Bonus tax confusion??

RoxieW

Hi all - just a query about income tax if anyones clever enough to explain to me!
Hubby's earns just shy of 30Kpa. This year he's had a bonus a Xmas £2500 and one just yesterday £5K:j

So in his May pay packet his gross earnings are £7452.08.

From this he's been deducted £1999.20 income tax :eek: (Plus another £1K NI and student loan).

Now his boss says that he's been overtaxed but that he will get it back in the following months pay packet?? I dont understand this. He's always been taxed heavily on his bonuses (40%) and his following months pay hasn't altered to what it was previously so why would this instance be any different?

So is the above tax right or not? Is it true that he'll be paying less tax next month?

Thanks to anyone who can reply!!

mitchaa

The way PAYE works is that when someone earns over x amount deemed to be the 40% tax threshold bracket then that is taxed at 40%, even if it is only a one off bonus.

i.e say the threshold was £700pw, but because of a bonus, he was paid £1500pw, that £1500 would be over the 20% threshold so would be taxed at 40% on it.

It may be given back proportionaly now until the end of the year in monthly rebates, ie your husband would pay lower than normal tax or he will receive a tax rebate some time next year after the financial year has ended.

His salary of £30k + £5k bonus would put him no-where near 40% taxation normally as this is set at around £41k, but because its a 1 off month,ie earnings of £7452pm, the way PAYE will see it as if he was earning £7452x12 = £89424 and he is taxed accordingly on this amount

When it realises that the £7452 doesn't come along next month and goes back down to £2452 then it should adjust to take into account the previous months contributions, if not he will get it back in the end of year rebate.

mitchaa

Also, because he was given a £2500 xmas bonus last financial year he probably overpaid tax last year and is due a tax rebate on that. Either that or he received reduced tax rate Jan/Feb/Mar

if you post up his P60 earnings and contributions, i can work out if he is due a tax rebate of some sorts as the £2500 would have also been taxed at 40%.

CLAPTON

mitchaa wrote: »

The way PAYE works is that when someone earns over x amount deemed to be the 40% tax threshold bracket then that is taxed at 40%, even if it is only a one off bonus.

i.e say the threshold was £700pw, but because of a bonus, he was paid £1500pw, that £1500 would be over the 20% threshold so would be taxed at 40% on it.

It may be given back proportionaly now until the end of the year in monthly rebates, ie your husband would pay lower than normal tax or he will receive a tax rebate some time next year after the financial year has ended.

His salary of £30k + £5k bonus would put him no-where near 40% taxation normally as this is set at around £41k, but because its a 1 off month,ie earnings of £7452pm, the way PAYE will see it as if he was earning £7452x12 = £89424 and he is taxed accordingly on this amount

When it realises that the £7452 doesn't come along next month and goes back down to £2452 then it should adjust to take into account the previous months contributions, if not he will get it back in the end of year rebate.

I'm afraid this is not quite correct.

If his tax code in correct then by the time tax year end occurs his tax will be correct.
However, if he gets a big bonus in the early part of the tax year e.g. april or may then he may well pay a lot of tax in the month he is paid.. however the tax will be repaid over the next couple of months (i.e. he will pay less tax than normal).. exactly how it works out depends upon the amounts involved.

When bonuses are paid late in the year then often there is no 40% paid but it depends upon the figures... in any event by tax year end the tax will be correct (assuming a correct tax code).

the situation for NI and student loan is different... there is no refund of the amounts paid.... although this may be to his advantage in the case of NI.

CLAPTON

whats his tax code?

RoxieW

Hi guys - thanks for your help. His tax code on this months payslip is 543L. His normal tax code is 522L.

Ooh I hope he will be due a rebate from last year - as he did pay 40% on his bonuses last year and his monthly wage didnt alter?? Will be doing the tax credit return forms so will post more info when I get the slips together.

Thanks again.

CLAPTON

If his tax code was correct i.e. 522L for last year then his tax was correct.
but post the numbers and we'll check them.
why do you say he was taxed at 40% last year?

isasmurf

Tax is charged pro-rata based on income received and tax paid to date.

So if we take this year's tax detail's as applied to pay slips at the mnute.

