Help with a tax question please!

[Mapleunicorn]

I’ve tried googling this but can’t quite find the answer I need, so hoping someone on here can please help me understand…

I am in the £100k - £125k salary bracket where I get taxed 60%. Previously I had completed self assessment tax returns and then paid the extra tax bill. They’ve now raised the threshold for self assessment to £150k, which I don’t qualify for.

How do I pay the extra tax moving forward?

As far as I’m aware PAYE will tax me for the standard tax bandings, not the extra bit as a result of the reduced personal allowance

Also, as a side note, I do realise I could just whack anything over £100k in my pension and avoid the 60% all together, but for various reasons it’s not something I want to do right now

Anyone know how it works?

I received a notification the other day with an adjusted tax code for the 25-26 FY which I presumed was caused by similar reasons. Is there anything showing on your tax portal?

My OH is in this position also so I am also concerned as to how this will work.

Won’t they just change your tax code so you don’t get the personal allowance and pay the correct tax that was. If HMRC have a correct expected income on your personal tax account (you can update this), then your personal allowance will be reduced via your tax code.

They will just amend your tax code

I did wonder if they might change my tax code, but then what happens about a discretionary annual bonus? It depends on company performance and isn’t guaranteed so couldn’t be built into my tax code?

Where would I find next year’s tax code? I did get a notification and it said to check online but when I go on the portal I can only see this years?

When is the bonus paid? If at the very end of the tax year I would just take a best guess and add it to estimated income that HMRC have on record. Otherwise if during the year you can update HMRC at the point it is paid and they will adjust your tax code accordingly.

Ah ok that makes sense. Thank you. It’s paid in October so I would have a few months to spread out the tax associated with it I guess

Im quite surprised there hasn’t been more guidance widely available on this to be honest (unless I’ve just missed it all)

Where would I find next year’s tax code? I did get a notification and it said to check online but when I go on the portal I can only see this years?

I went on today and found a link to next years in the PAYE section.. wasn't easy to find though

They'll just keep adjusting it as you go along, and estimate your bonus based on the previous years, which will mean it's a bit of a moving target, which can be hard to keep up with.

But you can still opt to do a tax return, the £150k is where it becomes compulsory, there's nothing to stop anyone from doing one no matter how much they earn.

For example if you earn more than £50k I think you need to do one to get full tax relief on pension contributions.

You can still voluntarily submit as a return if you want to keep on top of it and pay any tax due directly instead of your tax code constantly changing to catch up.

they will estimate your tax code in year and then do a simple assessment after year end which will result in an under or over payment. If it’s an underpayment they’ll adjust in following years tax code if it’s under £2k or you have to pay as lump sum if it’s more

Thanks All. Ok one more question on this please - I was of the understanding that the 60% tax trap was the government taking advantage of the fact that they didn’t historically build the reduction in personal allowance into your tax code. So you pay a chunk of money at 20% tax via PAYE (on the basis of a full personal allowance) then they reduce your personal allowance and you pay the 40% on the chunk of money that has moved into the 40% tax bracket as a result

So if the reduced personal allowance is now build into my tax code upfront, it should automatically put it in the correct 40% tax bracket? So there shouldn’t be a need to pay the additional 20% to take it to 60%?

(Appreciate that’s the not the case for anything not included in my tax code like bonus)

I would have thought the 60% tax trap is built into government budgets and I haven’t read anything online about this not being necessary anymore, but I don’t get how it would apply when it’s captured via PAYE?

(Sorry this stuff hurts my brain a bit!)

No matter how or when they deduct the tax, the total tax will remain the same whether it's coded or not. It's just a matter of timing.

The 60% tax "trap" is a term used to describe the effective tax rate for people earning between £100,000 and £125,140 where you're losing your personal allowance. There's no "additional" tax being paid.

You're correct though that if your tax code was generated correctly at the start of the year, the correct amount of tax would be deducted throughout the year without the need for any balancing payments/liabilities arising.

My understanding is that once you’re in the self assessment system you have to keep doing them until HMRC say you don’t have to. Don’t just stop without speaking to HMRC because then they may fine you for not doing one. If you speak to HMRC they may say you don’t need to do one any more, or they may ask you to keep doing one. The £150k cut off is for people who don’t already do one.

Yep! Already been caught out with that. Currently attempting to appeal a late filing fine 🙈 They’ve confirmed I don’t need to do one in future but not particularly forthcoming with info on how it will work if I don’t

Interesting. Can I ask a stupid question. Is it really as simply as any earnings over 100k you x by 0.4 and that's the (accurate) take home amount?

@DazzlingCuckoos

The 60% tax "trap" is a term used to describe the effective tax rate for people earning between £100,000 and £125,140 where you're losing your personal allowance. There's no "additional" tax being paid.

I thought there was a double tax? Because you paid 20% tax on some of your earnings through PAYE, and then the reduction in personal allowance moves that same chunk of earnings into the 40% bracket and you have to pay the 40% (rather than just the 20% difference) which totals to 60%

Everything I’ve read says it only affects those with a salary of £100k to £125k. Once you get over £125k you don’t get any personal allowance so there is no shifting of brackets so pay 40%

Have I misunderstood that?

On your PAYE section of your online account mine was at the bottom of the section

If you've already paid 20% tax on some wages you'd only pay 20% more to be paying the 40% rate. As the other post said it's an effective 60% rate because of the combination of losing personal allowance with the actual tax. You never are actually taxed at 60%.

PAYE is a cumulative calculation combined with your tax code over the year hence it can take changes into account along the way. You can update your expected earnings at any point allowing HMRC to generate a new tax code. Or if you don't want to pay the effective 60% sacrifice into a pension or use against other benefits if you can to take it back under £100k for the year

@wobytide ah ok, that does actually make sense now

I also found my tax code for next year and it does appear to have the reduced allowance baked in so I get it now. Thank you!

Thanks for this - my brain wasn't able to form an explanation as clear as yours!

Thank God HMRC did away with the "tax doesn't have to be taxing" tagline!

Unfortunately not!

Partly because at £100,000 earnings you start losing your tax free Personal Allowance.

Someone that earns £100,000 has a personal allowance of £12,570, but for each £2 over £100,000 you earn you lose £1 of personal allowance, so by the time you reach £125,140 you've got no tax free allowance.

Also, employees continue to pay employee's National Insurance at 2% also, so this would also be deducted.

Plugging numbers into a payroll calculator shows:

• £100,000 annual salary = £5,713.50 net pay per month
• £110,000 annual salary = £6,030.09 (extra £316 net out of £833 gross = 62% deduction)^
• £125,000 annual salary = £6,505.09 (extra £791 out of £2,083 gross = 62% deduction)^
• £140,000 annual salary = £7,165.54 (extra £1,452 out of £3,333 gross = 56% deduction)

The items marked with a ^ are within the bracket where you lose your personal allowance, so the notional tax charge is at 60% plus the 2% E'ees NI. Once you've lost your personal allowance entirely, you lose the effective tax rate change, but you are then in the 45% tax bracket.