Bonus incoming, what tax implications?

[jurbie]

I've been informed that I'm going to get a £10,000 bonus in December's pay run and as a basic rate tax payer I think this will push my yearly earnings into the higher rate bracket. Google tells me that the higher rate is £50,270 and this bonus will put me a couple of thousand pounds over this.

I'm assuming that my pension contribution will spike up next month which should go some way to keeping me within the lower rate so I suspect there is nothing to worry about and I'm not going to be particularly adversely affected?

If I do end up in the higher bracket does that mean I'm going to be paying 40% tax for the rest of the tax year in which case would it also be worth upping my pension percentage for next month anyway just to keep me on 20%?

Sorry but I'm a bit clueless about all this as I've never earned enough to worry about it.

[PistonHead007]

Bonus payments don't usually automatically get sacrificed for pension contributions, you'd likely need to elect for any of it to go into a pension.

The payment of £10k in itself won't take you over the threshold yet so you'll still get the full basic rate band's worth of income at 20% over the course of the tax year.

If your earnings are set and you can calculate the excess over the threshold you could elect to sacrifice just enough now. That would be the simplest thing if you don't want to pay any higher rate income tax.

[jurbie]

Interesting thanks. I was told the payment would be subject to the usual deductions so assumed that included pension deductions. I can clarify that with the payroll team.

It certainly won't hurt to put a little extra into the pension for the next few months just to be sure I stay within the lower rate.

[thekingisdead]

Most firms don’t include bonuses for pension contributions, but some do.

Ref: going into the 40% tax band - have you deducted your regular pension contributions? This effectively lowers your gross taxable pay - you may be just under the threshold already

[jurbie]

No I haven't, all based on gross pay so that's a great tip that means I need to revisit my maths. Many thanks.

[UnclePat]

As said, it’s probable, but not impossible, that pension contributions will not be taken from the bonus.

As well as your Employee pension contributions reducing your Gross salary income, other benefit deductions at source e.g. childcare vouchers can also operate to reduce it, so it may be that even with £10k bonus you won’t fall into the 40% bracket.

You’ll only pay the higher tax amount on earnings over the threshold, not all earnings in the remainder of the financial year.

Many employers offer the ability to pay some or all of a bonus into a pension, which could resolve the issue easily.

If you do ‘squeak’ into the higher tax band by even a couple of grand, it may affect your Child Benefit (if you claim it, and don’t have a partner earning over £50k already). In that case, you may get a letter from HMRC requesting a tax self-assessment to potentially reclaim part of any Child Benefit taken.

If you do have to do a self-assessment, it’s worth applying for the Work From Home tax rebate within the same process.

[Mandat]

UnclePat said:

You’ll only pay the higher tax amount on earnings over the threshold, not all earnings in the remainder of the financial year.

I'm not sure that is quite right.

If the £10k bonus puts the OP over the higher rate threshold in December, then the remaining salary payments from January to March are going to remain above the threshold, unless some sort of salary sacrifice scheme is used to bring the gross total down.

[supersport]

Mandat said:

UnclePat said:

You’ll only pay the higher tax amount on earnings over the threshold, not all earnings in the remainder of the financial year.

I'm not sure that is quite right.

If the £10k bonus puts the OP over the higher rate threshold in December, then the remaining salary payments from January to March are going to remain above the threshold, unless some sort of salary sacrifice scheme is used to bring the gross total down.

That’s not how it works.

You can think of it as getting a 12th of your tax allowance each month but that is a simplification.

[E63eeeeee...]

supersport said:

Mandat said:

UnclePat said:

You’ll only pay the higher tax amount on earnings over the threshold, not all earnings in the remainder of the financial year.

I'm not sure that is quite right.

If the £10k bonus puts the OP over the higher rate threshold in December, then the remaining salary payments from January to March are going to remain above the threshold, unless some sort of salary sacrifice scheme is used to bring the gross total down.

That’s not how it works.

You can think of it as getting a 12th of your tax allowance each month but that is a simplification.

There's two different ways it can work. You can pay your tax month by month, so as you say you get 1/12th of your allowance each month and pay the "right" amount of tax for each month individually, but most people pay a cumulative tax code where each month your tax position is assessed for the tax year to date, so if you get your bonus in December you'll get 3/4 of your tax allowance for the year applied to your total income from April to December.

It's possible for HMRC to move you from the latter to the former without telling you, causing you to start what can only be described as a feud with your payroll department, lasting several months, until they figure out what's happened. Ask me how I know.

[jurbie]

Mandat said:

I'm not sure that is quite right.

If the £10k bonus puts the OP over the higher rate threshold in December, then the remaining salary payments from January to March are going to remain above the threshold, unless some sort of salary sacrifice scheme is used to bring the gross total down.

