Salary and tax... Help me understand best course of action!

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I totally appreciate how fortunate I am, honestly, so please only comment if you’re able to help me thank you.

Hey... so despite being in quite a senior role, I’m a bit (embarrassingly) clueless regarding tax. I earn £95k but due to contracting earlier in the year, for this tax year I’ll earn c£130k. This means when I moved to my current perm role in the summer I’m now paying a massive amount of tax as I’ve lost my personal allowance. I’m sucking this up until April, life lesson and all that...

My question is, assuming a pay rise or bonus in future tax years, how do I avoid the ‘no mans’ land where I take home less due to losing personal allowance and/or tax?

I guess what I’m after is a dummies guide to annual salary ranges where you don’t get stung for tax reasons? As I feel a bonus could actually (unfortunately) do more harm than good.

Clueless

Did you set up a payroll scheme in your personal trading company (if that’s the vehicle you contracted through)?

The most likely explanation is that HNRC think that you are still employed by the other business and have allocated your personal allowance to that employment, meaning that your PA isn’t applied to your salary for your new role.

I’d suggest ringing HMRC to sort it out, but I wouldn’t wish that on anybody: the hold times are insane. Like over an hour. If you can wait until April to true up your tax when you do your self-assessment return, I’d suggest doing that.

Your PA might have been abated because your expected annual earnings for 2020/2021 are over £100k, but if that’s the case you’ll have to suck it up, I’m afraid. Unless you want to earn less!

Can you afford to pay £30k into your pension this tax year? That would bring you back down to £100k taxable, so you wouldn't lose your personal allowance.

Pension contributions are the best way to suppress your taxable income, for future tax years. You can (broadly) put up to £40k pa into your pension (employer pension or a SIPP), which can help keep your taxable income out of the 60% effective tax bracket.

I’ve even known people to borrow money in order to make tax effective pension contributions, because the tax saving more than offset the interest on the loan for a short period.

Probably time to hire an accountant.

Thank you so so much for coming back to me. I honestly feel bad for not knowing this!

So my contract was actually PAYE (hired by an agency and placed with client), so not LTD company etc.

I think the employee pension contribution is capped at my place of work to 7% so not sure if I could up that - or how I’d work out the pay?

Not sure if it helps but attaching my tax to date page from HMRC portal.

And with photo!

@MyAnacondaMight cross post - off to check out local accountants!

Thanks again all

I’d check that about the employee pension cap (is it a NEST scheme using the qualifying salary method of calculating the contributions? There is a cap if they calculate it that way, but not usually on the percentage, just on the slice of salary used to calculate the contributions). If it really is capped you could presumably pay into a private pension instead - this would still be taken into account in your tax return.

My question is, assuming a pay rise or bonus in future tax years, how do I avoid the ‘no mans’ land where I take home less due to losing personal allowance and/or tax?

This doesn't exist. What's exists is a portion of your salary where you'll pay an effective 60% tax (just on that portion). You won't earn less. You just won't keep as much of this earnings as a lower tax bracket.

Anything over £125k and you get zero personal allowance (oh and you need to speak to HMRC as you will need to fill in a tax return with that income). Even if you could get your income to under £100k (by paying extra pension contributions etc), the standard personal allowance is £12500, that would only have an impact of £2500 off your total tax for the year. That a lot of money if you earn minimum wage, on your salary, not so much.

I’m definitely going to contact an accountant tomorrow - hadn’t realised I needed to do a self assessment (had looked into it and assumed not).

It blows my mind I’m on this salary, so truly don’t take it for granted, I’m an outlier to my family etc so not too many people I can seek this kind of guidance from.

Thank you all again, if you know any good accountants let me know

@Pineapplemonkey

Anything over £125k and you get zero personal allowance (oh and you need to speak to HMRC as you will need to fill in a tax return with that income). Even if you could get your income to under £100k (by paying extra pension contributions etc), the standard personal allowance is £12500, that would only have an impact of £2500 off your total tax for the year. That a lot of money if you earn minimum wage, on your salary, not so much.

Earn £100k: pay £27.5k tax. Earn £125k: pay £42.k tax. That’s a difference of £15k: being 40% tax on £25k and 40% tax on £12.5k personal allowance.

If you put £25k of the £125k into a pension, you keep that entire £25k rather than only £10k of it. Sure you’ll probably have to pay tax on it later, if drawn as income, but not at 60%!

You can open up a SIPP to pay additional pension contributions into

Definitely the best thing is do a pension contribution (open a SIPP if needed) to bring income just under £100k. There are annual allowance rules but with those figures you should be fine.

As I feel a bonus could actually (unfortunately) do more harm than good.

You will never be worse off by earning more, there is an effective '60%' tax at the point you start to lose your personal allowance so on earnings between £100-£125k, so some people try to avoid by making pension contributions (especially if you have young kids and there are things like tax free childcare and 30 hour funding at stake!) but essentially you'll always have more in your pocket the more you earn. A bonus won't do any harm!

Thank you all, spot on and also explained in a straightforward manner! I’ve made enquiries for a few local places to call me this week. But I’m much clearer now, thanks

You don't need a good accountant. Tax is a different thing its just related. Some firms of accountants employ a tax specialist and some individuals especially the self employed are qualified in tax as well as accountancy but not all. So you need to find out what tax qualifications they have - which should be ATT or CIOT. Also this is the busiest time of year for people working in personal tax so if anyone is desperate to get your business they have either just set up or they aren't very good!