they'll ask for a lump sum payment

Underpaid tax will only be collected via PAYE if below £3K, so they'll want it all paying in one go.

Painter23

https://forums.moneysavingexpert.com/discussion/comment/81880246#Comment_81880246

We've already been paid for February and I'm already up to £117k year to date income so I'd imagine I'd have to pay almost all my March salary into the pension to make any difference?

Painter23

Yeah I've been overpaying into my work pension most months this year but not consciously with the intent of reducing my tax liability at this £200-125k void, so I'm lucky in some respects that I did that earlier in the year or my liability would be even higher.

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/81880330#Comment_81880330

No savings to cover it? To be honest it's a no brainer to pay as much as you can even something - you won't get a better return on your 'investment'

QrizB

Even borrowing £20k for a few months as a personal loanand paying interest would probably be better than paying 60% tax, IMHO.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81880330#Comment_81880330

In an ideal world you would get yourself to £100k exactly but you may want to spend your March salary on luxuries like food. Get as close to £100k as you can though - every £2 you put into the pension when you are in the trap will net you an extra pound of personal allowance.

Isthisforreal99

And if tax free child care is an issue for you, then another thing lost.