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odd tax on salary

Practical Issues
stooz
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odd tax on salary

#405430

Postby stooz » April 19th, 2021, 5:21 pm

I was asked by a friend if their tax was right.
They are on a mid 20k salary, then received a £1000 bonus.
The additional take home came to exactly £600 - which my matchbox maths says 40% detucted - but they are not on a 40% tax level, I appreciate NI and pension contribution woud have increased also - but this seems very off to me? The tax amount on the payslip was nearly double the previous months.

stooz
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Re: odd tax on salary

#405431

Postby stooz » April 19th, 2021, 5:25 pm

mmm. ive just run it through the salary calculator website (love that site) and I get this with a bonus;

Tax at 20% £3,086.00 with bonus month £440.50 normal - £240.50

so that looks about the same. depressing.

PhaseThree

Re: odd tax on salary

#405433

Postby PhaseThree » April 19th, 2021, 5:43 pm

A "bonus" isn't recognised by HMRC as something special. It is just another form of income so your friend should expect to pay Income Tax and National Insurance on the sum so the minimum possible deduction should be somewhere around 32%. The bonus sum may pensionable etc. etc. so £600 may well be correct.

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Re: odd tax on salary

#405438

Postby mc2fool » April 19th, 2021, 6:10 pm

stooz wrote:mmm. ive just run it through the salary calculator website (love that site) and I get this with a bonus;

Tax at 20% £3,086.00 with bonus month £440.50 normal - £240.50

so that looks about the same. depressing.

Uh? No it doesn't look the same. If I understand you correctly, the site (which site? link please) has told you that without the £1000 bonus the tax is £240.50 and with the £1000 bonus it's £200 more at £440.50, i.e. the £1000 bonus has been taxed at 20%. Sounds right to me.

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Re: odd tax on salary

#405443

Postby FanciThat » April 19th, 2021, 6:32 pm

The employer payroll s/w most probably thinks it is an 'every month' amount rather than a one-off and has taxed at the higher rate, I would imagine that it will correct itself over the next few months.

Same happens if you take a lump sum from a pension pot, you get taxed at a ridiculous rate as they think you are earning hundreds of thousands and have to claim it back

Cheers, FT

mike
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Re: odd tax on salary

#405451

Postby mike » April 19th, 2021, 7:19 pm

FanciThat wrote:The employer payroll s/w most probably thinks it is an 'every month' amount rather than a one-off and has taxed at the higher rate


Yes, as April is Tax Month 1 then this. If it was later in the tax year, the effect would be reduced.

There will be a much reduced tax take in May as the system realises it is not an 'every month' payment.

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Re: odd tax on salary

#407286

Postby modellingman » April 27th, 2021, 8:30 am

mike wrote:
FanciThat wrote:The employer payroll s/w most probably thinks it is an 'every month' amount rather than a one-off and has taxed at the higher rate


Yes, as April is Tax Month 1 then this. If it was later in the tax year, the effect would be reduced.

There will be a much reduced tax take in May as the system realises it is not an 'every month' payment.


This happens because of PAYE rules that employers are required to implement through their payroll systems. In broad terms, the annual allowances and thresholds (eg the £12571 personal allowance and £50270 higher rate threshold) are implemented as one twelfth of their values in month 1, two twelfths in month 2, etc.

In each month, cumulative pay for the tax year to date is compared to the relevant monthly values of allowances and thresholds to determine the cumulative tax due for the year to date. The actual tax due for the month is then the current month's cumulative value less the (cumulative) tax previously deducted for the year to date. This cumulative approach of the PAYE system is the reason why pay advice generally includes both current period and year to date values for earnings and tax deducted.

The cumulative approach has the effect of deducting more tax in month 1 than would be the case if the bonus had been paid later in the year. However, there is no effect on the total tax for the tax year as a whole. The effect is simply one of phasing when the tax is taken.

ReallyVeryFoolish wrote:
stooz wrote:mmm. ive just run it through the salary calculator website (love that site) and I get this with a bonus;

Tax at 20% £3,086.00 with bonus month £440.50 normal - £240.50

so that looks about the same. depressing.

Depressing indeed. The laffer curve in action. It's a serious disincentive to try harder. A great many, perhaps all, the small one man band companies and self employed I know/knew never look to grow their business as a result. Myself included. Likewise employees begin to wonder why they bother trying harder. It's very sad to think of the potential gain to the economy if such disincentive didn't exist in the economy.

RVF

Because of the phasing effect, whether being paid a bonus in month 1 as opposed to say month 12 is more or less of an incentive to working to achieve that bonus is something that only each individual can assess. I suspect that the degree of understanding of how PAYE works might be a factor in that assessment and the consequent degree of depression.

Of course, the self-employed and one man bands have no such phasing problems as, unless caught by IR35, they are not taxed on earnings under PAYE but instead under the annual self-assessment system.

AleisterCrowley
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Re: odd tax on salary

#407299

Postby AleisterCrowley » April 27th, 2021, 9:55 am

I think the short version is;
It should all come out in the wash
Check your tax every year, even if you don't fill out a tax return, just to make sure

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Re: odd tax on salary

#407344

Postby PinkDalek » April 27th, 2021, 12:11 pm

AleisterCrowley wrote:I think the short version is;
It should all come out in the wash ...


Not sure it has been mentioned so far and yes, in so far as the Income Tax element of PAYE is concerned but, as stooz mentions I appreciate NI and pension contribution would have increased also, which includes the potential rub re Employee's National Insurance.

That system doesn't get equalised over the tax year, as it is based on pay periods, so the Employee's NI on the bonus is a one off cost, due to the higher bands the bonus may fall within or whatever the precise term is.

As always, something along those lines anyway.

AleisterCrowley
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Re: odd tax on salary

#407353

Postby AleisterCrowley » April 27th, 2021, 12:40 pm

I don't understand the niceties of NICs...
I get round potential complications by having my bonus paid directly to my pension as a salary sacrifice. I know I'm liable 'on the way out'...


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