40% tax rate payer for first time

[Jasmine1]

I have just left my old job which was below the 40% threshold, my P45 says I've earnt £33.5k gross this financial year.

I started a new job last month which is now into the 40% tax band (£56k gross) however my March/April pay packets won't be enough to push me into the higher rate for this financial year.

When I get paid in later this month, will I be taxed at 20% still or will I be taxed 40% in which case will I be eligible for a refund from HMRC at some point?

Thanks

[rustyuk]

It might depend on the payroll software used.

However, you don't just start paying 40% on the full amount but just 40% on the amount over the 20% threshold.

Your NI contributions on the amount over the 20% threshold also decreases to 1% from 11% I believe. So you are not really paying an extra 20% in deductions

You won't really see that much of a difference to be honest

[bristolbaron]

As long as your P45 is processed prior to payroll you’ll only pay 20% tax this month on anything up to 6.5k so you’re fine.

I believe the next bit of advice will be to start paying 6k p/a into your pension, but I’ll let someone better qualified tell you that!

[95JO]

I was in a similar situation a few months back, I have been getting 'overpaid' in the form of my unused tax free allowance on a pro-rata basis. I've been paying roughly £160 less in tax than I will be come April. This is coming from £47k - £60k.

[CambsBill]

Unless your tax code has "W1/M1" at the end of it, the payroll will calculate tax on your cumulative earnings for the year (using your P45 from the previous job as the starting point), so no, you shouldn't get taxed at 40% for the last month or so.

What you will get is what feels like a pay cut in April, as your take-home reflects the higher salary from the start of the new tax year and taxes some of it at 40%.

[RobXjcoupe]

Jasmine1 said:

I have just left my old job which was below the 40% threshold, my P45 says I've earnt £33.5k gross this financial year.

I started a new job last month which is now into the 40% tax band (£56k gross) however my March/April pay packets won't be enough to push me into the higher rate for this financial year.

When I get paid in later this month, will I be taxed at 20% still or will I be taxed 40% in which case will I be eligible for a refund from HMRC at some point?

Thanks

If you are paye the tax is averaged to the end of each financial year with the last week or month being the correction to give back or add extra tax, ni etc. If your pay packet and average does go into the 40% tax bracket it’s only the amount over the threshold that’s taxed at 40%.
If you have a salary sacrifice pension that’s a way of removing gross pay into a pension before it’s taxed and you hence are earning slightly less and less tax. You can only adjust it twice per tax year though. It opts you out automatically if you do a 3rd adjustment

[Jasmine1]

Hi guys,
I didn't have a P45 when I joined so I filled out a P46 instead...I am now in possession of a P45, I will ask HR/Payroll if they need this.

bristolbaron said:

As long as your P45 is processed prior to payroll you’ll only pay 20% tax this month on anything up to 6.5k so you’re fine.

I believe the next bit of advice will be to start paying 6k p/a into your pension, but I’ll let someone better qualified tell you that!

I'm more than happy to receive any advice on this. Currently, I've asked to sacrifice 5%, which matches what my employer offers.

[mattlovescars93]

Jasmine1 said:

I'm more than happy to receive any advice on this. Currently, I've asked to sacrifice 5%, which matches what my employer offers.

£50k a year takes home ~£3k a month depending on taxable benefits etc. That will be quite a jump up coming from your previous salary so I’d be inclined to salary sacrifice everything over the 40% buffer into a pension. That’s what I do currently earning £57k and really notice the £12k that goes into my pension pa including employers.

Hope that helps

[OriginalFDM]

If you have no urgent need for an extra bit of disposable income, as a minimum I would change your pension contribution to the minimum you need to put in to bring your taxable salary down to the top of the 20% tax bracket.

At current rates, £56k with a pension cont of 5% means that your taxable salary is £40,700. You’ll pay 40% tax on anything above £37,500 so you’re instantly losing 40% of £3,200 = £1,280.

If you paid 11% your taxable salary would be £37,340. You’d pay no 40% tax and you’d have an extra £3,360 pa in your pension before any growth in said pension.

You’d be putting an extra £280 in your pension whilst paying less tax overall and only costing you c. £170 in take home pay - basically sacrificing £1 of take home pay to get £1.65 in your pension pot.

[irc]

rustyuk said:

It might depend on the payroll software used.

However, you don't just start paying 40% on the full amount but just 40% on the amount over the 20% threshold.

Unless in Scotland where it is 41% tax and 12% NI from £43430 to £50k. A rate of 53%.

[mattlovescars93]

OriginalFDM said:

If you have no urgent need for an extra bit of disposable income, as a minimum I would change your pension contribution to the minimum you need to put in to bring your taxable salary down to the top of the 20% tax bracket.

At current rates, £56k with a pension cont of 5% means that your taxable salary is £40,700. You’ll pay 40% tax on anything above £37,500 so you’re instantly losing 40% of £3,200 = £1,280.

If you paid 11% your taxable salary would be £37,340. You’d pay no 40% tax and you’d have an extra £3,360 pa in your pension before any growth in said pension.

You’d be putting an extra £280 in your pension whilst paying less tax overall and only costing you c. £170 in take home pay - basically sacrificing £1 of take home pay to get £1.65 in your pension pot.

5% of £56k doesn’t bring his income down to £40,700 it brings it down to £53,200 and 40% tax bracket for 2019-2020 year is £50k not £37,500 so none of your calculations are correct.
I think sacrificing 11% would bring you inside the top 20% bracket therefore avoiding the higher rate tax.

[Funk]

Jasmine1 said:

Hi guys,
I didn't have a P45 when I joined so I filled out a P46 instead...I am now in possession of a P45, I will ask HR/Payroll if they need this.

bristolbaron said:

As long as your P45 is processed prior to payroll you’ll only pay 20% tax this month on anything up to 6.5k so you’re fine.

