Help understanding large tax deduction after bonus

[redrabbit29]

Hi,

I'm fortunate enough that about a year ago I got a very significant pay increase after moving from the public sector into the private.

Last month I received a bonus of £12,000 for some really difficult work I had to do which impacted me and my family. I've never had a bonus in my working life, however I followed advice and requested through payroll and an external person - who manages our Scottish Widows pension - to pay £9000 directly into pension (this is on top of my normal contribution). This would leave a little of the bonus on top of my normal pay and avoid a large chunk being taken in tax.

My payslip came through yesterday and it shows:

Tax deduction: £8500 (which I thought would be around it's normal amount rather than this huge number)
Pension contribution: £9880
TOTAL DEDUCTION: about £19,000

My taxcode is K172 and has been all year.

The Scottish Widows website shows my pension contribution plus £2500 tax relief.

I have read up about self-assessment but the HMRC website provides only information for 2022-2023 which was before my pay increase and where I am not elgible. I have asked payroll about this and waiting for a reply.

Questions

Is this a payroll issue or expected as I have somehow misunderstood my pension type/arrangement?

Does anyone know whether it's typical to get this type of tax payment back quickly and into bank account? I had wrongly assumed this would avoid the huge tax deduction but that's an obvious misunderstanding on my part. I realise I may get this back but unsure of the exact process, options and timescales.

Thank you.

[Countdown]

redrabbit29 said:

Hi,

The Scottish Widows website shows my pension contribution plus £2500 tax relief.

It sounds like your pension provider reclaims basic rate tax relief (rather than you being given tax relief at source). i.e. your pension contributions are deducted AFTER tax.

if that's the case ScotWidows have reclaimed 25% of your net contribution, you'll be able to claim the rest of your year end tax return.

[redrabbit29]

Countdown said:

It sounds like your pension provider reclaims basic rate tax relief (rather than you being given tax relief at source). i.e. your pension contributions are deducted AFTER tax.

if that's the case ScotWidows have reclaimed 25% of your net contribution, you'll be able to claim the rest of your year end tax return.

Thank you for that, I appreciate the simple explanation. When you say claim - you mean in the self-assessment?

I did look on HMRC but couldn't see one for this year yet. I suppose it will come around March-April time at the year end?

[pghstochaj]

redrabbit29 said:

Countdown said:

It sounds like your pension provider reclaims basic rate tax relief (rather than you being given tax relief at source). i.e. your pension contributions are deducted AFTER tax.

if that's the case ScotWidows have reclaimed 25% of your net contribution, you'll be able to claim the rest of your year end tax return.

Thank you for that, I appreciate the simple explanation. When you say claim - you mean in the self-assessment?

I did look on HMRC but couldn't see one for this year yet. I suppose it will come around March-April time at the year end?

If you are a higher rate tax payer and pay pension after tax has already been taken then you need to check that your pension company is providing basic rate tax relief and then you need to additionally ask for the higher rate tax back. If your pension contributions are always taken like this, the same goes whether it is a bonus or not. Many people do not realise this and lose thousands per annum. I have a standard template that I share with junior colleagues that are not aware.

See section: "Claiming tax relief yourself" on this page:

https://www.gov.uk/tax-on-your-private-pension/pen...

You can either do a tax return or write to them as stated.

You can go backwards up to four years if you write to them, but remember you are claiming back the grossed up amount to include your basic rate, e.g. your net payments * 1.25.

See here for further information:

https://www.unbiased.co.uk/discover/pensions-retir...

Also be aware of any impact on the child benefit threshold or the £100k tax threshold if either apply to you (both generally mean you need to do a tax return or take other action).

[omniflow]

Also consider that (if you're paid monthly) your tax allowances are calculated per pay period, so assuming your payslip is for pay period 9, you will have a YTD allowance of 75% of £12,500 taxed at 0%, and 75% of whatever the 20% number is taxed at 20%. If you've had a one-off lump sum payment, you will be taxed much higher that you might "expect" for the month in which it is paid, and then get the extra back over your following pay cheques until the end of the tax year.

