A dumb question about income tax bands

[d000hg]

On HMRC (HM Revenue & Customs: Income Tax allowances) it lists the 20% band as being £0-£34370. I'd always thought (thought not really very much) that this means I pay 20% of earnings up to £34370, less my allowance (£8105), e.g I pay 20% on (34370-8105) and 40% on everything above £34270.

But that's not right is it - rather my allowance moves the zero point up to £8105 so I pay 20% on income from £8105 - £42475? And 40% from £42475 - £158105?

You can call me a cretin if you answer the question first

[Clare@InTouch]

That's correct.

Cretin

[LisaContractorUmbrella]

Yep you're right apart from the fact that you begin to lose your tax free allowance once earnings hit £100k - £1 allowance for every £2 that you are over the threshold.

It's no good - I can't call you a cretin

[northernladuk]

That's correct.

Cretin

Oooohh!! Am liking the new Clare!! Not that the old one wasn't bad of course! No no.. I mean the other one, not old one... A f**k it... am dead.

[Martin at NixonWilliams]

On HMRC (HM Revenue & Customs: Income Tax allowances) it lists the 20% band as being £0-£34370. I'd always thought (thought not really very much) that this means I pay 20% of earnings up to £34370, less my allowance (£8105), e.g I pay 20% on (34370-8105) and 40% on everything above £34270.

But that's not right is it - rather my allowance moves the zero point up to £8105 so I pay 20% on income from £8105 - £42475? And 40% from £42475 - £158105?

You can call me a cretin if you answer the question first

Hi d000hg,

The above is correct.

Another point worth noting is that the basic rate band is increased by the gross value of any pension/charity contributions made personally. This is important to know for contractors who extract the majority of their income in the form of dividends, as many cap their earnings at £42,475 not realising there are further dividends available before paying additional taxes. Be careful how much you contribute though as relief is only allowed up to the value of your relevant earnings (salary, BIK etc.), it is easy for this to be overlooked if paying a small salary and the remainder of your income as dividends.

Pension contributions can be even more tax advantageous if your income falls between £100,000 and £116,210 (£100k + 2xPA) as they are deductible for the purpose of calculating your personal allowance. The effective rate of tax saved by making pension contributions can therefore be as high as 60%!

I hope this helps.
Martin

[Clare@InTouch]

Oooohh!! Am liking the new Clare!! Not that the old one wasn't bad of course! No no.. I mean the other one, not old one... A f**k it... am dead.

I typed it, deleted it, typed it again, deleted it again - goes against my nature to be mean! I had to channel a bit of NLUK to manage it

[northernladuk]

I typed it, deleted it, typed it again, deleted it again - goes against my nature to be mean! I had to channel a bit of NLUK to manage it

Your professionalism is in tatters..... You attitude to potential customers has gone down the drain... and you are a potty mouth.. Love it!! Let's have more.

[d000hg]

Another point worth noting is that the basic rate band is increased by the gross value of any pension/charity contributions made personally. This is important to know for contractors who extract the majority of their income in the form of dividends, as many cap their earnings at £42,475 not realising there are further dividends available before paying additional taxes.

Interesting. I typically make fairly substantial charitable givings (~10% of the amount I take as dividends). So if I took a salary of £8105 and then dividends of £34370 and gave £3500 to charity, where do I stand?

Be careful how much you contribute though as relief is only allowed up to the value of your relevant earnings (salary, BIK etc.), it is easy for this to be overlooked if paying a small salary and the remainder of your income as dividends.

I didn't quite follow that part. In the example above are you simply saying that charitable giving up to £8105 would increase my personal allowance but beyond that it wouldn't?

Does any of this affect the charity's ability to claim Gift Aid on my giving?

[Martin at NixonWilliams]

Interesting. I typically make fairly substantial charitable givings (~10% of the amount I take as dividends). So if I took a salary of £8105 and then dividends of £34370 and gave £3500 to charity, where do I stand?
I didn't quite follow that part. In the example above are you simply saying that charitable giving up to £8105 would increase my personal allowance but beyond that it wouldn't?

Does any of this affect the charity's ability to claim Gift Aid on my giving?

Hi d000hg,

In response to your points:

Yes, your basic rate band will be increased by the gross value of charity contributions made. Assuming the £3,500 is a net contribution, there will be a further £4,375 that can be taken as dividends without paying additional taxes.

I assume you mean increase your basic rate band and not your personal allowance? If so, then yes relief would be capped at £8,105.

There should be no effect on the charity's ability to claim gift aid on the contributions. Donations are paid net - i.e. you pay 80% of the contribution, the charity will automatically claim the other 20% from HMRC.

Note that with charity contributions, you must've suffered tax equal to that you are trying to reclaim. According to HMRC's guidance, this would include the 10% rate of tax applied to your dividends before the tax credit.

I hope this helps. If I can assist you further please do not hesitate to ask.

Martin

[d000hg]

My brain hurts on that last bit. I have to have incurred the amount of personal tax that the charity wants to claim back as Gift Aid... OK this makes sense. However fairly typically as a contractor, I arrange things so my SATR bill is £0 (other than student loan payments). But then you're saying the 10% tax which I never actually pay on dividends still counts?

Did I get that right... it sounds like roughly speaking if I give 10% of my dividends to charity, this 'cancels out' the 10% dividend tax rather neatly without me having to think about things?

Side question - who is responsible for working out what Gift Aid can be claimed back? Me, the charity, or HMRC? The charity holds a form I completed in order to claim GA, would that mean HMRC handles it based on my tax returns?


Oh - and thanks!