Quick question on tax
Discussion
It depends on whether the bonus falls in the higher rate tax band or not. And that in turn depends on your current salary levels.
It also depends on what time in April the bonus is paid. The tax rates and tax bands change on 6 April 2013 as that is the first day of the new tax year (2013/14).
It also depends on what time in April the bonus is paid. The tax rates and tax bands change on 6 April 2013 as that is the first day of the new tax year (2013/14).
alan36 said:
My salary is 27k and I get paid on 25th if that makes a difference
If I assume that you have a regular personal allowance of £9440 , then each month in the 2013/14 tax year yopu will be taxed under PAYE as follows:First £786.67 - no tax
Next £2667.50 - 20%
Thereafter - 40%
So if your regular salary is £2250 per month, the £2500 bonus will be taxed as £1204.17 @ 20% and £1295.83 @ 40%.
However, as PAYE is processed on a cumulative basis, you will actually be taxed at 20% on the whole bonus as you will effectively receive a "rebate" via your net pay in May for £1204.17 @ 20% and the remaining £92 @ 20% app in June.
You didn't ask re NI, but the monthly ceiling for paying the 12% full rate is £3453.67 so you will pay 12% on £1203.87 and 2% on the remaining £1296.13.
Hope that helps.
David
sumo69 said:
Eric Mc said:
You will be comfortably below the 40% tax band so your bonus will be taxed at 20% and will also be subject to Employee's Class 1 NI at 12%.
Dont think you are wholly correct on that - see above.David
EVENTUALLY the bonus will be taxed at the standard 20%, but because of the way PAYE works he'll have to pay tax at 40% on part of the bonus and this overpayment of tax will be gradually unwound over the coming months.
Eric Mc said:
I can always rely on you to pint these things out - so I don't bother. Rather you waste valuable chargeable time than me 
Bit touchy when corrected aren't we??Only replying now as been busy earning since my last post..
For the record, I didn't post it to hack you off but to let the OP know that he would initially pay 40% tax and not 12% NIC on all of it as you alluded above.
My motives in posting are to correctly inform others or I don't post at all.
David
Nice to see you've got your nose to the grindstone too then.
The OP will pay 20% tax on his bonus. That is the correct answer.
He may pay some 40% tax on it at first - but his true tax liability on the bonus will still be 20% by the time then additional amount is fully processed through the PAYE system.
The OP will pay 20% tax on his bonus. That is the correct answer.
He may pay some 40% tax on it at first - but his true tax liability on the bonus will still be 20% by the time then additional amount is fully processed through the PAYE system.
Is the bonus being paid on or before 5 April? In other words, will it be taxed in 2012/13 or 2013/14?
If in 2013/13 - it will all be at 20%.
If in 2013/14, part of it will be taxed at 40% but during the course of the next few months the PAYE system will refund to you each month part of the tax incorrectly calculated at 40%, so your net take home pay will be higher than otherwise. Eventually the whole thing evens out and you will have, in the end, paid tax at 20% on the bonus - as originally stated.
PAYE works on an accumulative basis so this seemingly anomalous situation always evens itself out by the time you get to the end of the tax year.
If in 2013/13 - it will all be at 20%.
If in 2013/14, part of it will be taxed at 40% but during the course of the next few months the PAYE system will refund to you each month part of the tax incorrectly calculated at 40%, so your net take home pay will be higher than otherwise. Eventually the whole thing evens out and you will have, in the end, paid tax at 20% on the bonus - as originally stated.
PAYE works on an accumulative basis so this seemingly anomalous situation always evens itself out by the time you get to the end of the tax year.
We had a similar issue in my office last year. Quite a few people ending up paying more tax than they expected and had to claim it back via tax returns. Not sure if there is a simpler process if you don't have to do tax returns.
As someone else posted - even though the bonus won't take you into the 40% tax bracket for the year as a whole (because the bonus is a one-off and not repeated every month) it gets taxed initially as if you were receiving that each month and therefore would be a 40% tax payer. You then have to reclaim the overpaid tax at a later date.
I think it's a pretty stupid system on HMRC's part - just creates admin for all parties - but it does seem to be the way it works.
ETA: Actually, if your bonus is payable in April (i.e. next tax year) it might not be such a faff. My firm pays bonuses in March.
As someone else posted - even though the bonus won't take you into the 40% tax bracket for the year as a whole (because the bonus is a one-off and not repeated every month) it gets taxed initially as if you were receiving that each month and therefore would be a 40% tax payer. You then have to reclaim the overpaid tax at a later date.
I think it's a pretty stupid system on HMRC's part - just creates admin for all parties - but it does seem to be the way it works.
ETA: Actually, if your bonus is payable in April (i.e. next tax year) it might not be such a faff. My firm pays bonuses in March.
Edited by Zigster on Friday 22 March 11:21
Zigster said:
We had a similar issue in my office last year. Quite a few people ending up paying more tax than they expected and had to claim it back via tax returns. Not sure if there is a simpler process if you don't have to do tax returns.
As someone else posted - even though the bonus won't take you into the 40% tax bracket for the year as a whole (because the bonus is a one-off and not repeated every month) it gets taxed initially as if you were receiving that each month and therefore would be a 40% tax payer. You then have to reclaim the overpaid tax at a later date.
You don't have to "reclaim" it, it will unwind naturally via PAYE.As someone else posted - even though the bonus won't take you into the 40% tax bracket for the year as a whole (because the bonus is a one-off and not repeated every month) it gets taxed initially as if you were receiving that each month and therefore would be a 40% tax payer. You then have to reclaim the overpaid tax at a later date.
Here's the basics
Ok, so you know you have a tax free allowance each year? and then a 20% band? and then a 40% band? and then there was a 50% band too?
Well the way PAYE works is that it looks at your year to date income and compares it against the PRO RATED version of those bands. So after 1 month (i.e. end of Apr) you'd have to compare your Apr income with 1/12th of those band values, and pay the tax due.
At the end of month 2 you compare your Apr+Mar income against 2/12th of those bands and pay the difference in tax between what's now due (year to date) and what you already paid in Apr.
So if you get paid the same each month you don't notice this happening. But if you get a bonus (esp if it's just after Apr) then you're right to say that you'll initially be more likely to go into one of the higher tax bands. But if you continue to not receive bonus in the subsequent months then because the calculation is done on a year to date basis each month, it unwinds by itself. (Because at month 12 it finally compares your total income for the year vs. 12/12ths i.e. all, of the bandings. And then you pay the difference between the tax you're due for the year and what you've paid so far.)
Simple, right? no reclaiming or tax returns required.
IF (and it's a big "if" sometimes") PAYE is administered properly by your employer and IF HMRC issues the correct tax code, then the PAYE system should always ensure that an individual pays the correct tax due on their salary in any given tax year.
The problem is that various matters can conspire to throw the calculations out of whack and consequently the taxpayer MAY have to contact HMRC directly to try and get matters sorted out.
The problem is that various matters can conspire to throw the calculations out of whack and consequently the taxpayer MAY have to contact HMRC directly to try and get matters sorted out.
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