PAYE, K tax code - what should I have done?
Discussion
Situation so far:
- I work full time PAYE with no other income
- My salary went from below £100k to slightly above £100k in effective May last year (paid in July in arrears)
- My annual bonus was paid in July last year pushing my expected earnings for the tax year to around £112k
- For personal reasons documented elsewhere on PH I both needed every penny I earned last year and didn't think about the tax implications, ie the loss of some of my personal allowance.
- In December my payroll team wrote to me warning me about this and suggesting I update my expected earning on the HRMC portal, which I did. My tax code changed for a few months to 609T, obviously reducing my take home salary by halving my Personal Allowance
- My tax code has changed again from this month to K16 which I believe means I have now lost my personal allowance completely
Going forwards I expect my salary to rise slightly in July (backdated to May) and a modest bonus to be paid in July again. If we assume I cannot/do not want to pay extra into my pension, what should I do to ensure I pay the correct amount of tax each month and prevent the massive changes in take-home that I've seen over the past few months? Shall I continue to use the HMRC portal to update them on my expected annual earnings as and when they are known? Should I try to predict my payrise/bonus and put that in as expected annual earnings now? Should I be doing something else?
I naively thought that being PAYE with no other income and no need to complete a self assessment that my taxes would be correct each month but that is obviously not the case so any thoughts would be much appreciated.
- I work full time PAYE with no other income
- My salary went from below £100k to slightly above £100k in effective May last year (paid in July in arrears)
- My annual bonus was paid in July last year pushing my expected earnings for the tax year to around £112k
- For personal reasons documented elsewhere on PH I both needed every penny I earned last year and didn't think about the tax implications, ie the loss of some of my personal allowance.
- In December my payroll team wrote to me warning me about this and suggesting I update my expected earning on the HRMC portal, which I did. My tax code changed for a few months to 609T, obviously reducing my take home salary by halving my Personal Allowance
- My tax code has changed again from this month to K16 which I believe means I have now lost my personal allowance completely
Going forwards I expect my salary to rise slightly in July (backdated to May) and a modest bonus to be paid in July again. If we assume I cannot/do not want to pay extra into my pension, what should I do to ensure I pay the correct amount of tax each month and prevent the massive changes in take-home that I've seen over the past few months? Shall I continue to use the HMRC portal to update them on my expected annual earnings as and when they are known? Should I try to predict my payrise/bonus and put that in as expected annual earnings now? Should I be doing something else?
I naively thought that being PAYE with no other income and no need to complete a self assessment that my taxes would be correct each month but that is obviously not the case so any thoughts would be much appreciated.
A K code normally means you owe them a load of tax, effectively your tax code has gone negative as what you owe is bigger than you tax free allowance.
Since you’ve gone over £100k, your allowance is reduced anyway.
They once changed mine to a massive 2450k after Christmas which was painful.
I would be keeping your expected total earnings up to date so that you don’t get sudden shocks, although in my experience they can still cock it up. In the above case I got most of it back after submitting self assessment.
Since you’ve gone over £100k, your allowance is reduced anyway.
They once changed mine to a massive 2450k after Christmas which was painful.
I would be keeping your expected total earnings up to date so that you don’t get sudden shocks, although in my experience they can still cock it up. In the above case I got most of it back after submitting self assessment.
Terminator X said:
Pay between £100k and 125k is a dead zone imho. Better to stay away from it eg try and stay below £100k. Madness though by the Govt effectively incentivizing people to earn less 
TX.
All he has to do is contribute it to his pension, so his gross take home pay goes below £100k.TX.
As we have just moved into the new 25/26 tax year, the HMRC calculation is probably assuming that you will be paid at a higher monthly rate than previously, maybe by including your bonus more than once - they don't know if it is a one off or not.
In any event, if you earn (and don't sacrifice via pension or other means) over £125K, your personal allowance *is* 0.
