[Albion] Another Tax Post - personal allowance reduction

[Paulie Gualtieri]

All, wondering whether anyone can advise on the process of a reduced personal income tax allowance via PAYE

My personal allowance is now reduced for this tax year following a bonus payment.

I’m aware that I will need to complete a tax return next year but wanted to know whether the indirect tax (60% (extra 20%)rate for the personal allowance reduction) will be collected at source via PAYE or will I need to set this aside for tax return?

When I received the bonus I was taxed at the 40% higher rate so have put the additional money aside however HMRC have now changed my tax code reflecting a smaller personal allowance and are taking more tax on a monthly basis.

I called HMRC and their bod wasn’t able to confirm whether I was now taxed at source going forward and whether the money I’ve set aside will be liable next year.


Hopefully this makes sense as would be good to know if it’s taken at source or for me to pay later.

Many thanks

 

[Westdene Seagull]

I'm confused - if you're on PAYE then any income will be taxed at source - even your bonus. As a PAYE you wouldn't normally need to do a tax return unless you have income from other sources or are a director of a company. If you were already taxed at 40% then unless your bonus was rather large you would't move over into the next bracket so the bonus would be taxed at 40% at source. Do you get other benefits such as company car, private health care etc ? If so the change in your personal allowance maybe HMRC finally catching up with those benefits and now taxing you on them - it sometimes takes them a while to do so.

To be clear - I'm not a tax advisor - I'm just working on my experience of paying tax.

 

[Driver8]

Not answering your question but it’s an excellent opportunity to make a pension contribution and get 60% tax relief!

 

[Paulie Gualtieri]

I'm confused - if you're on PAYE then any income will be taxed at source - even your bonus. As a PAYE you wouldn't normally need to do a tax return unless you have income from other sources or are a director of a company. If you were already taxed at 40% then unless your bonus was rather large you would't move over into the next bracket so the bonus would be taxed at 40% at source. Do you get other benefits such as company car, private health care etc ? If so the change in your personal allowance maybe HMRC finally catching up with those benefits and now taxing you on them - it sometimes takes them a while to do so.

To be clear - I'm not a tax advisor - I'm just working on my experience of paying tax.

No other benefits but have exceeded £100k for the first time, I believe as a result employees over this need to complete a self assessment despite paying tax via PAYE

 

[Audax]

I'm confused - if you're on PAYE then any income will be taxed at source - even your bonus. As a PAYE you wouldn't normally need to do a tax return unless you have income from other sources or are a director of a company. If you were already taxed at 40% then unless your bonus was rather large you would't move over into the next bracket so the bonus would be taxed at 40% at source. Do you get other benefits such as company car, private health care etc ? If so the change in your personal allowance maybe HMRC finally catching up with those benefits and now taxing you on them - it sometimes takes them a while to do so.

To be clear - I'm not a tax advisor - I'm just working on my experience of paying tax.

No other benefits but have exceeded £100k for the first time, I believe as a result employees over this need to complete a self assessment despite paying tax via PAYE

The threshold is actually once you're over £50k, HMRC should begin asking you to do self-assessment. Especially if you (or your partner) have claimed child benefit.

In terms of the OP - I'm not aware of Bonuses causing a reduction in your tax free allowance? Is this something that only kicks in at the higher brackets? As far as I'm aware, reductions in the TFA should only be triggered by things reportable via P11D form and not from direct income (which a bonus is a form of). Unless your bonus included some form of non-cash element?

As an example, my TFA was reduced for a while a few years ago when I had a company car that was listed on my P11D. As soon as I bought the car and started taking the benefit as cash allowance (thanks to short sighted policy change at the company) it was no longer reported on my P11D and my TFA was restored to normal and the "company car" cash allowance was instead taxed in the same way as my base salary.

Are you sure your company has processed the bonus correctly and not landed you with extra tax costs?

 

[Paulie Gualtieri]

Not answering your question but it’s an excellent opportunity to make a pension contribution and get 60% tax relief!

Would normally consider but was due to be made redundant next year but have jumped ship early and starting at a new firm next month.

The bonus has been very much set aside for the contingency fund with it being a new job and the way things are at the minute

 

[Paulie Gualtieri]

The threshold is actually once you're over £50k, HMRC should begin asking you to do self-assessment. Especially if you (or your partner) have claimed child benefit.

In terms of the OP - I'm not aware of Bonuses causing a reduction in your tax free allowance? Is this something that only kicks in at the higher brackets? As far as I'm aware, reductions in the TFA should only be triggered by things reportable via P11D form and not from direct income (which a bonus is a form of). Unless your bonus included some form of non-cash element?

As an example, my TFA was reduced for a while a few years ago when I had a company car that was listed on my P11D. As soon as I bought the car and started taking the benefit as cash allowance (thanks to short sighted policy change at the company) it was no longer reported on my P11D and my TFA was restored to normal and the "company car" cash allowance was instead taxed in the same way as my base salary.

Are you sure your company has processed the bonus correctly and not landed you with extra tax costs?