[redrabbit29]

pghstochaj said:

If you are a higher rate tax payer and pay pension after tax has already been taken then you need to check that your pension company is providing basic rate tax relief and then you need to additionally ask for the higher rate tax back. If your pension contributions are always taken like this, the same goes whether it is a bonus or not. Many people do not realise this and lose thousands per annum. I have a standard template that I share with junior colleagues that are not aware.

Thank you - that's very helpful. Looking at links now, particularly that first one

This is what I see on the pension site:



The tax relief is 25% of my contribution which I believe is the maximum according to the link you posted. I will read again in the morning, had a terrible day at work and will need to process it properly with a fresh head.

[redrabbit29]

omniflow said:

Also consider that (if you're paid monthly) your tax allowances are calculated per pay period, so assuming your payslip is for pay period 9, you will have a YTD allowance of 75% of £12,500 taxed at 0%, and 75% of whatever the 20% number is taxed at 20%. If you've had a one-off lump sum payment, you will be taxed much higher that you might "expect" for the month in which it is paid, and then get the extra back over your following pay cheques until the end of the tax year.

This may be it actually as when I first joined the company in February 2023 I was paid:

By my old job who owed me a month of pay roughly and holiday I didn't take.

My new job who also paid £5k sign on bonus. I was taxed basically nothing on this pay which is why I think my tax code is k172.

Now this new bonus obviously has an impact on that too

[grumbas]

Without seeing a full normal payslip and the one relating to your bonus it's hard to comment, but it certainly sounds like you need some professional advice here.

As others have said the contribution to your pension could have been made in different ways with slightly different tax treatments.

K172 tax code suggests you either receive a lot of taxable benefits (eg company car) or HMRC are reclaiming unpaid tax through your tax code.

I'd try to find an local independent tax advisor to help (and file your self-assessment if necessary), it shouldn't be particularly expensive.

[supersport]

Your tax code is a K code so effectively negative.

Either HMRC think you owe them a lot of back tax or you have a lot of benefits. Check your tax account to see the break down and check that your expected income for the year is correct.

Your pension contribution has been paid out of net pay, I,e, after tax.

So you paid tax on your bonus that went into your pension, which is why the tax number is so high.

If you’re a higher or additional rate tax payer, you can claim the the 25% via your self assessment after the end of the tax year. You’ll need a P60 and P11D so cant do it straight away.

It’s worth spending some time understanding how tax works, it’s generally not to paid unless you have complications.

You can also down load the HMRC app to calculate what tax you should be paying.

[redrabbit29]

grumbas said:

K172 tax code suggests you either receive a lot of taxable benefits (eg company car) or HMRC are reclaiming unpaid tax through your tax code.
I'd try to find an local independent tax advisor to help (and file your self-assessment if necessary), it shouldn't be particularly expensive.

Thank you that's really helpful. I receive no taxable benefits at all, just standard salary. With the exception of this one-off bonus. My tax code is strange due to a job change in February 2023 when I had a really big increase in salary and my first payslip was not taxed basically. However, since then I have been paying £3130 in tax to make up the shortfall.

I think others are right about it being a post-payment claim through self-assessment. On a webchat now with HMRC.

supersport said:

If you’re a higher or additional rate tax payer, you can claim the the 25% via your self assessment after the end of the tax year. You’ll need a P60 and P11D so cant do it straight away.

It’s worth spending some time understanding how tax works, it’s generally not to paid unless you have complications.

You can also down load the HMRC app to calculate what tax you should be paying.

Thank you for the informative response. I don't receive any particular benefits - just regular salary (and this one-off bonus). I think I will have to wait until the end of the tax year and claim it all back as you state. Quite frustrating as it's a fair amount of money and I stupidly misunderstood my pension setup, thinking that by asking for it to all go to pension, it would avoid this.

I will read up and also seek some help as I find it really confusing despite trying to understand.

I've got the app now and will register for it. My salary is correct on the HMRC website.

Thanks again