I think that's the crux of my worry which you've summed up quite well.

Fortunately my tax affairs are fairly simple being a single male with no kids so I think I'm basically entitled to nothing.

As things stand I've taken my gross salary, added my car allowance and the £10k. From this I've subtracted my pension contributions for the whole year and it leaves me with a figure a couple of hundred pounds short of the threshold so all should be good. I just need to check for any overtime payments I've forgotten about but I'm fairly sure I haven't done any OT this year.

If the opportunity for overtime arrives in the coming months then I'll just up my pension contributions for the remainder of the tax year.

[PistonHead007]

You're only going to be paying higher rate for the rest of the year if your pay to date has taken you up to the threshold. From your description it doesn't.

[Burwood]

jurbie said:

Mandat said:

I'm not sure that is quite right.

If the £10k bonus puts the OP over the higher rate threshold in December, then the remaining salary payments from January to March are going to remain above the threshold, unless some sort of salary sacrifice scheme is used to bring the gross total down.

I think that's the crux of my worry which you've summed up quite well.

Fortunately my tax affairs are fairly simple being a single male with no kids so I think I'm basically entitled to nothing.

As things stand I've taken my gross salary, added my car allowance and the £10k. From this I've subtracted my pension contributions for the whole year and it leaves me with a figure a couple of hundred pounds short of the threshold so all should be good. I just need to check for any overtime payments I've forgotten about but I'm fairly sure I haven't done any OT this year.

If the opportunity for overtime arrives in the coming months then I'll just up my pension contributions for the remainder of the tax year.

What you need to do is check with HR whether the company you work for operates a Salary sacrifice scheme (SS) This is completely different to normal pensions contributions. If they do you will have to opt in before the date. The difference is SS payments do not have any NIC attached to them for both you and the employer and there is zero taxation at source as opposed to pension contributions which are taxed at source and you are given a 20% tax relief payment with potentially more claimed through self assessment.

[jimmybell]

Something to be wary of - HMRC can often, in times like these, make some wild predictions about your annual income, based on that one month payslip - so you may find they adjust your expected earnings and thus your tax code (maybe even tax the whole thing as if it’s all inside the bracket above). If you do find they claim more of it than they’re due - Usually you can call them up and explain your normal income and that it’s a one off thing, and they should revert your tax code and you can recover money in the following 1 or 2 payslips.

Also.. congrats!

[Burwood]

jimmybell said:

Something to be wary of - HMRC can often, in times like these, make some wild predictions about your annual income, based on that one month payslip - so you may find they adjust your expected earnings and thus your tax code (maybe even tax the whole thing as if it’s all inside the bracket above). If you do find they claim more of it than they’re due - Usually you can call them up and explain your normal income and that it’s a one off thing, and they should revert your tax code and you can recover money in the following 1 or 2 payslips.

Also.. congrats!

Correct, however the employer will receive a notification so as has been suggested-get ahead of it, be proactive. The employer can correct HMRC's tax code revision. You should also make sure you have registered and logged into your PTA (personal tax account)

[VR99]

Burwood said:

jimmybell said:

Something to be wary of - HMRC can often, in times like these, make some wild predictions about your annual income, based on that one month payslip - so you may find they adjust your expected earnings and thus your tax code (maybe even tax the whole thing as if it’s all inside the bracket above). If you do find they claim more of it than they’re due - Usually you can call them up and explain your normal income and that it’s a one off thing, and they should revert your tax code and you can recover money in the following 1 or 2 payslips.

Also.. congrats!

Correct, however the employer will receive a notification so as has been suggested-get ahead of it, be proactive. The employer can correct HMRC's tax code revision. You should also make sure you have registered and logged into your PTA (personal tax account)

Op - I sal sac via my employer pension scheme, usually vary my sal sac month to month e g: I received a small bonus earlier this year so increased my sal sac in advance as it has to be done by mid month to be included. Unfortunately I wasn't aggressive enough early in the tax year so think it's a bit late now to completely avoid paying all higher rate tax this financial year (it would result in a big pay drop for the last few months of this financial year)

Burwood - Hope OP doesn't mind me jumping on here, regarding a personal tax account, is this the same as a gov gateway account? I've never done a tax return ever (mainly been paye in my career) but I may need to do one this year....is it fairly straightforward without the need for an accountant? ( PAYE,.no other income, no GIA etc) thanks.

[The Leaper]

VR99 said:

Burwood - Hope OP doesn't mind me jumping on here, regarding a personal tax account, is this the same as a gov gateway account? I've never done a tax return ever (mainly been paye in my career) but I may need to do one this year....is it fairly straightforward without the need for an accountant? ( PAYE,.no other income, no GIA etc) thanks.