Employer is steered by the tax code and are correct

This is the process via HMRC

https://www.gov.uk/income-tax-rates/income-over-100000

What I think has happened is that they are now trying to collect the tax now due, due to my smaller personal allowance via PAYE, which I don’t mind as it’s easier to manage monthly but not knowing whether the money I’ve put aside (for the expected tax return) can be utilised, it’s currently in premium bonds

 

[Mancgull]

The threshold is actually once you're over £50k, HMRC should begin asking you to do self-assessment. Especially if you (or your partner) have claimed child benefit.

In terms of the OP - I'm not aware of Bonuses causing a reduction in your tax free allowance? Is this something that only kicks in at the higher brackets? As far as I'm aware, reductions in the TFA should only be triggered by things reportable via P11D form and not from direct income (which a bonus is a form of). Unless your bonus included some form of non-cash element?

As an example, my TFA was reduced for a while a few years ago when I had a company car that was listed on my P11D. As soon as I bought the car and started taking the benefit as cash allowance (thanks to short sighted policy change at the company) it was no longer reported on my P11D and my TFA was restored to normal and the "company car" cash allowance was instead taxed in the same way as my base salary.

Are you sure your company has processed the bonus correctly and not landed you with extra tax costs?

You are overlooking the fact that income over £100k reduces the personal allowance by £1 for every £2 over £100k. So, in effect creating a tax rate of 60% until the personal allowance is completely wiped out. It sounds like HMRC have altered the OP’s tax coding to take this into account. However, a tax return will ultimately be required which will calculate the tax liability accurately.

As Driver 8 states a pension contribution in the same tax year will be very effective as it can offset the loss of the personal allowance although the full tax relief will only be received once the tax return is completed.

 

[Westdene Seagull]

The threshold is actually once you're over £50k, HMRC should begin asking you to do self-assessment. Especially if you (or your partner) have claimed child benefit.

When I crossed that threshold I was asked to do an SA but after that they came back and said there was no need moving forwards - so it's saved my 15+ years of doing them !

 

[Audax]

What I think has happened is that they are now trying to collect the tax now due, due to my smaller personal allowance via PAYE, which I don’t mind as it’s easier to manage monthly but not knowing whether the money I’ve put aside (for the expected tax return) can be utilised, it’s currently in premium bonds

Think that sounds plausible. I'd forgotten that HMRC can and do use tax code alterations in order to recoup (or reimburse) mid-year variations etc. Been a while since I've been in that position .

You are overlooking the fact that income over £100k reduces the personal allowance by £1 for every £2 over £100k. So, in effect creating a tax rate of 60% until the personal allowance is completely wiped out. It sounds like HMRC have altered the OP’s tax coding to take this into account. However, a tax return will ultimately be required which will calculate the tax liability accurately.

As Driver 8 states a pension contribution in the same tax year will be very effective as it can offset the loss of the personal allowance although the full tax relief will only be received once the tax return is completed.

Thanks! Something I wasn't aware of as I've never been that high. Makes sense, though.

Also agree on the pension bit. I've played around with my voluntary contributions like this in the past (in order to stay below that £50k threshold as long as possible).

When I crossed that threshold I was asked to do an SA but after that they came back and said there was no need moving forwards - so it's saved my 15+ years of doing them !

You're lucky. They're still asking me to do them even though we've stopped taking the child benefit cash because I'm now over the £60k which means it's fully tapered away.

 

[rippleman]

Those earning over £100K (not £50K) must complete a SATR.

To correct something in a post earlier, being a company director no longer has an automatic requirement to file a SATR. Only if there is income not taxed under PAYE. A company director who receives dividends (non PAYE income) up to £10K PA is not required to file a SATR but must still report dividends over £2K and less than £10K to HMRC.

You need to bear in mind that HMRC is not particularly sophisticated. They assume that whatever you received / paid last year will be the same that you will receive / pay this year and will fanny about with the tax code accordingly. I had a client who paid a huge one-off pension contribution and claimed it on his SATR. HMRC then adjusted his tax code assuming that he would be paying the same contribution in the following year and stuck the (unclaimed and assumed) relief in the following year's tax code resulting in a significant underpayment of tax.

 

[Paulie Gualtieri]

Those earning over £100K (not £50K) must complete a SATR.

To correct something in a post earlier, being a company director no longer has an automatic requirement to file a SATR. Only if there is income not taxed under PAYE. A company director who receives dividends (non PAYE income) up to £10K PA is not required to file a SATR but must still report dividends over £2K and less than £10K to HMRC.

You need to bear in mind that HMRC is not particularly sophisticated. They assume that whatever you received / paid last year will be the same that you will receive / pay this year and will fanny about with the tax code accordingly. I had a client who paid a huge one-off pension contribution and claimed it on his SATR. HMRC then adjusted his tax code assuming that he would be paying the same contribution in the following year and stuck the (unclaimed and assumed) relief in the following year's tax code resulting in a significant underpayment of tax.

This!

This all started when I received the bonus mid year and HMRC assumed this was going to be the norm and increased my expected total income figure by 50%. I logged in and corrected the figure to be basic + 1 off bonus to keep it on track.

I managed to negotiate a joining bonus for the new firm (in lui of waiting for my redundancy tax free payment next year) so suspect there will be more fun and games next month.

