How to get the tax back for over 100k part

Question

I am UK based and I had got a good bonus in April 2021 which tipped me over 100k, for example, let's say that's an annual incoming of 125k between April 2021 and April 2022 including the good bonus.

HMRC had adjusted my tax code starting August 2021 and each month, I have got extra tax £700-£800ish deducted but I didn't understand why back then.

Only recently I have figured out that's because my personal allowance goes down by £1 for every £2 above the income limit of £100k. And because of that, I have lost £12k of my personal allowance.

If I didn't contribute to any pension during this period, before the end of this fiscal year (e.g. 05/04/2022).

The company I work for won't allow me to do Salary Sacrifice at this stage until the window opens for the next financial year in April.

I understand from my previous question that I can claim those tax back by pension contributions via SIPP.

And I have been trying to understand the calculation here, so please help me check if my understanding below is correct:

Let's say I ended with £127k annual with a very good bonus, but without any pension contribution this year, the extra 27k on top of the 100k got 60% tax bcos of the loss of all my personal allowance of £12,570 so I am paying:

1>40%*12570 = £5028 
2>40% * 27k = £10800

So overall I paid £15828 tax for my earnings between 100k-127k?

And in order to get those tax back including those bcos of lose of my personal allowance.

could you help me point out how much I need to deposit into SIPP ?

1>let's say I deposit £21k after-tax saving trying to solve this, SIPP would top-up 25%, that's 5250 which makes the SIPP pod of £26250?

2>I am then also entitled to get a refund from HMRC of a further how much ? I don't know how to calculate that but is it something like ?

 £15828 - £5250 = £10578?

I am fairly new to this and could really use this community's help , thanks in advance. Any input would be appreciated.

Answer 1

To get this exactly right, you need to project your full taxable income at the end of the tax year - i.e. what you'll have to put on your self-assessment tax return. You'll definitely have to fill one in even if you haven't before, as you earn over £100K.

Your taxable income is your salary, plus any other taxable income you have, minus any deductions you can make.

Some common examples of other taxable income:

• Bank interest - there may be some tax-free allowance, on your income it's probably £500.
• Dividends - there's usually a £2,000 tax-free allowance.
• Any non-payrolled benefits you expect to get a P11D for.

Some common examples of deductions:

• Gift aided charity donations.
• Personal pension contributions (not ones made directly from your payslip)
• Professional expenses, such as membership of a professional body.
• Working from home allowance.

For calculating taxable income you need to be careful to look at the gross figures for all of these. For example for charity donations and pension contributions, they are typically made net of basic rate tax, so you have to add 25% to get the gross figure.

You should be able to project the salary element through to the end of the tax year by looking at your payslips. They'll have a "cumulative taxable income" field. By looking at a normal month where you didn't get any extra money, and comparing to the previous month, you can hopefully work out how much it increases each month and hence what to expect to end up with in your final payslip in March, assuming you are paid monthly.

Once you do have the total figure without any personal pension contributions, you can work out what pension contribution to make. You want a gross figure of (taxable income - £100K).

If you don't want to, or can't, work this out exactly, you can also approximate. If you overshoot (contribute more) then you'll "only" get the 40% tax relief on the excess. If you undershoot, you'll end up paying the effective 60% tax rate on some money.

Note that if you end up wanting to contribute >£40K then you need to start worrying about the annual allowance which adds further complications, but from your question it probably isn't relevant.

Let's say that the contribution turns out to be £27K as would make sense given the income figures in your question (though you've since mentioned P11D benefits so you might need to go a bit higher.)

The actual contribution you should make to a SIPP is net of basic rate tax, so should be 80% of this number, i.e. £21,600. They will claim the other 20% to make it up to the £27K.

You won't get the rest of the tax back immediately through PAYE because your tax code is already setup to deduct as if you lose the personal allowance and even if you tried HMRC wouldn't change it in time.

You'll be able to get it back when you fill in your self assessment tax return. In theory you can do that immediately after the end of the tax year but you might need to wait for your P11D and perhaps a P60 before you know all the right figures to put in it.

Once you fill in your tax return, then compared to what you would have paid/got refunded otherwise, you should get back the other 20% tax on the whole £27K (40% higher rate - 20% basic rate), as well as the whole 40% tax on your personal allowance of £12,570. So that adds up to £5,400 + £5,028.00 = £10,428.00, in addition to the £5,400 that went straight into your pension.

Answer 2

For every pound from £100,000 to 125,000 you pay effectively 60 pence in taxes, 40% tax plus 20% because you lose your personal allowance. So that 1 pound puts 40 pence in your pocket.

You can instead pay one pound into a pension found. So for 40 pence in your pocket you get a pound in your pension fund. And at some point you can withdraw 25% of the pension fund tax free, so for 15 pence in your pocket you still have 75% in your pension fund. And these are the numbers that count.

Your tax code, and your tax payment, that will all be sorted out automatically when you go your tax return.