I have the option of taking a lump sum of £20473.31. I earn £23356.11 salary a year. Can you tell me if I pay 40% tax on all of the lump sum?Thank you
Province/Country relating to question: UK
Thank you for your question. What does the lump sum refer to? Is it to be paid by your employer?
To answer your question, each tax year all your income that is subject to income tax is added up and placed into tax brackets. You are also entitled to a personal allowance (PA); this is "pay free of tax". So, if you are under 65 years of age, this £6,475.
Based on your data, and on the assumption that the lump sum is subject to income tax, the calculation is:
Total income £43,829.42
Less PA £(6,475)
Taxable income £37,354.42
Tax at 10% on first £2,230 = £223
Tax at 22% on the band from £2,231 to £34,600 = £7,121.40
Tax at 40% on the remainder being £2,754.42 = £1,101.76
Total tax £8,446,16
As you see, only the top slice of your income is subject to tax at 40%, so if you have no other income in the tax year, then only £2,754.42 is taxed at 40%. Hopefully this is a better answer that you were expecting! Remember that if the income is from your employer, it will also be subject to National Insurance contributions.
I trust this addresses your question.
All the best, Anthony
ATT, ATII, 12 years tax experience