I guess until my P60 is produced and I can compare to annualised tax calculator I won’t know

 

[Mancgull]

Those earning over £100K (not £50K) must complete a SATR.

To correct something in a post earlier, being a company director no longer has an automatic requirement to file a SATR. Only if there is income not taxed under PAYE. A company director who receives dividends (non PAYE income) up to £10K PA is not required to file a SATR but must still report dividends over £2K and less than £10K to HMRC.

You need to bear in mind that HMRC is not particularly sophisticated. They assume that whatever you received / paid last year will be the same that you will receive / pay this year and will fanny about with the tax code accordingly. I had a client who paid a huge one-off pension contribution and claimed it on his SATR. HMRC then adjusted his tax code assuming that he would be paying the same contribution in the following year and stuck the (unclaimed and assumed) relief in the following year's tax code resulting in a significant underpayment of tax.

I had a similar issue with a pension contribution.
I took the view that cash flow wise I’d prefer the extra net income now, knowing that I’d have to pay some further tax in a few months time.
I agree with your assessment of HHRC. They are unsophisticated to put it mildly.

 

[maltaseagull]

All, wondering whether anyone can advise on the process of a reduced personal income tax allowance via PAYE

My personal allowance is now reduced for this tax year following a bonus payment.

I’m aware that I will need to complete a tax return next year but wanted to know whether the indirect tax (60% (extra 20%)rate for the personal allowance reduction) will be collected at source via PAYE or will I need to set this aside for tax return?

When I received the bonus I was taxed at the 40% higher rate so have put the additional money aside however HMRC have now changed my tax code reflecting a smaller personal allowance and are taking more tax on a monthly basis.

I called HMRC and their bod wasn’t able to confirm whether I was now taxed at source going forward and whether the money I’ve set aside will be liable next year.


Hopefully this makes sense as would be good to know if it’s taken at source or for me to pay later.

Many thanks

I find this number really helpful:
0300 200 3300

 

[Paulie Gualtieri]

I find this number really helpful:
0300 200 3300

Thanks - already spoken to them and also at the best time (8am!) but they were unable to confirm either way, which wasn’t particularly helpful!

 

[Shropshire Seagull]

If you have an HMRC account [if you've done a SA previously you will] you can login and see [under PAYE] your Coding Notice and this will have a link to show how this code was arrived at.

 

[Pondicherry]

Employer is steered by the tax code and are correct

This is the process via HMRC

https://www.gov.uk/income-tax-rates/income-over-100000

What I think has happened is that they are now trying to collect the tax now due, due to my smaller personal allowance via PAYE, which I don’t mind as it’s easier to manage monthly but not knowing whether the money I’ve put aside (for the expected tax return) can be utilised, it’s currently in premium bonds

I think this is likely although only HMRC could say for definite. This is what Real Time Information (RTI) was designed in part to do, adjust tax codes in real time so unexpected tax bills at the end of the year are avoided. I guess you could roughly estimate if the monthly increase in tax will approximate the tax you think was due on your bonus. On a side note, the quality of staff answering HMRC help lines varies a great deal. Sometime you can get lucky and end up talking to someone who really knows their stuff. Mostly though its inexperienced staff following some sort of script and when they are asked something off script they are no help.

 

[Springal]

You can login and set your own tax code effectively by putting in expected income and it adjusting accordingly. Generally they will assume whatever you do this year you’ll do next year (including private pensions etc) so you do need to keep on top of it.

Recommend the private pension recommendation; you’ll save a fortune and have a nice little nest egg for the future

 

[Paulie Gualtieri]

You can login and set your own tax code effectively by putting in expected income and it adjusting accordingly. Generally they will assume whatever you do this year you’ll do next year (including private pensions etc) so you do need to keep on top of it.

Recommend the private pension recommendation; you’ll save a fortune and have a nice little nest egg for the future

Thanks, that’s exactly what I did and all need to readjust again when I start at the new firm.

Good points raised regarding pension and it’s something I will do once I have built a buffer and cleared the probation period.

An ex colleague of mine did exactly that, paid in the maximum allowance for private pensions (£40k I believe) for a number of years and essentially retired 10 years early with a significant pot plus a sizeable 25% tax free withdrawal, makes sense!

 

[Pavilionaire]

You need to bear in mind that HMRC is not particularly sophisticated. They assume that whatever you received / paid last year will be the same that you will receive / pay this year and will fanny about with the tax code accordingly. I had a client who paid a huge one-off pension contribution and claimed it on his SATR. HMRC then adjusted his tax code assuming that he would be paying the same contribution in the following year and stuck the (unclaimed and assumed) relief in the following year's tax code resulting in a significant underpayment of tax.

I've just had a teacher client who claimed Working From Home Allowance for a 21/22 employment that ended 31 Aug 21. He retired and started taking teacher's pension wef 01 Sep 21. We've submitted his 21/22 Tax Return and now HMRC have coded in the same amount of WFH Allowance into his pension! How can you have job expenses coded into a pension?!? I don't think anyone apart from accountants check this stuff any more, it's all computerised.