Can Tax be Avoided for One Off Bonus Payment?

You cant avoid it. Not as bad as you think though. You only pay the higher rate though on the amount you go over by. Might help

Not sure about the pension

It would not cost them anymore to do this - they could even introduce a clause that you still had to be working for them next April to qualify for the second payment.

You pay higher rate tax on the amount by which it pushes you into the higher rate band. You would also have to pay higher rate tax on any savings income you receive this year.

Paying it into a pension is a legitimate way to avoid tax. If the company pays it directly into the pension fund, there are NI advantages for both you and the company. You probably only want to do this for the higher rate bit of your income as you pay tax on the pension fund money when you take it out.

Not quite "also". Any savings taxed at the higher rate would push an equal amount of non-savings income "back out of" the higher rate band.

For example if, before the bonus, his income including savings interest of £500, is £3000 short of the higher rate threshold, then receiving a bonus of £5000 puts his total income £2000 over the threshold.

Of the £5000, the first £3000 is taxed at 22%, and the remaining £2000 at 40%, but then the £500 interest is taxed at an extra 20% (40% instead of 20%), "in exchange for which" £500 of the £2000 is now taxed at 22% again instead of 40%.

Another way of looking at it is to say that the whole £5000 is taxed initially at 22%, but then of the £2000 above the threshold, £500 incurs an extra 20% while the other £1500 incurs an extra 18%.

"Eric Jones" wrote

Sorry fellas, didn't explain fully! Yes they will be issueing the bonus in two parts, separated by a year. But each part will take me into higher tax bracket. So the situation will occur in two successive years.

Phil

"Jonathan Bryce" wrote

Thanks Jonathan Is there any reason why they shouldn't pay this into a pension of my choice? ISTR when this "salary sacrifice" was mentioned previously, we were told that this could only be done into a Barclay's pension. This had something to do with our company adopting the Barclay's stake holder schemes when they first came out.

Would there be any legal/financial regulation reason why a one-off payment could not be made into an existing pension scheme?

TIA

Phil

These days you can mostly have more than one pension.

So there is probably a very good chance that you can take it in salary and pay it into a pension of your choice and get the full 40% tax back (you normally get 22% back from the pension company and the rest you claim from the tax man - i.e. you pay in 7,800gbp, the penion co claim back 2,200gbp from the tax man and add it to your pension pot, then you claim 1,800 back that eventually goes to your bank account).

Your employer shouldnt need to know anything about this.

(Subject to 2,000,000 pension law caveats)

At 15:05:22 on 16/10/2006, TheScullster delighted uk.finance by announcing:

Our company has awards in the form of expense claims. The employee spends the amount of the award and then claims it back as a business expense. I've always wondered about the tax implications.

Are those numbers correct?

Shouldn't it be 6000 into the pension - pension co reclaims 2200 and then you reclaim 1800 on your tax return?

Or you pay in 7800, pension co reclaims 2200 (so it makes no difference to the pension co whether you are a higher or basic rate tax payer which makes more sense I suppose) and then you reclaim 3000.

(scaling this would be 6000 into the pension 1692 reclaimed by the pension co and 2308 reclaimed on the tax return for 10K of earnings at

40%)

On your figures you are reclaiming 4000 of tax on 11800 of earnings which is not 40%.

Tim.

Yes.

No.

That's right.

Eh? You've made a gross contribution of 10,000 (7800 + 2200). You have received basic rate relief, but you are entitled to higher rate relief, so you claim an additional

18% (40% - 22%) of the gross amount - ie 1800.

No you're not. You have put 10,000 gross into the pension, 7800 plus 2200 basic rate tax relief which the pension provider reclaims. You then get 1800 back when you do your tax return - that goes to you not the pension - end result is you have put

10,000 into the pension and it has cost you 6000 (7800-1800).

OK. Yes. I can see where I was going wrong. I was thinking that if I have an after tax bonus of 6000 then if I pay that 6000 into my pension I should effectively pay no tax on the 10K gross amount but there is also a "loan" to HMG and if I want tax relief on the loan I need to pay that amount into the pension as well.

Thanks.

Tim.

You can transfer the money from Barclays to a fund of your choice later. If it is stakeholder, there shouldn't be any charges for doing this.

You get the tax back, however you don't get the NI back, so for that reason it is better to have an employer contribution.

Yes, but that'll (almost certainly) only be 1% if it's higher rate earnings.

Plus the 12.8% employers contribution, if they give you it.

In message , Miss L. Toe writes

But then the payment to the employee would be subject to employers NI and possibly employees NI. If the employer were in on the deal then they could make the payment and no would be payable thereby enabling the company top pay more into the pension but at the same cost to the employer and possibly saving on NI by the employee.

Horrible, I would have thought.

tim

IIRC there are certain allowances for awards to be given to employees tax free.