I have done my own SA for many years. IMO completion is straightforward but the big issue is finding and making sure you have all the information you need before you start. I maintain various spreadsheets recording events as they occur and keep a copy of all the relevant documentation (eg interest payments received, other income, gift aid payments), which means SA completion for me is no problem.

From what you say, it seems that completion of your own SA should be a straightforward matter.

R.

[Burwood]

VR99 said:

Burwood said:

jimmybell said:

Something to be wary of - HMRC can often, in times like these, make some wild predictions about your annual income, based on that one month payslip - so you may find they adjust your expected earnings and thus your tax code (maybe even tax the whole thing as if it’s all inside the bracket above). If you do find they claim more of it than they’re due - Usually you can call them up and explain your normal income and that it’s a one off thing, and they should revert your tax code and you can recover money in the following 1 or 2 payslips.

Also.. congrats!

Correct, however the employer will receive a notification so as has been suggested-get ahead of it, be proactive. The employer can correct HMRC's tax code revision. You should also make sure you have registered and logged into your PTA (personal tax account)

Op - I sal sac via my employer pension scheme, usually vary my sal sac month to month e g: I received a small bonus earlier this year so increased my sal sac in advance as it has to be done by mid month to be included. Unfortunately I wasn't aggressive enough early in the tax year so think it's a bit late now to completely avoid paying all higher rate tax this financial year (it would result in a big pay drop for the last few months of this financial year)

Burwood - Hope OP doesn't mind me jumping on here, regarding a personal tax account, is this the same as a gov gateway account? I've never done a tax return ever (mainly been paye in my career) but I may need to do one this year....is it fairly straightforward without the need for an accountant? ( PAYE,.no other income, no GIA etc) thanks.

Different but linked https://www.gov.uk/personal-tax-account. You can see the criteria. You can always register for SA and HMRC may tell you you don't have to do another. If you receive child benefit and earn over 50k you should complete one. Pay into a pension, same, as you can claim extra cash. it's very simple and you don't need software or an accountant. The take away is, if you don't sacrifice earnings but use an employers pension contribution scheme you should do SA. It's free cash most likely. Not if you are a basic tax payer because you get the relief at source.

[VR99]

Thanks The Leaper and Burwood!

We dont currently receive Child benefit but that could change v soon.......wife is under £50k so would be fine, for myself as mentioned i will need to sal sac quite aggressively till end of this tax year to get me down to £50k, still undecided if I will do it though kicking myself for not planning better earlier this year.
I am contributing above the threshold required to receive max employer contribution so getting the free money and a bit more on top! I agree about maximising sal sac, get it while you can as we don't know when the govt might change/take away, esp if you are a higher rate tax payer. I am nowhere near LTA (I'd say it's a pipe dream based on assumptions for investment growth over the next 5/10/15 years) so happy to keep pushing in as much as I can for now and will review in a few years.
Op - just to add, if you will salary sac (if it's an option) check/review your investments, a lot of the default funds are not great IMO (nothing wrong with them per say but the risk sometimes is they don't take enough risk.esp for a long timeframe)

Edited by VR99 on Sunday 28th November 15:52

[JapanRed]

VR99 said:

Thanks The Leaper and Burwood!

We dont currently receive Child benefit but that could change v soon.......wife is under £50k so would be fine, for myself as mentioned i will need to sal sac quite aggressively till end of this tax year to get me down to £50k, still undecided if I will do it though kicking myself for not planning better earlier this year.
I am contributing above the threshold required to receive max employer contribution so getting the free money and a bit more on top! I agree about maximising sal sac, get it while you can as we don't know when the govt might change/take away, esp if you are a higher rate tax payer. I am nowhere near LTA (I'd say it's a pipe dream based on assumptions for investment growth over the next 5/10/15 years) so happy to keep pushing in as much as I can for now and will review in a few years.
Op - just to add, if you will salary sac (if it's an option) check/review your investments, a lot of the default funds are not great IMO (nothing wrong with them per say but the risk sometimes is they don't take enough risk.esp for a long timeframe)

Edited by VR99 on Sunday 28th November 15:52

On a side note the person who’s going to be earning least (usually the person going on maternity/paternity leave the longest) is almost always better to be the one claiming the child benefit in their name. It’s also worth claiming it even if you earn over £50k as it counts towards NI contributions.

Lots on Google about this.

[Dave350]

for clarity, the child benefit is c.£1,100 a year.

If you earn between £50k and £60k total taxable income (i.e. After pension), then it's a sliding scale. Be cautious e.g. if you earn £52k taxable income, you'd be paying 20% of that £1100 back, they pay you the full amount. So if you aren't careful, you could end up owing c.£210 a year, for 5 years if you didn't ensure it was only the correct amount you kept.

What % of your salary do you currently pay into your pension? What is the current base salary?