Shock tax bill: Is it true that there is no way my employer would or could deduct the removal of my personal allowance?
I am in the fortunate position of earning more than £100,000 a year but this means that I am one of the people who lose their personal allowance.
I had an inflation-matching 10 per cent pay rise last April and got a bigger bonus of £10,000 last December, which means my earnings went from just over £100,000 to £120,000.
All of my earnings come from my employer and I am PAYE, so I was under the impression that my work and HMRC would be deducting my reduced personal allowance.
However, I have just found out that this isn’t the case. My employer says this is not something they would do, or even can do, and the removal of the personal allowance must be done by me via self-assessment.
I had no idea this was the case and my employer said it doesn’t notify staff of this when their pay goes over £100,000.
This means that by my calculations I will end up losing roughly £10,500 of my personal allowance this year and face an extra tax bill for 40 per cent of that, which is £4,000.
This is obviously a big shock and I am quite annoyed with my employer for not warning me about this. I knew about the 60 per cent tax trap but as I am PAYE and all my tax is done by my employer and HMRC, and both know what my salary is, I reasoned it would be taxed at source.
Is it true that there is no way they would or could deduct the removal of my personal allowance?
Is there anything I can do in future years, or do I have to save the money and settle up via self assessment every year?
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Heather Rogers replies: This is a very common issue – you are not alone. I’ll explain and then detail my advice on your particular circumstances.
What is your personal allowance and why do people lose it?
You can earn £12,570 tax free on income, and this is called your personal allowance.
However, for each £2 you earn over £100,000, you lose £1 of your allowance, meaning that at annual earnings of £125,140 no personal allowance is available.
Complications with an employee’s tax position often arise when an annual bonus is paid at the end of the company’s financial year, and the employee loses their personal allowance because of it. As a result, they may not know that they have not paid enough tax.
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 still find it more convenient to do a tax return anyway, either by themselves or with the help of an accountant if their finances are not straightforward.
If you do not, you might receive a ‘surprise’ bill from HMRC.
Why hasn’t your employer worked out your tax 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 this can be at the beginning of the tax year, or at various points during the tax year, for example, after the submission of your P11D by your employer for any benefits you may receive.
It may change during the year depending on your remuneration package or your level of earnings.
The tax code is issued to your employer and to you.
You should receive a breakdown showing how it has been calculated.
Your employer just receives the tax code to use, and they do not ‘warn’ you of anything because they are not a tax adviser and have no right to know any of your other income or personal circumstances, so they do not receive any details.
You may have other allowances such as personal pension contributions, gift aid, or other income, for all they know.
Each month your employer files your earnings with HMRC as part of RTI (Real Time Information).
This means that each month, HMRC has an up-to-date report of your earnings and tax and therefore, should 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 if you are unsure, then you should take advice from a reputable accountant.
Why might your tax code not change in time to avoid a tax bill?
Bonuses are difficult. They may vary from year to year, are often paid at the end or near the end of the tax year – common payment dates are 31 December or 31 March.
If the bonus is the only reason that the employee loses some or all of their allowance, then even if the code is changed to correctly reflect the earnings, there is very little of the tax year left to collect the tax shortfall, especially if all of the tax is effectively due in the last month or two due to the date of the bonus payment.
Will your tax code be correct by the following tax year?
If your situation is expected to be the same next year, then in theory HMRC should get your code correct based on the information your employer sends them.
However, in practice, it often does go wrong and the error is perpetuated throughout the following tax year, giving rise to a further bill.
HMRC used to base tax codes on the P60/P11D annual forms the employer sent in. The Real Time Information system should allow for tax code changes 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 over £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 get the tax code correct.
However, now this limit has been raised to £150,000 for the 2023/24 tax year, this will require HMRC to pay more attention to tax codes for people earning £100.000 to £150,000. We can only hope.
If you are caught out by a situation like this and owe tax, you can opt to have it collected through your tax code providing:
– You owe less than £3,000;
– You submitted your paper tax return by 31 October or your online tax return by 30 December (it is earlier than the usual 31 January to give them time to adjust your tax code).
You cannot have it collected 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 tax.
More information can be found here: Pay your self assessment tax bill.
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
What if your tax code is wrong and you can’t get HMRC to change it.
Complain. Although, you may have a long wait! If you don’t get satisfaction or HMRC does not reply to your complaint, go straight to the Adjudicator.
My guide on how to challenge tax code errors is here.
How can you reduce your tax bill if you earn £100,000-plus?
To avoid a hefty tax charge, you can make a personal pension contribution. This is because the personal allowance is based on ‘adjusted net income’.
This is total taxable income before personal allowances, less certain reliefs which include pension contributions, charity donations, and so on.
Therefore if you make a pension contribution which reduces your adjusted net income below £100,000 then you will get your personal allowance back.
> Should I pay extra into my pension to dodge the 60% tax trap above £100k? Steve Webb replies
What action can you take now?
In your particular circumstances, I would suggest the following.
1. As explained above, your employer is not to blame here. They just apply the tax code issued by HMRC to your pay.
It sounds as though your salary exceeded the £100,000 threshold before the bonus, so it is worth checking your tax code to see what you were on.
2. HMRC may correct your code, but don’t hold your breath – check it and take it up direct with them.
3. If you can, make a payment into a pension scheme which will reduce your tax liability.
Remember the amount you pay is net so the relief you receive will be on the gross amount of the contribution – eg £15,000 net contribution equates to £18,750 gross.
4. In future, check your code regularly and your payslip to ensure that your code is right.
Remember taxable income includes not just your salary and bonus, but any benefits your employer provides – car, medical insurance and so on.
You may also have other income sources which need to be covered in your tax code, such as income from investments.
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 on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a question about tax, email her at [email protected].
Heather will do her best to reply to your message in a forthcoming monthly column, but she won’t be able to answer everyone or correspond privately with readers. Nothing in her replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Heather is unable to answer your question, you can find out about getting help with tax here, including sources of free professional advice if you are elderly and/or on a low income.
You can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. Its number is 0800 011 3797.
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