Osborne 5: Tax computation bits Flashcards
How to determine personal allowance
Calculate Adjusted net income:
NOTE - This is ONLY to work out allowances. To do Calc you use the full amounts and adjust the BANDS
Total Income from ALL sources.
(less Grossed up P.PENSION payments)
(less Grossed up GIFT AID payments)
Personal Allowance:
If > £100K then DEDUCT Half the EXCESS from PA
(Osborne rounded down ded in favour of TP when .50)
(Remember this by the fact that 125K is the amount that wipes out the PA completely)
Savings allowance :
If ANI less PA is 37,500 or less then £1000 (LR taxp)
If ANI less PA is 37,501 - 150,000 then £500 (HR taxp)
If ANI greater than 150,000 then £0
When doing a tax calc for someone who made pension pmts or gift aid pmts … how to bring this in?
Calculate the Total Income as normal
Show the ‘Less Personal Allowance’ as normal
Show the ‘Taxable Income’ as normal
Just change the amounts of the bands EG
Normally 37,300 @ 20%
Now eg. 38,300 @ 20% (made a 800net pension pmt)
NB You would also increase the next band ie. only income between 38,300 and 150,100 gets taxed at 40%
Then income over 150,100 at 45%
Not Clear
When worked out ANI and it results in a reduced PA.
Do you use that new PA when deciding whether to reduce Savings allowance?
Or do you always do ANI - 12,500 ????
,
Tax relief on PPP & Gift Aid pmts work in same way
By increasing lower rate threshold
You pay over the NET amount allowing 20% tax. Eg pay £80 … scheme claims £20 from gov.
You declare the GROSS amount on your tax return.
eg. £100.
(NB. This declaration triggers an increase the basic rate threshold of £100 (eg. 37,600)… so you you pay 20% on that £100 instead of 40% …. saving you 20%.
NB the bands apply to taxable income.
- Check whether the individual has reduced PA. (Total income all sources add benefits, less allowable deds ie. Pension & Gift aid)
- Start over with total income then deduct appropriate PA from step 1
- That is ‘taxable income’
The bands are then 37,500 ; 150,000
Taxable income then determines savings allowance.
So just look at ‘taxable income’ and decide:
£37,500 or under …… £1000
£150,000 or under…….£500
Over £150,000 …………£0
Because the reduced PA has ALREADY been accounted for in working out the ‘taxable income’
.. You still just use the 37,500 @ 20% etc working in the actual tax calc section. (Adjusting the 37,500 if there has been GiftAid or PPP pmts … using gross amt ie 100/80th of the net pmt)
NICS is based on ?
Gross Income -
don’t deduct pension & payroll giving
Tax planning involves … ?
Using tax legislation in the way it was originally intended.
Tax planning involves … ?
Using tax legislation in the way it was originally intended.
- Property: Adjust timing of replacing assets like appliances, carpets to make best use of £1000 allowance and individuals tax band position.
- Employment:
- Choice of company car. Decision on fuel.
- Interest free 10K loan.
- Salary sacrifice - involves altering contract to receive less pay in exchange for provision of agreed (often tax exempt) benefit (widely used in some industries, gov is legislating to restrict such schemes)
- Savings: Its cash basis so could choose accounts that make interest/div payments at times that are beneficial
- Married couples / civil partners
Scope to save tax especially n savings & Investments.
Can pass money/shares with no implications CGT/IHT
So arrange that person with lower marginal rate ‘owns’
(However tax is not only issue so transfer assets should only happen when full implications are understood.
Where held in joint names income arising will be split equally.
Marginal tax rates.
This is the highest tax rate the person pays and usually the rate at which tax will be saved (gen & savings income)
Avoiding moving into next tax band sometimes makes the greatest saving.
Eg avoid reduction of PA.
For thise with income just above 100K this should be considered when tax planning since this effectively increases marginal rate to 60%.
Reducing ANI by £1000 reduces tax by £600
(eg make P>Pension pmt)
As a CHECK:
When completed calculation (Gen; Sav; Div)
If applied Higher rate (any section so including div rate) … what to do?
Double check the savings allowance was adjusted
Same applies to additional rate
I think this is definitive… see Osborne T Q5.3 answer
‘Since ANI less Pa is below 37,500 John is BR taxpayer and his Personal Savings allowance could be up to £1000 (in this case 630)
SO method is:
- Do ANI & find PA
- Do ANI - PA & decide SA
up to 37,500 …. £1000
up to 150,000 ……£500 - Then do List total income; analysis; calc etc
.
Remember
Allowable deductions like Prof Subs which are paid by the individual after tax and the org doesn’t claim any tax back get dealt with by adjusting Employment income. … No further adjustment or messing with bands.
ONLY the 2 allowables P.Pension & Gift Aid where the org claims the 20% tax get adjusted by messing with the bands..
..
And yes you DO adjust al the band up by the grossed up (by 20%) amount.
This means the person gets the tax saving at their ‘marginal’ (top) tax rate.
If told person made P.Pension pmts do you include this as a deduction in the calc of ANI ?
YES
Grossed up. and along with BIKS & other allowables
This is then used to determine PA
Also used after deduction of any PA to determine savings allowance using the 37,500 150K bands
(you don’t adjust the bands here to determine SA because you’ve got all the chargeable/allowables in there already)
Then you go on to the calc and take out only the 2 allowables PP & GiftAid where 20% has been reclaimed.. these 2 are incorporated through adjusting the bands…. the other BIKS & Allowances are incorporated in the ‘Assessable employment income’ figure
When doing the computation what not to do
Dont skip the steps:
- Work out total income (inc. benefits & allowable deds)
- Work out PA
- Deduct PA to get taxable income (decide SA here)
- Analyse income (deducting PA from NSI) **Dont skip!
Errors
1. Skipped the analysis and ended up getting it wrong because for the 40% calc I took total salary & didn’t deduct the PA
- Did the analysis right but then somehow used the full salary in the calc instead of the ‘analysed’ amount which had the PA taken off
