Receiving a bonus, a pay rise or increasing your income in any way, could increase your tax bill by much more than you think.

Most people in the UK are entitled to a personal allowance, the amount of which depends upon your age. The personal allowance allows you to earn a specific amount of income without having to pay tax. Income in excess of your personal allowance is taxed at a variety of rates depending upon your level of income and the type of income received. From 6 April 2010, the personal allowance is reduced as your earnings increase over the current threshold of £100,000. For every £2 of adjusted net income above £100,000 you will lose £1 of your personal allowance. This means that once your net income reaches £112,950, you will not be entitled to receive a personal allowance for the current tax year.

Your adjusted net income is generally found to be your gross income from all sources less pension contributions and gift aid donations but specific advice should be taken to assess this figure.

If you are employed then your tax liability is generally deducted each month by your employer under pay as you earn (PAYE) and so most people would expect the correct tax to be paid. However, to calculate the tax, the employer uses your tax code which could be incorrect for a variety of reasons resulting in you under or overpaying tax.

If your tax code is incorrect due to an excessive personal allowance being given, a 40% taxpayer with one employment and no other income could easily have an underpayment of up to nearly £2,600 despite their salary being taxed at source.

Tax codes are generally issued by HMRC around the start of the tax year. To calculate how much personal allowance to give you in the code, HMRC base their calculations on the level of income which you received in the previous tax year. If you earned over £100,000 in the previous year, then it is likely that your personal allowance has already been reduced to an appropriate level. If you earned less than £100,000 last year and expect to earn in excess of that amount this year, then you should check your PAYE tax code. If you have a personal allowance of £6,475, then you should contact your tax office to provide them with an updated income estimate. They should then provide an updated tax code if appropriate. You may then pay more tax for the rest of the tax year.

If you complete a self assessment tax return, then any underpayment will be collected through self assessment. If you do not do so, then any underpayment will be assessed by HMRC and you may receive an unexpected tax bill.

It is in your interest to keep an eye on your level of income and the personal allowance that HMRC may have allocated you for this year and future years.

If you are worried that your tax code may be incorrect or have any more questions, then please contact us.

This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this article.