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 know where the word support came from!)
You are going to kick yourself with how much could have been sitting in a private pension already.

If he can do a bonus sacrifice to pension then it may be matched by the company - ours is uplifted 10%. If not then pay an AVC of anything over £100k. You can contribute up to £40k a year and carry back contributions for the previous 3 tax years if he would be over this for this year

Re: pension, you also need to be aware of the annual pension input amount and the lifetime allowance, which he may be nearing.

Thanks everyone. I think what we’re struggling to understand is the impact that putting say an extra £20k per year into his pension to keep him under the £100k threshold will have on his monthly take home - maybe take home approx £2k a month less (which we couldn’t afford) and then he has no guarantee of a bonus (luckily he’s had one for the past 5 years but it’s not guaranteed under the terms of his contract).

Why not just put a lump sum of the bonus into the pension? So if he earns 82k and gets a 40k bonus, keep 18k of the bonus to be taxed at 40% and then put 22k in the pension. That way the monthly salary is not cut and you save the 22k being taxed at 60%.

I’m not sure he can. His boss told him at the start of last week what his bonus would be (it could be anything between £0-£40k) and it was paid out on Friday, so no opportunity to divert any into pension. For a massive, multinational, household name company employing hundreds of thousands of staff, I find his company very disorganised and haphazard. It was only very recently that he was able to submit annual leave via an online system. For years he had to email requests to his boss’s PA who would keep a written running tally

Might be worth using an accountant for next years tax return and see if they can advice what might be best going forward,prob pay in long run
My dh earns nowhere near what your dh earns but its disappointing when you see so much go even on his smaller bonus by the time we pay the tax and nI its so much less.

Of course he can divert it to a pension!
What an odd view to take.
Has he done no research at all? For this amount of money?!! I can’t understand why he’d have so little understanding but not see an accountant.

Money doesn’t have to go from an employee directly to a pension scheme.

The tax year doesn’t end for almost a month. He could have a private pension scheme set up in days (it’s all online - possible even same day, but certainly WELL before April. Then he pays it from his bank account after bonus pay day, into that private (personal) pension. The pension company will automatically uplift it by 25% (allowing for the 20% tax rate) and claim that from HMRC without him doing a thing. Then, in his self assessment he gets the rest of the tax reclaimed.

Btw... there is a reason his bonus is paid in March - and this is the reason!

We still do manual holiday forms and I can divert bonus to pension. If not then just set up an online one as PP said. Definitely worth it to keep under £100k

I also work for a multinational and in month before we receive bonus, we are asked if we want to put some or all of it into pension. We do this without knowing how much it will be...you have to guess and it’s not a guaranteed bonus either. My salary was going to be about £110k this tax year and I diverted 10k of bonus into pension to keep me under the 60% rate. I don’t have an accountant. It’s pretty simple unless you have complicated tax affairs. Also remember that when making charity donations, try and do as much as you can using gift aid as that also helps to keep you under the threshold (keep records of all donations).

@NichyNoo what might be worth you doing is mocking up his tax return in the HMRC online system so that you see what the impact of paying into his pension now could be.

If his bonus has meant that he has now earned for example £110k then by making a payment of £8k you could bring him down to £100k and get tax relief plus reinstate the personal allowance or at least part of it depending on how much you pay in.

When I've looked at this before I found that doing the tax return helped me to understand the maths of it. You don't have to actually submit the return. Hope that makes sense!

Also as an aside if he has a holiday buying scheme or anything similar which allows you to salary sacrifice it would be worth looking at that for next year.