Income Tax

M

Maniac

Elite
Guys,

I'm negotiating with a potential new starter and I'm getting different information from different people on tax bands for income tax.

I'm being told by an accountant that if they earn over £32010 then they'll hit 40% income tax. However by my reckoning its £32010 - their personal allowance (say £9440) which means they'll need to earn £41450 to get into the 40% bracket and anything under that is 20%

I'm fairly positive its the latter, but when an accountant tells you differently I'm not sure I believe what I read or am told!!

HMRC are no help, their website is written in Mandarin and I've held on the phone for 30 minutes to ask this question before giving up.
 
For 2013-2014 higher rate (40%) starts at £32,011.

http://www.hmrc.gov.uk/rates/it.htm
 
ab7 said:
For 2013-2014 higher rate (40%) starts at £32,011.

http://www.hmrc.gov.uk/rates/it.htm
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Then why when I use all the tax calculators online does 40% kick in at the £41K figure... that's what I can't work out. I realise I'm told the figure is £32K but then I'm told minus the personal allowance, which would take it to a taxable £22.6K hence you'd need to earn £41K - £9K allowance = £32Kish for the 40% band? :|
 
My understanding is you have an allowance which is the amount you can earn before you start paying tax. After that you pay tax on every pound over your allowance at the first band until you hit the next threshold. At that point you pay tax on every pound earned over that at the higher rate etc.

Other things can eat into your personal allowance as a benefit in kind. So a company car would count as earnings as would health insurance etc. you can also claim things back.

Once you hit a threshold your personal allowance goes away, currently that's 100k

Any accountants on here :?
 
mmm-five said:
40% on the next £117,990 (to £150,000) [although the reduction in tax-free allowance above £100k complicates this)
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Bloody right it does - the marginal rate of tax for earnings between £100k & £115k is over 60% :cry:
 
Sorry maniac, I've just had a play on a salary calculator and I see what you're getting at.

The online calculators etc. imply that the rate is based on just the taxable salary (i.e. gross salary minus the personal allowance) and that the 40% kicks in at a salary of £32,011 + £9,440 as you suggest. This isn't how I thought/think it works.

I start training to be an accountant in September I'll have a better answer then :lol:

PerryGunn said:
mmm-five said:
40% on the next £117,990 (to £150,000) [although the reduction in tax-free allowance above £100k complicates this)
Click to expand...
Bloody right it does - the marginal rate of tax for earnings between £100k & £115k is over 60% :cry:
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Lol personal allowance reduces by £1 for every £2 earnt over £100k, seems harsh... but unfortunately not something I have to worry about :oops:
 
mmm-five said:
This table should be easier to understand.

Basically you get £9440 tax free.
20% of the next £22,670 (to £32,010)
40% on the next £117,990 (to £150,000) [although the reduction in tax-free allowance above £100k complicates this)
45% on anything over £150,000
Click to expand...

Think your reading this wrong.

Personal alloance £9440 tax free
PA Plus 32010 taxed at 20% from 9440 to 41451
PA plus 150000 taxed at 40% from 41451 to 159440

etc

Hope this is a bit clearer :thumbsup:
 
buzyg said:
Think your reading this wrong.
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Probably - and this seems to confirm it - but it seems to show that HMRC purposely want to make it as confusing as possible. I mean, would it have been so difficult to clarify this by stating "£32k plus personal allowance"?

I just put 20% of self-employed earnings away and wait for the calculation to tell me how much I owe. Usually within ±£100.
 
Finally...

http://www.moneysavingexpert.com/banking/tax-rates

So over £41k earnings is 40% which would make the accountant I spoke with wrong?!
 
Maniac said:
Finally...

http://www.moneysavingexpert.com/banking/tax-rates

So over £41k earnings is 40% which would make the accountant I spoke with wrong?!
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Maniac, your accountant is wrong if he / she is suggesting higher rate kicks in at £32k of gross salary. The part that the HMRC website spectacularly fails to clarify is that the basic rate of 20% is applied to "taxable income" of £0 - £32,010, and 40% is applied thereafter to taxable income of £32,011 - £150,000

The devil is in the detail as taxable income is (for most purposes*) gross salary minus personal allowance I.e. in salary terms 40% kicks in from £32,011 + 9,440 = £41,451

*ignores effects of pension contributions / benefits in kind / complications of reduction to personal allowance when crossing £100k boundary
 
chris g said:
Kryton said:
ab7 said:
Lol personal allowance reduces by £1 for every £2 earnt over £100k, ...
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There are ways to reduce that :)
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do tell
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Make a contribution to your personal pension plan equal to (your salary minus £100k) x 80% this will bring your income for tax calc purposes down to £100k

Worked example - £120k salary, personal allowance is toast

Make a personal pension contribution of £21k (you only need to part with £16.8k to do this as HMRC tops up basic rate of 20%)

Taxable earnings are now £99k

For an outlay of £16.8k you have achieved the following:

1) £21k contribution to personal pension pot following 20% gross up ( £4.2k gain )

2) reclaim additional 20%* as a higher rate tax payer through your self assessment (4.2k gain)

2) payment saved by no longer needing to pay tax on 'lost' personal allowance portion of income - £9,440 x 40% = £3,776 (£3.8k gain)

If you earn £165k plus the benefit starts to break down as you cannot get relief on contributions above £50k... As always with all things tax it's highly situation specific - worth seeking professional advice to clarify what will and won't work for you if you're in the zone if being able to do this.
 
I'm a financial adviser, this is correct and hopefully simple to follow.

Most people have a Personal allowance so can earn £9440 tax free Or to put it another way is taxed at 0%.
The first £32010 OVER personal allowance is taxed at 20% . So 20% tax rate applies to salary upto £41450.
Tax is paid at a higher rate of 40% on earnings from £41451 and up to £100,000.

Someone earning £50k will have part of their salary taxed at 0%, part (the bulk of it) at 20% and part at 40%.
 
Pension contributions are good as you get 40% tax relief and they mitigate the loss of personal allowance. Not so good if you want to live for the moment or worry about financial collapse eg Equitable Life. I suspect also when a lot of us retire (at 70+) the state pension will either not exist or be means tested so penalising you for having saved a private pension. Joy.
 
Stuart Truman said:
My understanding is you have an allowance which is the amount you can earn before you start paying tax. After that you pay tax on every pound over your allowance at the first band until you hit the next threshold. At that point you pay tax on every pound earned over that at the higher rate etc.

Other things can eat into your personal allowance as a benefit in kind. So a company car would count as earnings as would health insurance etc. you can also claim things back.

Once you hit a threshold your personal allowance goes away, currently that's 100k

Any accountants on here :?
Click to expand...

I'm an accountant...but you don't need one since you are completely correct in your explanation.
 
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