High rate tax

rodders

rodders

rodders

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Might be a dumb question, but just want to be clear in my head.

I've done my self assessment and I owe £1k. I can either pay it off or adjust my tax code for 2023/24

If I did the latter, they will lower my tax allowance so I pay them more back.

But then, in essence, as my tax allowance is lower, I'll hit high rate tax sooner and pay more @ 40%

Or am I wrong, it will just all work itself out and be fine?
 
You will hit the lower tax band earlier (the basic rate). They reduce your tax free allowance by the amount you owe. It will work itself out. No you won't pay the higher tax band amount earlier.

Personal tax free allowance: £12,570
Basic rate: £12,571 to £50,270
Higher rate: £50,271 to £125,140 **
Super tax: £125,141+

Note that you also start losing your personal tax free allowance over £100k so in reality there is a hidden tax in the middle of that higher rate. But that won't affect you.

So if you opt to collect the £1k you owe via your tax code, then your personal tax free allowance will reduce to £11,570. By the end of the tax year you will have paid off the full £1k and no more.
 
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rodders said:
Might be a dumb question, but just want to be clear in my head.

I've done my self assessment and I owe £1k. I can either pay it off or adjust my tax code for 2023/24

If I did the latter, they will lower my tax allowance so I pay them more back.

But then, in essence, as my tax allowance is lower, I'll hit high rate tax sooner and pay more @ 40%

Or am I wrong, it will just all work itself out and be fine?
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You are incorrect. They're taking the underpayment from your tax free allowance (the first £12.5k you earn) and the threshold where you hit the 40% rate will remain the same, regardless.

It's an interest free loan of £1k, and in reality well reduce your monthly take home pay by £83. There's no reason not to choose this option.
 
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It will work itself out in the end, but whether or not it works itself out in the next tax year depends on how close you are to the 40% band and how the calculation is done to reduce your personal allowance.

Basic rate band is a fixed amount above personal allowance. The higher rate lower limit can go down. For example:

Personal Allowance is reduced by £5k as assumption is made you are a basic rate taxpayer (5,000 x 20% = £1,000 tax).
Reduced personal allowance is £7,570
Basic rate band is next £37,700
Higher rate kicks in at £45,270 (mental arithmetic so maybe unreliable).

You earn £49k per year, you will pay additional tax as personal allowance reduction didn't take this into account. But then either HMRC repay you or next tax year Personal Allowance is increased to compensate.
 
Pudney said:
It will work itself out in the end, but whether or not it works itself out in the next tax year depends on how close you are to the 40% band and how the calculation is done to reduce your personal allowance.

Basic rate band is a fixed amount above personal allowance. The higher rate lower limit can go down. For example:

Personal Allowance is reduced by £5k as assumption is made you are a basic rate taxpayer (5,000 x 20% = £1,000 tax).
Reduced personal allowance is £7,570
Basic rate band is next £37,700
Higher rate kicks in at £45,270 (mental arithmetic so maybe unreliable).

You earn £49k per year, you will pay additional tax as personal allowance reduction didn't take this into account. But then either HMRC repay you or next tax year Personal Allowance is increased to compensate.
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I think this overcomplicates things. They've exceeded the threshold by £5000 and it really depends on why - unexpected overtime? Their tax code of (probably) 1257L already takes the 40% threshold into account, so this must have been an irregular extra payment and probably won't be repeated this year?
 
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Dirk Diggler said:
I think this overcomplicates things. They've exceeded the threshold by £5000 and it really depends on why - unexpected overtime? Their tax code of (probably) 1257L already takes the 40% threshold into account, so this must have been an irregular extra payment and probably won't be repeated this year?
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What threshold?

The basic rate band is £37,700, the tax code or personal allowance are irrelevant to that.

They're doing self-assessment, the likelihood is other sources of income.
 
Self assessment due to claiming child benefit. I owe £584 of that back and it seems even though I'm on PAYE, I am £500 short in tax as well. So £1k total to repay.
 
throwaway4372 said:
pay it off
then increase your pension contribution so you're not paying 40%
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I'm Rodders brother. Good luck telling him this one :cry: I've been saying this from day dot!! I couldn't be bothered to work out all the numbers but with only being 5k into the higher tax band but I'm sure it'd be better upping the pension, saving on tax there, keeping the child benefit etc. Might end up around £1k physically out of pocket over the year but gain much more come pension time (granted there's the unknown with stock market etc ref pension and whether you make it to the age to draw on it).

It's what I plan to do when I hit the 40% tax band. Upping pension will also hopefully offer me more options later, i.e. retiring early, though I'm 45 now so there's not much time left for interest to accumulate. I also have to hit that tax band, which I think I'm around 2 to 3 years away from doing still.
 
