Tax rates on bonus

[NichyNoo]

I wonder if anyone can help me with a question about tax rates on bonuses please. DH works in the private sector and is very lucky in that he gets a bonus. This year his bonus was 40k. The payment has just arrived in his bank account and after tax it is £17.6k. It’s been the same in past years. He earns 82k so his bonus always takes him over the £100k mark so he needs to fill in a self assessment which always results in an extra 3-4K tax payment in January meaning his bonus cash in hand is £14.5k from a gross payment of £40k. Between £100-150k the tax rate is 40% so I’m struggling to understand why he is taxed at 63% when this is the tax rate that doesn’t exist in the UK? Can anyone please shed any light as I’ve been struggling for the past few years to work this out?

Don't forget national insurance.

Google effective tax rate £100k.

Ideally he should put anything above £100k into a pension to avoid being penalised by this.

Very very very roughly that looks right. Can you put his entire earnings into listen to taxman and see if the net matches his annual net including his bonus?

Have you tried putting all of the figures into here: www.thesalarycalculator.co.uk/ It might break it down so you understand.

Does he get any benefits in kind like a company car or private medical insurance?

Don’t you lose all your tax allowance over £100k? So the payment will include a deduction for tax on the first £100k salary too.

As you go over £100k you start to lose your tax free allowance which can lead to some very steep marginal tax rates, and it looks like this is to blame. The marginal tax rate is 60% between 100k and 125k, plus 3% national insurance.

I am no expert so might be worth putting it into a tax calculator online or asking an accountant, but a quick google gives you this answer.

Solution is to work harder and get above £125k or don't bother and stay under £100k. Good 'ol disincentive to work in action, that's tax for you.

The marginal rate between 100-120k is over 60%, since HMRC have to claw back personal allowance - which is why he has a bill at self assessment. His options are to pay more into his pension which attracts significant tax relief and could pull him just under 100k or earn over 120k so his tax is bacl to 40% or 45% if over 150k. Also, if he knows he will be getting a bonus, it may be best to declare that prospectively to HMRC so that his tax code reflects that and the reduced personal allowance is spread through the year, with no big bill at tax return time.

That is largely the unfortunate impact of the tapered loss of the personal allowance over £100,000.

The extra tax he is paying in January does however need to be looked at. If all income is through PAYE (and his staff benefits are stable and accounted for via his tax code) then there shouldn't be extra to pay, unless, for example he (or you if you earn less than him) are claiming child benefit?

Oh wow - thank you everyone for the responses! I’ll look into this some more but so glad to hear that it sounds about right (well not really as it’s a crazy disincentive but we realise how lucky we are to even be in this situation). In answer to one poster - he does salary sacrifice to get private healthcare (not used in the five years he’s had it but you never know) but no other perks or deductions.

It’s because you start to lose your tax free allowance at 100k. By the time you get to 125k you lose it all. Every £2 you earn over 100k, you lose £1 of it.

No child benefit and no other income or investments apart from PAYE but every year he gets an increasing self assessment tax bill of around £3.5k. Reluctant to pay to see an accountant when all we have are £82k salary plus £40k bonus with no private pension, child benefit, investments. I naively thought an accountant was for people with lots of different investments

He has a pension of course but it’s a company pension so can’t be included in self assessment

Is he still paying any student loans? I usually pay around £250 a month but in bonus months it’s around £1,000 and my bonuses are usually around £5-6k

No student loan - when he fills in the tax return literally every box is left blank apart from the PAYE income (salary plus bonus) and the PAYE tax deduction.

He literally uses his P60 for the tax return and a HSBC current account statement where he’s received around £5 per year in untaxed interest!

It will be the loss of his personal allowance. You lose £1 of your personal allowance for every £2 over £100k that you earn.

He should be able to make extra voluntary contributions to his pension, even if it’s a company one. Might be the way to go here.

Thank you so much everyone. We’ve learnt a lot from your posts and a lot to think about so thank you for taking the time to reply.

He should pension it.

Why not see an accountant as a one off just to check what's going on.

I echo PP - an accountant (or competent financial advisor) should be able to help him avoid such a tax rate by gaining in other ways eg pension.

He needs to put the bonus into pension.

His effective tax rate over 100k is 60%

I agree with others he should pay more in the pension. It won’t be matched by the company but at least it won’t get lost.
I’m earning just over 50. I’ve done extra hours in the last months + salary increase + sold few days. This resulted that out of the 6k extra I got half of it was going straight to taxes.
I’ve incremented my pension contribution so that I’m yearly just over 51k I’m still taking home same amount as last year (so as if I had not had that bonus) but instead of it going to taxes I keep it for the future.

I agree with others tho that you should be able to see a. Finance advisor who would be able to help you better than here tho

I am 🙈 that you have let this financial support inefficiency and both your lack of understanding go on for several years, without bothering to see an accountant! Please - see an accountant!