Why are the deductions so high on my payslip

Question

My base salary is approximately £110,000 and I also get an annual bonus of approximately £30,000 paid in January.

This December my employer gave out a flat bonus amount of £750 grossed up, so I was expecting my December take home pay to be £750 higher than my normal monthly take home pay. In fact it was about £150 higher than normal. Looking at my payslip, there is a line on the "credits" side to add £750 and then a "tax sub" and "NI sub" of £516 and £26 respectively. On the "deductions" side, however, the NI deduction is £26 higher than normal as expected but the tax deduction is £1100 more than normal, which accounts for the £600 difference between what I was expecting and what I received.

My tax code was 1055L for the first few months of the tax year then switched to 810T Week1/Month1 in the summer (I assume this is the point at which my income flipped over some boundary) for most of the year. On my December payslip however it is listed as K1032 Week1/Month1 and I don't understand what this means (I've read the page about tax codes but it doesn't shed a lot of light!).

If it makes any difference to anything I submitted my tax return for 2020/21 during December, from which I ended up owing £3300 which I was intending to pay electronically by 31st Jan. I did not tick the box to stop them trying to collect it through my tax code, but as it is more than £3000 owed I did not think they would do that. My self assessment online account still shows the £3300 owed.

Does anyone understand what is going on here?

Edit: to answer a comment, when I click on my tax code in my HRMC online account it says:

Your last tax code for tax year 6 April 2020 to 5 April 2021
This section is Previous tax years
Your tax code for (employer) from 6 December 2021 to 5 April 2021 was K1032
Definition of tax code part K. K
The definition of this part of your tax code is as follows: You had untaxed income which was more than your tax-free amount. This was added to your pay or pension so the extra tax can be collected.
Definition of tax code part 1032. 1032
The definition of this part of your tax code is as follows: £10,320 needs to be added to your pay or pension so the extra tax can be collected.
Definition of tax code part X. X
The definition of this part of your tax code is as follows: Your tax was based on your pay in each pay period, not the whole year. It was used to stop you paying too much tax in one go. This could have been shown on your payslip or pension statement as W1/M1, or week1/month 1.

Note the "from 6 December 2021 to 5 April 2021", something is clearly not right here. The 6 Dec 2021 was I think the date I submitted my online self assessment for 2020/21.

Answer 1

I'm not really going to address the question of why you owe HMRC tax, or why your Taxcode has changed or why you are on Week 1/Month 1 basis, but merely accept that and calculate the tax based on it.

Since you are taxed on a Month 1 basis, this simplifies the calculations as we are treating each month independently and also we can assume your pay has reached the 40% tax band. And because your Bonus has been grossed up, we can ignore it from our calculations.

So it comes down to the change in Tax Code.

Normal tax codes indicate how much free-pay you get (ie before you start paying taxes), but K codes like negative free pay. They usually mean you are paying tax on some benefit other than your basic pay, eg a company car, but if you owe HMRC tax, then this would one way for HMRC to recover it. (Note I am not saying that that is the reason for the Taxcode change, as only HMRC can know that.)

If your Tax code was 810T in Nov then you would be getting a tax free allowance of 8109 per year or about 675 per month.

If your Tax code was K1032 in Dec, then you would be getting a negative tax free allowance of -10329 per year or about -860 per month.

Hence the Tax code change means you are taxed on 1535 more in Dec than in Nov.

Presumably the tax rate is 40% and so that mean you need to pay £614 more tax.

Unfortunately this means the increased tax bill will continue until your Tax code is changed again.

Hope this helps.