Q on Cumulative Basis Bonus Payment

Sadderday

Hi All,
Can anyone offer advice on this.

Q: Paid cumulative basis to date. Bonus in March. Taxed through the roof.

Payroll dept say its right and The way the cumulative tax basis works means that each month your tax is calculated based on your earnings for the year to date. In the coming months, this will result in you paying less tax than you did in January and February

Can anyone explain how this works

Thanks so much

Legend100

Payroll dept is correct in what they are saying to you.

if you take an example (not using proper rates and bands as im a bit too lazy to look them up )

Say you earned 2k per month in jan and feb (cumulative 4k)
If your cut off per month was say 2500 - yes I know this is wrong but just assume for this eg
Then you would pay tax at 20% on the first 2500 per month (therefore on all your 2k) and 41% anything over 2500 (zero in this case - This is before allowing for your tax credits - keeping it very simple)

Now if in March you got your 2k and say a bonus of another 4k, then your cumulative gross would be 10k (2+2+2+4) and your cumulative cutoff would be 7500 (2500*3) so you with be taxed at 41% on the difference between 10k and 7500 in that month

As the year goes on you keep getting your 2k per month and your cut off will continue to be 2500 so looking at April you will have a cumulative gross of 12k and a cumulative cut off of 10k thereby meaning you will pay tax at 41% on 2k but you will have already overpaid on a year to date basis in March so you will see a refund of some of the tax you paid in March monthly

This is a very simple example so pm me if it doesn't make sense

Sadderday

Legend100 wrote: »

Payroll dept is correct in what they are saying to you.

if you take an example (not using proper rates and bands as im a bit too lazy to look them up )

Say you earned 2k per month in jan and feb (cumulative 4k)
If your cut off per month was say 2500 - yes I know this is wrong but just assume for this eg
Then you would pay tax at 20% on the first 2500 per month (therefore on all your 2k) and 41% anything over 2500 (zero in this case - This is before allowing for your tax credits - keeping it very simple)

Now if in March you got your 2k and say a bonus of another 4k, then your cumulative gross would be 10k (2+2+2+4) and your cumulative cutoff would be 7500 (2500*3) so you with be taxed at 41% on the difference between 10k and 7500 in that month

As the year goes on you keep getting your 2k per month and your cut off will continue to be 2500 so looking at April you will have a cumulative gross of 12k and a cumulative cut off of 10k thereby meaning you will pay tax at 41% on 2k but you will have already overpaid on a year to date basis in March so you will see a refund of some of the tax you paid in March monthly

This is a very simple example so pm me if it doesn't make sense

Thank you kindly for taking the time to explain!!