I believe the next bit of advice will be to start paying 6k p/a into your pension, but I’ll let someone better qualified tell you that!

I'm more than happy to receive any advice on this. Currently, I've asked to sacrifice 5%, which matches what my employer offers.

Might be worth checking your pension is paid pre-tax - mine says it is but turns out it isn't which means I've not been getting the correct amount of tax relief. I've had to claim that back manually for the last few years as a result.

Congrats on the new role and pay bump too!

[bristolbaron]

mattlovescars93 said:

OriginalFDM said:

If you have no urgent need for an extra bit of disposable income, as a minimum I would change your pension contribution to the minimum you need to put in to bring your taxable salary down to the top of the 20% tax bracket.

At current rates, £56k with a pension cont of 5% means that your taxable salary is £40,700. You’ll pay 40% tax on anything above £37,500 so you’re instantly losing 40% of £3,200 = £1,280.

If you paid 11% your taxable salary would be £37,340. You’d pay no 40% tax and you’d have an extra £3,360 pa in your pension before any growth in said pension.

You’d be putting an extra £280 in your pension whilst paying less tax overall and only costing you c. £170 in take home pay - basically sacrificing £1 of take home pay to get £1.65 in your pension pot.

5% of £56k doesn’t bring his income down to £40,700 it brings it down to £53,200 and 40% tax bracket for 2019-2020 year is £50k not £37,500 so none of your calculations are correct.
I think sacrificing 11% would bring you inside the top 20% bracket therefore avoiding the higher rate tax.

Read what’s he’s said again.. you’re talking about income, he’s talking about taxable salary - i.e. the amount above the 12,500 tax free allowance..

[mattlovescars93]

bristolbaron said:

Read what’s he’s said again.. you’re talking about income, he’s talking about taxable salary - i.e. the amount above the 12,500 tax free allowance..

What a plonker, my mistake! Both saying the same thing though, get that 11% in the pension pot and forget about it!

[Jasmine1]

Really appreciate the comments so thank you.

Working out how much I need to contribute to my pension is a bit more difficult than what I alluded to in my original post as £6k of my salary is from my car allowance and so not pensionable. I also have a student loan which is deducting £277 a month, and I also get a £10k bonus PA (subject to performance), again this is not pensionable.

I'm thrilled with my pay rise and I'm looking forward to the extra money (although I have no plans to go on a spending spree) but at the same time, it seems daft to pay so much tax when I could instead be getting 'free' money and topping up pension.

I'm guessing there's a bit of a trend for people to dump anything over the 40% bracket into a pension? That would basically mean I have reached my earning capacity until retirement.

[bristolbaron]

Jasmine1 said:

Really appreciate the comments so thank you.

Working out how much I need to contribute to my pension is a bit more difficult than what I alluded to in my original post as £6k of my salary is from my car allowance and so not pensionable. I also have a student loan which is deducting £277 a month, and I also get a £10k bonus PA (subject to performance), again this is not pensionable.

I'm thrilled with my pay rise and I'm looking forward to the extra money (although I have no plans to go on a spending spree) but at the same time, it seems daft to pay so much tax when I could instead be getting 'free' money and topping up pension.

I'm guessing there's a bit of a trend for people to dump anything over the 40% bracket into a pension? That would basically mean I have reached my earning capacity until retirement.

I’d probably post up the last bit on the stickied IM thread, sure the guys there would help work out the figures you should be working from.
https://www.pistonheads.com/gassing/topic.asp?h=0&...

And yes, over 50k it makes sense to get as close to the pension cap as possible (40k total) if you can live on what’s left.

[RobXjcoupe]

The 40% threshold is what everyone is using as you stated that originally. Basically every tax increase threshold that’s met is only taxable at the greater amount from that earnings point. Gets a bit more in depth above the £100k mark but what you have said if you can spare a percentage of your earnings via salary sacrifice that cash is tax free into a pension and it reduces your earnings threshold so hence you pay less tax. Only via salary sacrifice though!

[VR99]

Some great advice above, I personally max out my pension contributions to minimise the tax hit as I'm only slightly above the 40% threshold.

Edited by VR99 on Thursday 5th March 20:00

[alistair1234]

Jasmine1 said:

Really appreciate the comments so thank you.

Working out how much I need to contribute to my pension is a bit more difficult than what I alluded to in my original post as £6k of my salary is from my car allowance and so not pensionable. I also have a student loan which is deducting £277 a month, and I also get a £10k bonus PA (subject to performance), again this is not pensionable.

I'm thrilled with my pay rise and I'm looking forward to the extra money (although I have no plans to go on a spending spree) but at the same time, it seems daft to pay so much tax when I could instead be getting 'free' money and topping up pension.

I'm guessing there's a bit of a trend for people to dump anything over the 40% bracket into a pension? That would basically mean I have reached my earning capacity until retirement.

Student loan makes no difference, it's deducted off net.

[CaptainSlow]

Jasey_ said:

Jasmine1 said:

I'm guessing there's a bit of a trend for people to dump anything over the 40% bracket into a pension? That would basically mean I have reached my earning capacity until retirement.

You can claim the difference in tax back so it doesn't necessarily mean you have reached your earning capacity per se.

Rather than paying your pension as salary sacrifice you can pay it after you have paid tax.

The pension will usually claim and pay 20% tax into your pension fund.

You then do a tax return and you get the 20% back as a tax refund.

It all depends on whether or not you need the cash or are happy to build up your pension more.

Ask on the IM thread and that Julian will get Nik to help you through the quagmire

If possible do it as salary sacrifice as some employers will pass their NI saving on to the employee and also child benefit payments considerations may be applicable