Income Tax

[craft1948]

If you wander into the 40p tax rate is all your income taxed at 40p or only the part which is above the 20p threshold?

[emeritus]

Just the amount that exceeds the 20% cut off

[DTCwordfan]

the latter.

[craft1948]

Thank you emeritus :-)

[craft1948]

A friend has had a pay rise in April which would just take her into the 40p bracket, and has also been paid her annual bonus in the same pay. She has been taxed at 40p on the lot..............

[Flyhalf]

No, it rises in bands, so that once you reach the maximum of one band you move to the next until you reach its max, and so on.

[DTCwordfan]

First £7475 is at 0%

Tax from 7475 to £35000 so 27525 @ 20% = £5505

Say you have an income of £65000 and no other offsets, single, under 65 etc, then you would pay £30000 @40% = £12000

Total tax on £65000 = £17505 or an overall rate of 26.9% payable.

[Flyhalf]

Ah, that's a different proposition.
If the payment was in Month 1 of the PAYE calendar, only 1/12 of the total PA and basic rate would be set against it, and the bonus may thus be wholly charged at 40%.

[emeritus]

Its possible that the inclusion of the Annual Bonus has alerted PAYE that there has been a significant pay increase and therefore applied the 40% to the whole amount (Just a thought). That being the case this will be adjusted when the salary reverts to normal ?

[factor-fiction]

If the salary exceeds the threshold then any bonus needs to be taxed at 40%. There should still be a large element of the basic salary which is either tax free (around £800 a month) or at 20%, with only the bit that exceeds the 40% tax threshold being taxed at 40%

[DTCwordfan]

true, that a bonus involved is treated differently as factor and flyhalf have suggested.

[craft1948]

emeritus that does appear to be the case. I x12 the amount paid (salary and bonus) and she'd paid 40% tax on the whole amount.

[ubasses]

Don't forget if you earn over £100,000 your tax allowance starts dropping by £1 for eacg £2 earned until it reaches zero. A large bonus this month may make the tax office think she will exceed the limit for this tax year. It should start adjusting itself over the coming months.

[craft1948]

Thank you all :-)

[factor-fiction]

If tax has been deducted at 40% on every penny of the month's income then that seems wrong. Is she sure? If it is so, i can only assume she had already exceeded the threshold for the year (unlikely)or she has some sort of special tax code- equivalent to the BR code but at 40%, maybe because she has another source of income (maybe a pension) and her normal allowances are used against that

[Kathyan]

Why is our tax system so complicated?

[craft1948]

No factor she only exceeds the tax threshold (excluding the bonus) this year due to a pay rise effective 1st April. I'll ask her to bring her pay slip round next time I see her. It's ironic really as the bonus refers to her performance in the last tax year (when she was under the threshold) yet as she's been paid it after a pay rise she's had to pay more tax.

[factor-fiction]

She will have to pay some NI (marginal rate of only 1-2% I think) and, if applicable, student loan repayments at 9%, on the bonus

[Flyhalf]

I don't have access to the Basic PAYE Tools HMRC insists on, but calculating manually:
Assuming basic salary £3400 per month, annual tax bill is £6272, and you would expect to have deductions of £523 per month.
A bonus £2000 would bring the total tax bill to £6942.
If the bonus is paid in Month 1, tax in Month 1 is £1312 and £1893 Month 2,
i.e. £512 deducted Month 2.
Each remaining month £512 would be deducted, around £11 less than "expected amount".
Explanation:
1) tax deductions £1312 plus 11 x £512 comes out to £6944.
OR,
2) the "extra" tax due on the bonus is £670; £790 extra is collected month 1, and "expected tax" is reduced by £121 over the remaining months.