Can I reclaim an £11,000 tax bill to boost my pension?

27 December 2019

Q

My salary varies slightly from year to year (primarily due to bonus payments). Two years ago, I had one of my largest bonus payments, plus two sets of share options. This meant I earned £125,000 rather than my usual £80,000 in a tax year.

When I put in my self-assessment tax form, HMRC said I owed an additional £11,000 because I had gone over the £100,000 threshold and I had to repay my tax-free allowance. This was a huge shock, but I dipped into my savings and paid it.

I wonder if I should have put these bonuses into a pension? And is it too late? Can I retrospectively go back to HMRC and say I would like to put that extra £25,000 (over the threshold) into a pension and can I have my £11,000 back?

From
FM/Dundee

A

You should check the tax status of your share options. With share schemes such as ‘share incentive plans’, ‘Save As You Earn’ and  company share option plans, you may not have to pay income tax or national insurance on their value. However, you may be liable to capital gains tax if you sell the shares.

In terms of income tax calculations, most people benefit from a personal allowance, which is £12,500 in the current 2019/20 tax year and was £11,850 in the previous tax year. This is the amount of income they can receive before they become liable to pay income tax.

However, the personal allowance is reduced by £1 for every £2 that a person’s adjusted net income exceeds £100,000. This means that, in the current tax year, those with income of £125,000 or more will lose all of their personal allowance.

Your adjusted net income is the total income you receive minus deductions for loss relief and interest payments and minus the gross amount of pension contributions and gift aid donations that you make. Therefore, you can reduce your adjusted net income by making additional pension contributions.

In terms of pension contributions, you will be entitled to an annual allowance each year, with the standard rate currently being £40,000. This is the maximum amount that you can invest into pensions, subject to you having sufficient earnings, and benefit from tax relief on all of your contributions. You are also able to carry forward any unused annual allowances in the previous three tax years to increase the amount you can pay into a pension tax efficiently. 

However, while you can carry forward unused pension allowances, you cannot backdate pension contributions to offset your tax bill from previous years. This is a shame because you could have avoided a large tax bill had you acted sooner.

That said, the tax bill you have paid of £11,000 seems too high if it is simply based on you having annual earnings of £125,000. Maybe this additional bill is because of the share options, but you need to understand what is happening to ensure you have not paid too much tax now and that you don’t pay too much tax in the future.

What are share schemes?

Some companies offer their employees tax-efficient savings options, such as Save As You Earn (SAYE) or Share Incentive Plans (SIPs).

If your company offers SAYE, you can save up to £500 a month for however long the scheme lasts (usually three or five years). At the end of that period, you will receive a tax-free bonus added to your savings and the choice to take your nest egg or use it to buy shares in the company. SIPs give you the chance to buy or receive shares in the company you work for.

With shares bought via SAYE, you don’t pay income tax or national insurance contributions (NICs) on the profit you make – that is the difference between the price you pay for the shares, which was set at the beginning of the scheme and what they are actually worth when you buy them. But you could be liable for capital gains tax (CGT) when you sell. With SIP shares, you don’t pay income tax or NICs on them when you take them out of the plan – as long as they were in the scheme for five years. You also won’t pay CGT if you sell them while they are still in the SIP, but you might if you take them out of the SIP and then sell them.

Patrick Connolly, certified financial planner at Chase de Vere

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