Accountants Assemble - Christmas Bonus, sal sac in Jan/Feb/March.

Ahleckz · 15 Dec 2023 at 12:51

I know there's a few knowledge people on here, and not sure where else to ask...I can't decide if this is worth me worrying about or not...

I'm currently a 21% tax payer, however, with a bonus I'll be taken to 42% for this month. FWIW, pretty much all of the bonus will be taxed at 42% as I'm JUST under the threshold. January, I'll be back to a 21% tax payer. A fair whack of this bonus will be gobbled up in extra tax, so I'm wondering if I can salary sacrifice some of my salary into my pension in Jan, Feb and March so my total yearly earnings are below the 42% threshold. Will that then give me a tax rebate from the bonus, or will I pay less PAYE for those months to account for it?

The obvious answer is to salary sacrifice this bonus into my pension, but I've missed the boat for that.

In Scotland, which explains the funny tax rates but assume the point stands if I was 20%/40%. I floated the idea of sal sacing my bonus into my pension to work, and they said this is possible in theory but timings wouldn't work. I also suspect I'll get a more coherent answer here than from my HR/Payroll!

Have I missed anything?

EvilRob · 15 Dec 2023 at 20:12

Not an accountant but if it was me and I missed the boat for the salary sacrifice on the bonus, I'd probably not **** about trying to salary sacrifice at the right levels for the rest of the year (and potentially reset it again in the new FY). Instead, I'd probably just open a SIPP, pay in whatever I wanted to and claim back the higher rate tax from HMRC at the end of the financial year.

Jim99 · 15 Dec 2023 at 20:18

Yeah, I would probably solve this with a SIPP as well. Slightly less optimal but a lot less hassle.

cheesyboy · 15 Dec 2023 at 21:01

Tax is calculated across the whole financial year, so you can pay more into your pension in Jan, Feb, Mar to bring you back under the threshold.

Think you might need to submit a tax return to claim the higher rate tax relief back on your pension contributions though.

Psiko · 16 Dec 2023 at 13:27

In my organisation, when we salary sacrifice into our pension, they top up with the employer’s NI contributions since they don’t need to pay those so it’s much more efficient than a SIPP. Not sure whether yours would be similar.

If you salary sacrifice for Jan, Feb, Mar and the tax doesn’t equalise properly, HMRC should just adjust your tax code for the following year allowing you to claim it back over time. Of course this is not optimal from a timing perspective so you might want to complete a self assessment tax return to get it back faster but that’s a lot of hassle. You’d have to weigh up whether you can be bothered.

Ahleckz · 17 Dec 2023 at 11:26

Just so I understand, as this is new to me… if I salary sacrifice under 42% my tax code will just be adjusted and I’ll pay less tax until the ‘overpayment’ of tax is paid?

I’ve googled for a calculator but can’t find one, would have thought this would be a relatively normal thing.

I’m not even sure how much tax I’ll save doing this!

Mr^B · 17 Dec 2023 at 21:03

Just make sure you stay under the pension annual allowance (currently £60k), and once you start earning more (£260k adjusted income) the tapering and carry-forward rules around it get a bit more complex.

Buffman · 18 Dec 2023 at 07:36

I'm probably not exact here (and varies in scotland) but the tax bands are

20%+12.5% national insurance
40%+2% national insurance

So the difference is around 10% not 20% which loads of people seem to neglect.

EvilRob · 18 Dec 2023 at 21:18

Buffman said:
I'm probably not exact here (and varies in scotland) but the tax bands are

20%+12.5% national insurance
40%+2% national insurance

So the difference is around 10% not 20% which loads of people seem to neglect.

The difference may be that but you still save 40% or more absolutely which is what matters.

Buffman · 18 Dec 2023 at 21:56

EvilRob said:
The difference may be that but you still save 40% or more absolutely which is what matters.

For salary sacrifice, yes but for the general understanding of "how much more tax I'm paying" it's only an extra 10% / 10p per £ earned over the previous rate.

BennyC · 25 Dec 2023 at 18:33

If your employer is offering their NI saving as part of SS take them up on it, you will pay slightly less employee NI too.

Besides timing differences or opportunity cost, from a tax perspective, you're no better off than just making contributions (from taxed pay) to a pension scheme and claiming pension tax relief via self-assessment. It's also much easier to manage than jiggling a SS around. You receive 20% at source and claim the additional 20% back manually, that is until your tax code is adjusted to account for predicted PTR.

Sounds like you are on a Week 1 / Month 1 tax code for some reason, which isn't cumulative or are at least thinking about it this way, but your year-end position in April will look at total taxable pay and total tax paid to true up, so focusing on each month in isolation doesn't make much sense.

slinxy · 27 Dec 2023 at 08:49

It’s not just your salary… it’s your total taxable income.

Interest earn on savings that are not in a tax wrapper. It wasn’t a thing to worry about back in the days unless you had loads in the bank, but with the high interest rates.. you may only need 20k before earning the 1k of interest, and anything over is taxable.

Not sure about Scotland but in England and wales, it’s a double edge sword. Once you get to the 40% bracket.. the tax allowance for savings drops to £500.

Also capital gains, S&S dividends and others all have their allowances but adds to the taxable income even when they are within the allowance.

My niece; who is a tax accountant told me this a few days ago, and I’ve readjusted my pension payment for to give myself more breathing space from other taxable incomes.