A simple, visual model of 2016/17

kidmugsy wrote: »

Thank you. How about my hypothetical taxpayer. Salary £8k; taxable interest £600; dividends £40k?

In 2016/17:

Default order would be:
1. Salary £8,000
Interest £600
Dividends £2,400
Total: £11,000
Covered by personal allowance

2. Remaining dividends are: £40,000 less £2,400 = £37,600
The basic rate band is £32,000 but £5,000 of dividends are tax-free
5,000@0% = 0

3.Remaining dividends are: £40,000 less £2,400 less £5,000 = £32,600
Remaining basic rate band is £32,000 less £5,000 = £27,000
Then is £27,000@7.5% = £2,025 tax

4.Remaining dividends are: £40,000 less £2,400 less £5,000 less £27,000 = £5,600
£5,600@32.5% = £1,820 tax
Total tax = £3,845

But the interest could be covered by the savings nil rate band so we would instead do:

1. Salary £8,000
Interest £0
Dividends £3,000
Total: £11,000
Covered by personal allowance
Interest £600 in savings nil-rate band = 0.
£5,000 of dividends @0% = 0

Remaining basic rate band = £32,000 less £5,000 less £600 = £26,400
£26,400@7.5% = £1,980 tax

Remaining dividends = £40,000 less £3,000 less £5,000 less £26,400 = £5,600
£5,600@32.5% = £1,820 tax
Total tax = £3,800
Saving is £45
Which is the dividends not taxed in the BRB of £600 *7.5% = £45!

polymaff wrote: »

As I wrote previously. does one follow the legislation, HMRC's interpretation of the legislation, or HMRC's implementation of that interpretation?

Whilst those three differ - and, currently, by HMRC's own admission, the legislation and the implementation do differ - which is to be paramount? Stricly the legislation but, if you think that the implementation doesn't reflect the legislation, you'll have a battle proving it.

It seems to be that there are two unknowns in this:

1. What is HMRC's current algorithm for distributing allowances and reliefs.

2. What will be the algorithm when it is repaired to treat the Starting Rate Allowance correctly.

An Online Self-Assessment is the judge and jury, as far as HMRC is concerned, but that requires only one thing - that HMRC's algorithm is perfect.

We are some way from that.

If HMRC would release their programme's source then one could identify - after a lot of work - what is happening. In the absence of that, one can attempt to reverse-engineer the current HMRC system. This reveals what looks like a definite methodology for the distribution of allowance and reliefs but is it the perfect methodology?

The legislation. However, sometimes it can be interpreted in different ways, hence we have so many tax cases!

The HMRC calc is by their own admission incorrect this year: https://www.rossmartin.co.uk/sme-tax-news/2634-software-specification-error-affects-2016-17-self-assessment

Some commercial software is calculating things correctly, however to use that you need to get an accountant and submit on paper for now.

You can look at the HMRC calculation here if you want to look at their algorithm:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/580000/2017-indi-taxnic-calc.zip

Be warned that it is 100 pages long!

grey_gym_sock wrote: »

the provision you link to, about deducting "the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax", is about applying the personal allowance (and the blind person's allowance, and various kinds of loss relief).

it's not about applying the personal savings allowance, or the dividend allowance, since they are involved at step 4 of the calculation, not at step 2 or 3 - see http://www.legislation.gov.uk/ukpga/2007/3/section/23

Yes correct

grey_gym_sock wrote: »

Dazed & Confused's calculation in post #4 is correct (i now think).

Agreed

polymaff wrote: »

Online Self Assessment has always assumed that there is a fixed order of consumption of Allowances and Reliefs - and the representation of the Starting Rate Allowance has been based on this order. The latter may explain why the current online self-assessment process is admitted not to handle SRA correctly. In SA2016/17 just how does one define the relationship between SRA and the allowances and reliefs?

As HMRC have admitted their calcs are wrong!

Once you have used your personal allowance (in a way of your choosing), you look at the next £5,000 of income in the normal order non-savings, savings then dividends, if any of that £5,000 is savings then it is taxed at 0% due to the starting rate band for savings.

(On top of this you also get the £1,000 or £500 personal savings allowance)

grey_gym_sock wrote: »

i think the idea (in the legislation) is ...

a choice of order applies to allowances and reliefs.

SRA, and PSA, and dividend allowance, are not allowances (nor reliefs). they're tax bands (which happen to have 0% rates).

you can choose what kinds of income to set against your allowances and reliefs. then, whatever income is left over is set against tax bands in a fixed order (non-savings, then savings, then dividends).

Yes correct.

polymaff wrote: »

Yes, OK, but what if the £1 was £5,000?

Before this you'd get the SRB - but now?

EDIT: So, what are the criteria that determine when and how much of the SRB is available?

Then you get the £1,000 or £500 personal savings allowance.

Criteria in my post above: Once you have used your personal allowance (in a way of your choosing), you look at the next £5,000 of income in the normal order non-savings, savings then dividends, if any of that £5,000 is savings then it is taxed at 0% due to the starting rate band for savings.