You have a Personal Allowance of £5,435
the next £36,000 are taxed at 20%
and anything above that at 40%

So, if you are paid monthly we are currently in "pay period 2" (that is the second month of the tax year). All the above figures will be divided by 12 and multiplied by 2 to get to the allowances at this point in the tax year:

Personal Allowance: £905
Basic Rate: £6,000
and any income above £6,905 in the current tax year is taxed at 40%.

What happens is that the payroll takes income earned to date and adds on this months income. It then calculates the tax due to date and subtracts the amount of tax paid in the current tax year as at the last pay date. The difference is the amount of tax you pay in the current month.

Let's take your situation with a basic pay of £2,452 a month and a £5k bonus in month 2.

Pay period      PA      BR up to    Pay to date  Tax due  Tax in month
1	April	452	3452		2452.08	  400.02	400.02
2	May	905	6905		9904.16  2399.66	1999.65
3	June	1358	10358		12356.24 2599.30	199.63
4	July	1811	13811		14808.32 2798.93        199.63
5	August	2264	17264		17260.4	 2999.28	200.35
6	Septe	2717	20417           19712.48  3399.1       399.82

This shows that any earnings less than £452 in April are not taxed. Any earnings between £452 and £3,452 are taxed at 20% and anything above that at 40%. In May, the first £905 of total earnings in April and May are not taxed, anything between £905 and £6,905 are taxed at 20% and any earnings in the current tax year above £6,905 are taxed at 40%, and so on.

As your hubby's total earnings in the current tax year are £9,904, this means taht he is taxed at 20% on £6,905 and 40% on £3,000 total due is £2,399. He already paid £400 in April, so he pays £1,999 in the current month to get the correct tax.

Now, as others have said the tax should correct itself. From the table in June he gets paid his normal earnings of £2,452. Tax due up to that point is £2,599. He has already paid £2,400 so he only pays another £199. He will see him paying less tax up to the point when his total earnings to date falls below the pro-rata 40% threshold. As you can see from the table this happens in August, so this is the final month in which his tax will be be corrected. In September his tax returns to normal.

Edit to add, if you want to check this for yourself go to HMRC's PAYE tax calculator. You'll need total pay and tax from the May payslip and just enter how much he expects to be paid in June and his pay date.

mitchaa

CLAPTON wrote: »

If his tax code was correct i.e. 522L for last year then his tax was correct.
but post the numbers and we'll check them.
why do you say he was taxed at 40% last year?

That is not true, his tax code for last year will always have been 522L no matter what kind of bonus he was paid.

A £2500/£5000 bonus along with normal monthly salary will be taxed at 40% guaranteed. If PAYE does not sort it out or adjust to take less tax in the further months then there will be a rebate due.

Roxie...His tax code was 522L last year, this year it is 543L, that is standard , it goes up every April. (It will soon be 603L in Sept due to this 10p tax nonsense)

CLAPTON

mitchaa wrote: »

That is not true, his tax code for last year will always have been 522L no matter what kind of bonus he was paid.

A £2500/£5000 bonus along with normal monthly salary will be taxed at 40% guaranteed. If PAYE does not sort it out or adjust to take less tax in the further months then there will be a rebate due.

Roxie...His tax code was 522L last year, this year it is 543L, that is standard , it goes up every April. (It will soon be 603L in Sept due to this 10p tax nonsense)

I suggest you read the excellent and correct post of Isasmurf above.

The payroll system will always give the correct tax by tax year end if the tax code is correct. That is how the system is designed ..it doesn't matter whether you earn less that the personal allowance , whether you are in the 'standard tax band' or whether you pay 40%; nor does it matter if you are paid the same each month or have highly variable income... by year end the tax will be correct.

mitchaa

CLAPTON wrote: »

I suggest you read the excellent and correct post of Isasmurf above.

The payroll system will always give the correct tax by tax year end if the tax code is correct. That is how the system is designed ..it doesn't matter whether you earn less that the personal allowance , whether you are in the 'standard tax band' or whether you pay 40%; nor does it matter if you are paid the same each month or have highly variable income... by year end the tax will be correct.

And why do many millions of people receive tax rebates then?

I have always been PAYE. in July 2006, i received a £5k bonus, thought i was taxed correctly so never thought anything about it, and only a couple of months ago received a cheque back for £330 in overpaid tax.

The PAYE system doesn't always sort it out hence millions of tax rebate cheques that are sent out every year.