So you should update your expected earnings with HMRC for the 25/26 tax year to be 112K or whatever you think the amount is, but you will see a reduction in your personal allowance / tax code. The alternative is to sacrifice some or all of your earnings above £100K into a pension or other option if they are available to you.
In any event, if you earn (and don't sacrifice via pension or other means) over £125K, your personal allowance *is* 0.
So you should update your expected earnings with HMRC for the 25/26 tax year to be 112K or whatever you think the amount is, but you will see a reduction in your personal allowance / tax code. The alternative is to sacrifice some or all of your earnings above £100K into a pension or other option if they are available to you.
Thanks for the responses. I've updated HMRC with my expected earnings for the year and they have also stated on their portal that I have underpaid around £1800 in tax last year due to the incorrect tax code. I'm definitely going to keep a closer eye on this in the future but I'm still slightly surprised HMRC cannot work this out for themselves and apply the correct tax code automatically given they are given the figures every month.
Terminator X said:
Pay between £100k and 125k is a dead zone imho. Better to stay away from it eg try and stay below £100k. Madness though by the Govt effectively incentivizing people to earn less
TX.
It doesn’t incentivise you to earn less. You are still better off if you earn £125k, you just need to be aware of the tax bandings and dump plenty into a pension (or even give it to charity). TX.
wiggy001 said:
Thanks for the responses. I've updated HMRC with my expected earnings for the year and they have also stated on their portal that I have underpaid around £1800 in tax last year due to the incorrect tax code. I'm definitely going to keep a closer eye on this in the future but I'm still slightly surprised HMRC cannot work this out for themselves and apply the correct tax code automatically given they are given the figures every month.
True, but if you earn £5K for three months, £6K for 3 months (pay rise), then £12K for one month (bonus), how are they supposed to 'know' what you are going to earn for the remaining 5 months? They have no idea why your pay has varied....If you give anything to charity and/or have any professional subs or expenses it might be worth submitting a tax return, every little helps in bringing the amount owed down. On top of that you can then keep the HMRC app up to date.
If you can afford it this year it really is worth thinking about pension contributions or if your employer has such a thing getting a “green” car.
If you can afford it this year it really is worth thinking about pension contributions or if your employer has such a thing getting a “green” car.
CharlesElliott said:
True, but if you earn £5K for three months, £6K for 3 months (pay rise), then £12K for one month (bonus), how are they supposed to 'know' what you are going to earn for the remaining 5 months? They have no idea why your pay has varied....
I probably should know this given I implement HR systems for a living, but doesn’t the RTI submission split out basic pay and bonus payments? If I can be expected to work out my earnings for the full/rest of the year I’m not sure why HMRC can’t with the same data available to them?DJC76 said:
If you give anything to charity and/or have any professional subs or expenses it might be worth submitting a tax return, every little helps in bringing the amount owed down. On top of that you can then keep the HMRC app up to date.
If you can afford it this year it really is worth thinking about pension contributions or if your employer has such a thing getting a “green” car.
I am going to be putting every penny over £100k into my pension this year, it was just last year that this wasn’t an option for several reasons (my ex wife taking half my pensions in our divorce was one of them, paying for said divorce was the other!)If you can afford it this year it really is worth thinking about pension contributions or if your employer has such a thing getting a “green” car.
I’ve considered our company electric car scheme but it doesn’t make financial sense against my 9 year old low mileage daily driver.
wiggy001 said:
I am going to be putting every penny over £100k into my pension this year, it was just last year that this wasn’t an option for several reasons (my ex wife taking half my pensions in our divorce was one of them, paying for said divorce was the other!)
I’ve considered our company electric car scheme but it doesn’t make financial sense against my 9 year old low mileage daily driver.
I understand. Life ain’t cheap sometimes.I’ve considered our company electric car scheme but it doesn’t make financial sense against my 9 year old low mileage daily driver.
Do you cycle? A C2W bike isn’t a bad shout, 62% is a hefty discount.
On a positive note they’ve made the adjustment through tax code. I’ve had a couple of tax bills that I’ve had to settle, that stings even more!
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