This can mean their bonus is not quite as attractive as it might have seemed originally and they should be made aware they will not receive the full amount.
The client will also be paying national insurance and pension contributions on top of this, so it can quickly dwindle and not be quite as impactful as they first thought.
Now moving into the higher tax bands does come with some advantages – such as being able to claim additional tax relief on any pension contributions from income where higher and additional rates of tax have been paid.
Loss of allowances
If the bonus means the client will now earn more than £100,000 then things begin to get a bit more complicated and allowances begin to get chipped away.
The personal allowance, the amount that can be earned before tax is paid, goes down by £1 for every £2 that your adjusted net income is more than £100,000.
This means your allowance is zero if your income is £125,140 or above. Those in high paying jobs will likely see this happen in the event of a bonus so it is important they understand what it will mean.
Earning large amounts as a result of the bonus will also impact your pension allowances. This is another incredibly complicated area and will need to be explained to clients in the simplest terms possible. Essentially, if your adjusted income is more than £240,000 your pension annual allowance in the current tax year will be reduced from the £40,000 level.
For every £2 your adjusted income goes over £240,000, your annual allowance for the current tax year reduces by £1. The minimum reduced annual allowance you can have in the tax year is £4,000.
However, it will not be reduced if your threshold income for the current tax year is £200,000 or less, no matter what your adjusted income is.
Mitigating the loss of allowances
If clients are going to be impacted by these losses of allowances then there are things that can be done to help mitigate them. For those who will experience a loss of annual pensions allowance and thus breach it, they may be able to consider using carry forward.
Carry forward is available when a client’s pension contributions exceed their annual allowance limit for that year, and they have unused allowances from the previous three tax years to allow them to reduce or eliminate any annual allowance excess paid.
Going forward a client who has had their annual allowance reduced will not be able to make use of this facility, but in the immediate aftermath of receiving a bonus this may be a perfect opportunity.
