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Where Taxpayers and Advisers Meet

Income tax issues over £100k salary

fmfg88
Posts:2
Joined:Fri Nov 24, 2023 12:17 pm
Income tax issues over £100k salary

Postby fmfg88 » Fri Nov 24, 2023 12:33 pm

Hi,

This is very much a first world problem, but I'm hoping someone can put my mind at ease.

I started a new job in June 2022 which meant that I was earning over £100k for the first time. Once you break that threshold, there seems to be a whole range of challenges when it comes to your tax code. In the 18 months or so since I started, I think I've had about half a dozen different tax codes and have had to fill out a self assessment for the first time.

My tax code was changed last month to 743T following submission of my self assessment (I have no other income apart from my salary, so it was a very basic return). It's pay day today, and I noticed that I've paid £400 more in income tax despite none of my details changing (I was on the same tax code as last month). Having spoken to HMRC, they confirmed that last month's pay contained a £400 rebate following them changing my tax code to 743T and that the amount I received this month would be the correct amount going forward. Fine.

However, I received a pay rise in September and so asked them to update my estimated salary for the year. When they did this, it generated yet another tax code (208T) and put my income tax up again. The result of which is that, following a £6k pay rise, I'm taking home an extra £20 a month. They confirmed that this is to ensure any possible underpayments are recovered and that, come next April, my code will change again and I should see an increase in my take home pay.

Can anyone explain why the income tax situation has become so complicated since I started earning over the £100k limit? Or have I just been unlucky with wrong codes being applied? I understand that your personal allowance reduces the more you earn over £100k, but it seems that HMRC can't settle on which code to give me to the point where a pay rise worth £500 a month gross ends up being taxed at 96%.

Thanks for your help.

someone
Posts:686
Joined:Mon Feb 13, 2017 10:09 am

Re: Income tax issues over £100k salary

Postby someone » Fri Nov 24, 2023 2:29 pm

It's because between 100K and (approx) 126K for every two pounds you earn you lose one pound of your personal allowance.

So (assuming you're not over the 126K limit), your 6K increase resulted in a reduction in your tax code of 300.

The second problem you have is that you underpaid tax last year (because your tax code wasn't adjusted during the year - probably by 40% of the amount over 100K)

So they're now also collecting that money by instalments.

So, lets say you were on 110K last year and are on 116K this year. You underpaid tax by 4000 last year - so that's 333 per month in tax they need to collect this year (actually it will probably be more because they probably didn't start collecting it in month 1). Plus your 6K pay rise was taxed at an effective 60% (40% tax plus another 20% due to the loss of 3K of personal allowance). so (assuming these numbers), you're ending up paying an extra 7.6K tax on a 6k payrise.

Next year it should sort itself out and you won't be paying the 333 per month to repay the shortfall from the previous year.

However, if your salary went up in October from 110K to 116K then your annual salary for April-April was (approx) 113K. So if they updated your annual income to 116K for 2023-24 then you'll be paying too much tax.

JFHC, this is all because politicians don't want to "put up tax" and "be fair". If they'd just made the top rate of tax 50% at 100K rather than 40% plus 20% and then back to 40% and then up to 45% at 150K then none of this cr*p would happen and everything would be much simpler.

But like the previous person on this topic yesterday, you'd be wise to seek out a financial advisor or accountant about pension contributions. You can get 60% tax relief on this money - instead of your 6K payrise ending up as 2.4K in your pocket, you can make it the full 6K in your pension.

fmfg88
Posts:2
Joined:Fri Nov 24, 2023 12:17 pm

Re: Income tax issues over £100k salary

Postby fmfg88 » Fri Nov 24, 2023 3:32 pm

Thanks very much - that's incredibly helpful.

Yes, I think I do need to get some advice on reducing my tax burden through pension contributions if possible. I'm guessing there are some existing threads on here about such things?


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