I will do my best to explain this as simply as I can, but it's not that simple (to me at least!). I've put this in PAYE because although the issue emerged during my recent self-assessment, it's caused by my basic PAYE job activity.
I am very lucky to be paid a relative good salary in my job that I started 4 years ago, earning around £75k, which stayed stable during the first year and a bit of the Covid era.
In the 21/22 tax year, I was further lucky enough to receive an unexpected bonus in March 22 - the final month of the tax year - which push me over £100k in earnings. HMRC were aware of the level of my earnings then via my payroll and P60. Because I went over £100k, I expected it to have some ramifications and for HMRC to contact me accordingly, reducing my tax code. No qualms about this at all.
Because I earned over £100k, I was asked to complete a self-assessment. I have no other income other than my main job, so I completed my self-assessment in early December and was told I needed to pay an additional £1,975 in tax. This represents the additional amount of tax that had been caught by my personal allowance reducing as a consequence of going over £100k. I elected to have HMRC collect this money through my payroll moving forward and thought nothing further of it. My colleagues and I were pleased to have received a bonus but thought it would be a one-off.
Fast-forward 12 months to the 21/23 tax year and the company we work for had performed better than expected, resulting in another bonus that pushed my salary above £100k and to virtually the same amount as 21/22, give or take £100. Again, this bonus was paid in March, the last payroll run of the tax year.
Since then, I have changed roles slightly and reduced my working days/hours and earn much less than I did - and do not expect to receive any bonus this year. Even if I did, my earnings will not reach anywhere near £100k.
Yesterday, I went to file my self-assessment tax return for the 22/23 tax year and was really surprised to be told that my underpaid tax was £3,900 and that - because it was over £3,000 - it could not be collected through payroll. Although I put my bonus into savings for our house and so can repay any underpayment, I was still surprised as to why the underpaid tax has doubled from £1,975 one year to £3,900 the next even though my earnings were virtually identical.
I am not historically a very high earner and so I fully understand that - in hindsight - I should have put my bonus into my pension in order to bring my taxable earnings under £100k, but I would like to understand what has happened to the amount of tax due year-on-year.
I spent 1 hour and 4 minutes queueing on the phone to HMRC yesterday until I finally got through, only to be disconnected after 20 minutes of conversation during which time I didn't understand much of what the adviser was saying. However, I think the following is correct:
When I went over £100k in March 2022 - and then also self-assessed in December 2022 - HMRC didn't change my tax code until April 2023 (13 months after I went over £100k) to reduce my personal allowance and start collecting the underpaid tax.
HMRC have suggested that because my bonus wasn't paid until the last payroll of the tax year, there were no further payroll opportunities for HMRC to update the tax code prior to the tax year starting - which doesn't sound correct?
In my self-assessment calculation for 22/23, it says that my tax free allowance is £2,859, but I don't have any documentation showing that anywhere. By my calculations, that amount seems like it's correct (as £40% tax on the difference between £2,859 and £12,570 is equivalent to the £1,975 that I elected to repay via PAYE for the 21/22 year), BUT my tax code on all my payslips is 637L and I assume that this means my employer is currently not deducting sufficient tax to cover the underpaid tax from 21/22.
So, what I'm struggling to get my head around is:
1) Why is my employer using a different tax code and personal allowance to the one that HMRC are using to calculate my self-assessment?
2) Why, when I opted to repay underpaid tax via PAYE, is it effectively spilling over nearly multiple years? The £3,900 bill I have got seems to include elements of the £1,975 that would have been paid between 31st January 2024 and 4th April 2024, but because I've 'underpaid on a repayment for underpaid tax', I'm getting double-hit for it. In other words, my calculation today is factoring in the fact my employer is not collecting underpaid tax at the correct rate.
3) Am I getting 'hit twice' - or three times? - as a consequence of exceeding the upper earnings limit of £100k in a year when my personal allowance has already been reduced for that year because of exceeding the upper earnings limit in the previous year? E.g a compound penalty, in effect?
I have absolutely no issues whatsoever with paying additional tax if I have been incredibly fortunate to receive a bonus, particularly at a time when many people are suffering from financial difficulty. However, I just feel a bit surprised to have been given a £3,900 bill that I can't repay via PAYE when last year I could - and I've done everything correct (as have my employer) to notify HMRC in a timely fashion when my salary has exceeded the upper limit that reduces the personal allowance.
This would all have been avoided - ignoring if I had put my bonus into a pension - if the reduction in personal allowance was factored into the tax at the time that the bonus was paid, at source. OR, if the reduction in personal allowance was automatically initiated by HMRC via an immediate reduction in tax code when someone exceeds £100k. OR, it would have been mitigated if my employer was using the same personal tax allowance that HMRC are referencing.
Hopefully this makes sense?
My final question is, if a tax amount if above £3,000, is it possibly to pay the amount about £3,000 and collect the rest via PAYE?