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Gixer said:
I'm Rodders brother. Good luck telling him this one :cry: I've been saying this from day dot!! I couldn't be bothered to work out all the numbers but with only being 5k into the higher tax band but I'm sure it'd be better upping the pension, saving on tax there, keeping the child benefit etc. Might end up around £1k physically out of pocket over the year but gain much more come pension time (granted there's the unknown with stock market etc ref pension and whether you make it to the age to draw on it).

It's what I plan to do when I hit the 40% tax band. Upping pension will also hopefully offer me more options later, i.e. retiring early, though I'm 45 now so there's not much time left for interest to accumulate. I also have to hit that tax band, which I think I'm around 2 to 3 years away from doing still.
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Increasing pension contributions isn't always the right thing to do, depending on the circumstances. For the scenario that you have described, I'd say it probably feels like the right move based purely on the fact you'd be just passing the threshold by a little, and therefore losing the additional 20% to the tax man would mean working your final week in the year for less money. However, if you think about how much additional money you would be adding to your pension contributions it surely wouldn't be that much? Would it be worth it? Possibly if your employer was matching the increase.

As for your age, yes it's against you as you say but remember you can withdraw a lump sum tax free at age 55.
 
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Dirk Diggler said:
Increasing pension contributions isn't always the right thing to do, depending on the circumstances. For the scenario that you have described, I'd say it probably feels like the right move based purely on the fact you'd be just passing the threshold by a little, and therefore losing the additional 20% to the tax man would mean working your final week in the year for less money. However, if you think about how much additional money you would be adding to your pension contributions it surely wouldn't be that much? Would it be worth it? Possibly if your employer was matching the increase.

As for your age, yes it's against you as you say but remember you can withdraw a lump sum tax free at age 55.
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Paying into your pension means you basically double your money and then it compounds over several years. So yes, unless you can double your money elsewhere and lock it away for a decade or two, it is totally worth it.
 
dLockers said:
Paying into your pension means you basically double your money and then it compounds over several years. So yes, unless you can double your money elsewhere and lock it away for a decade or two, it is totally worth it.
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I currently pay 20% into my pension, so in principle I clearly agree. However, personal circumstance is important when it comes to personal finance. It's not a broad brush, IMO.

An example would be a person just encroaching into the zone where personal tax free allowance is being lost - sure they could use pension contributions to counter that but they might also be experiencing rocketing mortgage costs and not able to sacrifice the loss.
 
Dirk Diggler said:
I currently pay 20% into my pension, so in principle I clearly agree. However, personal circumstance is important when it comes to personal finance. It's not a broad brush, IMO.

An example would be a person just encroaching into the zone where personal tax free allowance is being lost - sure they could use pension contributions to counter that but they might also be experiencing rocketing mortgage costs and not able to sacrifice the loss.
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Oh for sure. I'd assume that's a given. It's an especially challenging calc at 100k because you have the tapering allowance, lose 2k childcare top-up but face off to a 66% effective tax.
 
Din
Dirk Diggler said:
I currently pay 20% into my pension, so in principle I clearly agree. However, personal circumstance is important when it comes to personal finance. It's not a broad brush, IMO.

An example would be a person just encroaching into the zone where personal tax free allowance is being lost - sure they could use pension contributions to counter that but they might also be experiencing rocketing mortgage costs and not able to sacrifice the loss.
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Stop looking at my bank accounts.... Pension gutted twice by a divorce and then the Tories having a brain fart. Mortgage effectively doubled due to a divorce and then coming off a fix @1.6% this month. Yeah i'd love to top up my pension to be tax clever, but i have other priorities right now, mainly overpaying the mortgage as much as possible.

On a side note, Nationwide have a list of words you cant use in a mortgage title.
 
Gixer said:
I'm Rodders brother. Good luck telling him this one :cry: I've been saying this from day dot!! I couldn't be bothered to work out all the numbers but with only being 5k into the higher tax band but I'm sure it'd be better upping the pension, saving on tax there, keeping the child benefit etc. Might end up around £1k physically out of pocket over the year but gain much more come pension time (granted there's the unknown with stock market etc ref pension and whether you make it to the age to draw on it).

It's what I plan to do when I hit the 40% tax band. Upping pension will also hopefully offer me more options later, i.e. retiring early, though I'm 45 now so there's not much time left for interest to accumulate. I also have to hit that tax band, which I think I'm around 2 to 3 years away from doing still.
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Couldn't be more true for me. The decision wasn't so straight forward until now as I've wanted some cash buildup following dumping practically everything (including emergency fund) in to our house move. It's an absolute no brainer now though, for me at least, with the arrival of child number 2 as its now the £40 a week child maintenance +40% claimed back. It's a hell of a high price to pay for instant access to what is not that much money ultimately.
 
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