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Impact on tax bill: Is it true that there is no way for my employer to or can deduct the removal from my personal allowance?
I am lucky enough to earn over £100,000 a year, but this means I am one of the people who lose their personal allowance.
Last April I received a 10 per cent inflation-matched pay rise and last December I got a bigger bonus of £10,000, meaning my income went from just over £100,000 to £120,000.
All my income comes from my employer and I’m PAYE, so I was under the impression that my job and HMRC would deduct my reduced personal allowance.
However, I just discovered that this is not the case. My employer says that this is not something he would do, he cannot even do, and that the removal of the personal allowance must be carried out by me through a self-assessment.
I had no idea this was the case and my employer said they do not notify staff of this when their salary is over £100,000.
This means that, according to my calculations, I will end up losing approximately £10,500 of my personal allowance this year and will face an additional tax bill for 40 per cent of that amount, which is £4,000.
Obviously this is a big shock and I’m pretty upset with my employer for not letting me know about this. I knew about the 60 per cent tax trap, but as I’m PAYE and all my taxes are paid by my employer and HMRC, and they both know what my salary is, I reasoned that it would be taxed at source.
Is it true that there is no way you can or will deduct the removal from my personal allowance?
Is there anything I can do in the future or do I have to save the money and pay it off through a self-assessment each year?
SCROLL DOWN TO FIND OUT HOW TO ASK HEATHER HIS TAX QUESTION
Heather Rogers responds: This is a very common problem: you are not alone. I’ll explain and then detail my advice for your particular circumstances.
What is your personal allowance and why do people lose it?
You can earn £12,570 tax-free on your income, and this is called a personal allowance.
However, for every £2 you earn over £100,000, you will lose £1 of your allowance, meaning that with an annual income of £125,140 there will be no personal allowance available.
Complications with an employee’s tax situation often arise when an annual bonus is paid at the end of the company’s financial year and the employee loses their personal allowance as a result. As a result, they may not know that they have not paid enough taxes.
Before the 2023/24 tax year, people earning more than £100,000 a year were required to complete a self-assessment tax return, but this limit has now been raised to £150,000.
However, many people earning between £100,000 and £150,000 will find it better to do a tax return anyway, either on their own or with the help of an accountant if their finances are not straightforward.
If you don’t, you may receive a “surprise” bill from HMRC.
Why hasn’t your employer calculated your taxes for you?
It’s not your employer’s fault. Your employer deducts tax through PAYE according to your tax code.
The tax code is issued by HMRC and can be at the beginning of the tax year or at various times during the tax year, for example after your employer submits your P11D for any benefits you may receive.
It may change during the year depending on your compensation package or income level.
The tax code is issued to your employer and to you.
You should receive a breakdown showing how it has been calculated.
Your employer simply receives the tax code to use and does not “warn” you of anything because they are not a tax advisor and have no right to know your other income or personal circumstances, so they do not receive any details.
For all they know, you may have other allowances, such as personal pension contributions, donations or other income.
Each month your employer submits your earnings to HMRC as part of RTI (Real Time Information).
This means that each month, HMRC has an updated report of your earnings and taxes and should therefore be able to respond quickly with a corrected tax code.
It is your responsibility to check your tax code and if you do not believe it is correct or are unsure, you should consult an accredited accountant.
Why might your tax code not change in time to avoid a tax bill?
Bonds are difficult. They may vary from year to year and are often paid at or near the end of the fiscal year; The usual payment dates are December 31 or March 31.
If the bonus is the only reason the employee loses some or all of his or her allowance, then even if the code is changed to correctly reflect the earnings, there is very little of the fiscal year left to collect the tax shortfall, especially if everyone Tax is effectively due in the last month or two due to the bonus payment date.
Will your tax code be correct for the next tax year?
If your situation is expected to be the same next year, then in theory HMRC should correct their code based on the information your employer sends them.
However, in practice, it often goes wrong and the error is perpetuated into the next fiscal year, resulting in a new invoice.
HMRC used to base tax codes on the annual P60/P11D forms sent by the employer. The real-time reporting system should allow changes to tax codes to be made quickly, but it doesn’t always seem to happen as it should, so keep an eye on your code.
Meanwhile, because in the past people earning more than £100,000 were required to complete a self-assessment tax return in any case, even if they were on PAYE, there was little impetus for HMRC to fix the tax code.
However, now that this limit has been raised to £150,000 for the 2023/24 tax year, this will require HMRC to pay more attention to the tax codes for people earning between £100,000 and £150,000. We can only hope .
If you are caught in a situation like this and owe taxes, you can choose to collect them through your tax code by providing:
– You owe less than £3,000;
– Filed your paper tax return by October 31 or your online tax return by December 30 (this is before the usual January 31 to give them time to adjust their tax code).
You can’t collect it through your tax code if:
– You would pay more than 50 per cent of your PAYE income in tax;
– You owe £3,000 or more in unpaid taxes.
You can find more information here: Pay your self-assessment tax bill.
HEATHER ROGERS ANSWERS YOUR QUESTIONS ABOUT TRIBUTES
What if your tax code is wrong and you can’t get HMRC to change it?
Complain. Although you may have to wait a long time! If you do not obtain satisfaction or HMRC does not respond to your complaintgo directly to the judge.
My guide on how to challenge tax code errors is here.
How can you reduce your tax bill if you earn over £100,000?
To avoid a high tax burden, you can make a personal contribution to your pension. This is because the personal allowance is based on “adjusted net income.”
This is the total taxable income before personal allowances, less certain reliefs including pension contributions, charitable donations, etc.
Therefore, if you make a pension contribution that reduces your adjusted net income below £100,000, you will get your personal allowance back.
> Should I pay more into my pension to avoid the 60% tax trap above £100,000? Steve Webb responds
What actions can you take now?
In your particular circumstances, I would suggest the following.
1. As explained above, your employer is not at fault in this case. They simply apply the tax code issued by HMRC to your salary.
It appears your salary exceeded the £100,000 threshold before the bonus, so it’s worth checking your tax code to see what you were up to.
2. HMRC may correct your code, but don’t hold your breath – check and discuss it directly with them.
3. If you can, make a payment into a pension scheme which will reduce your tax liability.
Remember that the amount you pay is net, so the relief you receive will be on the gross amount of the contribution; For example, a net contribution of £15,000 is equivalent to £18,750 gross.
4. In the future, periodically check your code and your pay stub to make sure it is correct.
Remember that taxable income includes not only your salary and bonus, but also any benefits your employer provides you: car, health insurance, etc.
You may also have other sources of income that should be covered in your tax code, such as investment income.
Ask Heather Rogers a tax question
Tax expert Heather Rogers answers our readers’ questions
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions about any tax topic: tax codes, inheritance tax, income tax, capital gains tax and much more.
If you would like to ask Heather a tax question, email her at taxquestions@thisismoney.co.uk.
Heather will do her best to respond to your message in an upcoming monthly column, but will not be able to respond to everyone or correspond privately with readers. Nothing in her answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message; This will be kept confidential and will not be used for marketing purposes.
If Heather can’t answer your question, you can Learn how to get help with your taxes here. including sources of free professional advice if you are elderly and/or low-income.
You can also contact money helper, a government-backed organization that provides free assistance to the public in financial matters. Their number is 0800 011 3797.
Heather provides tips here on how to find a good accountant, including when to seek help, hiring the right type of firm, and typical costs.
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