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40% tax bracket

8 replies

TheWordWomanIsTaken · 09/04/2022 11:56

This is a really daft question I am sure but at what point do you start paying 40% tax?
I understand the tax code system but does the higher tax bracket kick in once you reach gross amount or are deductions for pensions taken into account.
I'm normally in the 20% bracket but overtime, a small bonus and a backdated pay rise means that my gross income for the year is just over the banding.

But it wouldn't be if pension contributions were excluded?
As a result, in January HMRC informed me of a new tax code (I assumed because they assumed the level of income would maintain until April - but this isn't the case)
When I look at payslips there seems to be a gross pay and a taxable pay.
I thought I understood all this but this element has flummoxed me as I have never tipped in to the higher bracket previously and I'm unlikely to again.

OP posts:
LittleBearPad · 09/04/2022 11:58

Taxable pay is the amount you pay tax on. It’s calculated after pension payments.

If your taxable pay is under the 40% threshold you won’t pay 40% tax at all despite your gross income being over the threshold.

TheWordWomanIsTaken · 09/04/2022 22:49

Thank you so much. I’ll have to look at it in more detail as gross pay literally only just tipped me over.
But that really helps me
Thanks again

OP posts:
MrsMurtystaxreturn · 10/04/2022 09:25

If you’re just over the limit, say £52k, I’d suggest you put that £2k into a pension as Additional Voluntary Contributions (AVCs) to keep you in the basic tax bracket. Then you get to keep all of your overtime pay (albeit) in pension savings rather than getting taxed at 40% plus any other deductions. Furthermore your entitlement to child benefit will not be affected as it’s tapered after £50k. That’s assuming any partner isn’t earning above £50k.

Darbs76 · 11/04/2022 07:29

I’m in the same boat as basic salary is under 50k but now overtime and bonus pushed me into the higher tax bracket. I have no idea if my tax is right - but I’ve now got the added problem of child benefit so I’ll have to do a tax return at the end of this year. Also have to pay higher national insurance so I’m beginning to wonder if my overtime is worth if! It should be ending at the end of April so I’ll probably end up with my salary messed up for a while

RomansTheyGoTheHouse · 12/04/2022 10:07

You need to watch how your pension is paid.

Lots of companies pay the pension contributions before tax. This reduces your total taxable income and you are taxed on the rest.

e.g. paid £100,000
5% pension cont = £5000
Total taxable income = £95,000
You then get £12,500 (ish) of that tax free as personal allowance.
You then pay 20% on Anything above £12,500 plus an extra 20% on anything above £50, 250 (ish)

However, some companies pay pension contributions after tax. This means you have paid tax on that money already. To try to neuralise this they often just py 80% of your contorbutions to the pension company, who claim 20% back from HMRC. The end result is that you've only hd 20% tax relief on this money, but should have had 40% - so you need to claim the extra 20% from HMRC yourself.

e.g. paid £100,000
You get £12,500 of that tax free.
You then pay 20% of everything over that and an extra 20% again on everything over £50,250 (ish). At this point your pension contrbitutions have not reduced your taxable income (you are paying too much tax because it has been calculated against £100,000-£12,500 not £95,000-£12,500).

5% pension contributions = £5000 but you only see 80% of that leave ypur pay packet (£4000). The pension company claims £1000 from HMRC to make up the rest. You need to also claim 20% (£1000) back from HMRC to get the full tax deducted.

BridesmaidPanic · 13/04/2022 22:03

Also note that you'll only pay 40% tax on the bit that goes over that bracket, so if you went over it by £100 you'd pay £40 of tax on that £100 but 20% on your earnings up to that point.

If you think your tax code is wrong, call HMRC and tell them what your earnings are and they'll adjust it.

The tax code is only an estimate and you'll always end up paying the right tax in the end.

RicitosdeOro · 20/04/2022 21:54

A supplementary question - if a company provides a salary sacrifice arrangement to allow the individual to buy tax-free additional annual leave, does that amount come off the gross salary alongside the pension payments too? Thus taxable pay would be gross pay minus pension payments and annual leave purchase?

I believe it does but not 100% sure.

ClarkVamasa · 24/07/2022 17:22

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