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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My husband has been awarded an annual bonus payable in March

Resolved Question:

My husband has been awarded an annual bonus payable in March which takes him over the 100k limit. We understand that this takes away any tax code benefit but would like to work a monetary figure of the tax payable and ni. He is thinking of putting a lump sum into his pension. His current tax code is 869L. We don't want to put a lump sum into a pension and then find a large tax bill due from his return. We have to make decision on the pension sum by Tuesday. His annual salary is £87000 and bonus of circa £56000. His pension scheme is non contributory. We have other significant sources of income or liability.
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Hi.

Without knowing what other income your husband will have for the current tax year, I can only use the information you have given me. If he has other sources of income which may only suffer tax at source at 20%, then he will certainly have more tax to pay on income produced by those sources since he is a 40% or possibly a 45% taxpayer (income over £150,000).

If the salary and bonus were his only income for 2013/14 then he would be a 40% taxpayer. The bonus would suffer tax at 40% (£22,400) and there would be a 2% Class 1 employee NIC charge (£1,120). He will also lose the personal allowance of £9,440 which will cost him £3,776 in tax at 40% but that would come out through his tax return as the tax code does not cope with the loss of all or part of the personal allowance if the income reaches £100,000 part way through the year. It has to be taken away from the start of the tax year, if necessary, to avoid an underpayment at the tax year end.

Your husband can contribute the lesser of £50,000 or 100% of his salary and bonus into a pension fund in any one tax year. However, that limit is reduced by any company pension contribution. If he has not used the maximum allowance from any of the three previous tax years (maximum of the lesser of £50,000 and gross earnings), he could utilise that too. There is some information on pension contribution limits here and here. Your husband should discuss his options with his employer's pension plan managers.

If he sacrificed some of the bonus, his employer could pay it directly into the pension fund subject to the limits and other employer contributions and not pay tax or NIC on that part of the bonus he sacrifices. He would probably need to sacrifice over half the bonus to get his income down to the £100,000 level but you would then need to add in income from other sources which may keep it above £100,000. The personal allowance is lost at the rate of £1 for every £2 of income over £100,000 so at a level of £118,880 it is all lost. You can read about that here.

I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.
Thanks for that.
Only question relates to the £3776. Does he pay 40% of that amount (so £1510) or the whole? And just to be clear, this would be paid after a tax return not through his tax code?
There is no significant other income ( c.£100 div income plus next to nothing deposit and current account interest)
Expert:  TonyTax replied 3 years ago.

The figure of £3,776 is the 40% tax he has to pay on the loss of the £9,440 personal allowance. That would come out in the wash, so to speak, when the 2013/14 tax return is completed and submitted to the tax office unless he brings his "adjusted net income" down to £100,000 or less. Adjusted net income is defined here.

If there is no other significant income (I think you missed the "no" in your question) then your husband is a 40% taxpayer.

The £50,000 annual pension contribution limit is the maximum amount tax relief is given on.

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