Is income tax based on monthly pay?

[Heatherbell1978]

Recently I upped my pension contributions (salary sacrifice) to bring me into the lower tax threshold - in Scotland so that's a tax home pay of £43k after contributions.
I'm lucky enough to get an annual bonus which is paid end of this month and in my budgeting I've assumed it's taxed at 40%. I'm confused if this means I'll get taxed at the lower amount now based on the last 2 months. Feels too good to be true if that was the case.

PAYE evens it out over the course of the tax, doesn't it? There must be online calculator you can plug the details into.

It's based on income over the whole tax year (and what's collected is based on your tax code).

If the bonus puts your pay for the year over the 40% threshold then you'll pay 40%.

This is what I thought but given the tax year has not long started how would they know what the position will be by April 2025? My bonus isn't huge and it's quite possible that my bonus plus salary will be less than £43k by the end of the year as I'm really hammering my pension at the moment (I can play around with contributions every month and adjust them based on what I can afford).

Assuming your PAYE code doesn’t end with M1, you will pay tax on the assumption that you will continue to earn at the same pro-rata level as you have done on your aggregate earnings for the tax year to date for the remainder of the tax year.

So if for example you earned £4K each basic salary in April, May and June and then in June you also get a £12K bonus, you’ll be taxed on June on the assumption that you will earn £8K pcm for the remainder of the tax year.

So on your £24K YTD earnings, you will have the first circa £3K tax free, the next circa £9,500 @ 20% and the rest at 40%.

In subsequent months if you earn less pro-rata, you will get some of the 40% tax you will have overpaid offset against your tax bill so that by the end of the tax year you’ve paid the correct amount .

In the month you're paid the bonus you may well fall into 40% and the system assumes this pay will continue. When the pay drops back to normal next month it adjusts the tax back - may take a couple of months depending on the size of the bonus - but over 12 months you will pay the correct amount.

If you can afford it why not just put the whole bonus into the pension?

But basically you know your salary and you know your bonus. So just make sure that over the course of the year you put the excess over the threshold into your pension.

I had this last year, I didnt realise my AVCs % didnt apply to my bonus payment in September.

So i upped my AVCs to 50% for the last few months of the tax year and my tax was recalculated based on tax already paid and new AVC % and it reduced to a negative figure of -£43! So by the end of the tax year everything was correct.

I can't afford if - bonus money earmarked for other things

It's assessed over the whole tax year 6 April one year to 5 April the next. This is the only way to be fair for people whose income (like yours) is "lumpy" due to bonuses, commissions etc.

You get a twelth of your tax free personal allowance and basic rate band for each month, so this month is month 3 of the current tax year, so your year to date earnings (3 months inc bonus) have 3/12ths of your tax free allowance against against, then the balance is taxed at basic rate for 3/12ths of the basic rate band and the balance at higher rate.

Next month, July, the same happens, year to date earnings set against 4/12ths of tax free personal allowance, basic rate on 4/12ths of the basic rate band and balance at higher rate.

So it averages out as the months pass during the tax year. That is unless you have a month 1/week 1 (x) marker in your PAYE tax code.

Great thank you - so I could pay different amounts of tax throughout the months of the year? Would this mean an adjustment to tax code each time?