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  • FIRST POST
    • polymaff
    • By polymaff 8th Apr 17, 8:17 PM
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    polymaff
    A simple, visual model of 2016/17
    • #1
    • 8th Apr 17, 8:17 PM
    A simple, visual model of 2016/17 8th Apr 17 at 8:17 PM
    See post #8
    Last edited by polymaff; 09-04-2017 at 7:12 PM.
Page 3
    • talexuser
    • By talexuser 16th Apr 17, 2:55 PM
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    talexuser
    Hmm, you've lost me there. The difference between choosing the order of taxation and splitting the allowances....
    • kidmugsy
    • By kidmugsy 16th Apr 17, 2:57 PM
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    kidmugsy
    Suppose I have £45k of salary, £500 of interest and £5k of dividends.

    I'd like, of course, to plunk the interest and divis at the top of the column, above the higher rate threshold, and yet pay 0% tax on them. What is it in the rules that stops me doing that?
    • polymaff
    • By polymaff 16th Apr 17, 7:08 PM
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    polymaff
    Hmm, you've lost me there. The difference between choosing the order of taxation and splitting the allowances....
    Originally posted by talexuser
    Remember what "Order of Taxation" means. That you process each item without consideration of the remaining items. Change the order of taxation and how do you process savings before non-savings?

    What I'm suggesting is that this writer has got the wrong end of the stick. Not that there seems to be any clear definition of the stick, let alone its ends.
    • polymaff
    • By polymaff 16th Apr 17, 7:20 PM
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    polymaff
    Suppose I have £45k of salary, £500 of interest and £5k of dividends.

    I'd like, of course, to plunk the interest and divis at the top of the column, above the higher rate threshold, and yet pay 0% tax on them. What is it in the rules that stops me doing that?
    Originally posted by kidmugsy
    Looks fine - although this case doesn't exploit the freedom to distribute personal allowance. I.e. it happens to provide the optimum by allocating all of the aggregated personal allowance to the taxable non-savings income.

    Just as it would have in the old days
    Last edited by polymaff; 16-04-2017 at 7:25 PM.
    • SnowMan
    • By SnowMan 17th Apr 17, 4:30 PM
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    SnowMan
    "
    Optimising that split is a devil of a task. I can write it out mathematically - but describing it in a simple, visual way is proving quite - err - taxing.
    Originally posted by polymaff
    My thought is that it can be visualised by adapting your original visual model but as you say not in a simple way if just using words rather than a video. I won't attempt it in words.

    The basic idea is that you have your column with the personal allowance, savings band and higher rate level marked off, as in your original visual model, and then 3 separate columns with your earnings, savings inteest and dividend marked and you fill up the main column according to a series of rules. The optimising suggestions I mention below give some clues as to what those rules are.

    My starting assumptions are that you can't change the order of taxation, but that you can decide whether to utilise your personal savings allowance against earnings, savings and dividends in any combination.

    I am also assuming that if you set some of your dividends against your personal allowance, you are still left with a 0% band for the first £5,000 of remaining dividend income.

    And I am assuming that if you set some of your savings interest against your personal allowance, you are still left with the £5,000 savings band (assuming your earnings are low enough to give you scope to use this) and you are still left with your personal savings allowance of £1,000 or £500. So taxed savings interest of £7,000 would be tax free on top of £11,000 earnings.

    The way then to allocate your personal allowance most efficiently for 2016/2017 is roughly as follows (I believe )

    First allocate your savings to make full use of your personal savings allowance and any available part of the £5,000 savings band.

    If this utilises all of your savings (which it will do for example if you have say £8,000 earnings, £5,500 savings and £9,000 dividends and so the £5,500 is covered by the savings band and personal savings allowance combined of £6,000) then the most efficient way to do things is to allocate just your dividends to the personal allowance not coverered by earnings.

    So in the example you would allocate £3,000 of your personal allowance to dividends, £8,000 to earnings, nothing to savings, just leaving you with 7.5% tax on the remaining £1,000 of dividends after utilising the £5,000 dividend allowance (£9,000 - £5,000 - £3,000).

    If your savings aren't used up by the £5,000 savings band and personal savings allowance then you should first use your personal allowance to cover what you can of any remaining savings interest.

    For example, earnings of £9,000, savings interest of £7,000, dividends of £8,000. First you know that you can cover £6,000 of your savings interest through the £5,000 savings band and £1,000 personal savings allowance.

    So you allocate £1,000 of your personal allowance to cover the remaining savings, £8,000 against earnings, and that leaves £2,000 to allocate against dividends. So you end up paying 7.5% tax on £1,000 of dividends (i.e. £8,000 - £2,000 - £5,000).

    The reason you allocate your remaining savings against the personal allowance first is that saves you 20% tax on those savings. Had you used just used your dividends to cover your personal allowance you would have saved yourself 7.5% of £1,000 in dividend tax, but at a cost of 20% of £1,000 in savings tax.

    This works quite well as a principle until your total income is above the higher rate tax threshold, when some of the logic can break down.

    For example £38,000 earnings, £10,000 dividends and no savings interest. In that scenario if you allocate £6,000 of your personal allowance against earnings and £5,000 against dividends you minimise your tax bill. You avoid paying dividend tax through the 5K of dividends set against your personal allowance and the £5,000 dividend allowance.

    If you had instead set your personal allowance against earnings alone, you would have saved 20% of £5,000 = £1,000 income tax, but would have had to pay dividend tax of £5,000 x 0.325 =£1,625, so a net loss of £625.

    A more complicated example is earnings of 9K, savings interest of 33.5K and dividends of 10K. Here the optimum position is to allocate £500 of your savings against your personal allowance.

    If you allocated just your dividends against your personal allowance then you end up paying an extra 20% (basic rate tax) of £500 = £100 of savings tax, but end up paying 32.5% (higher dividend tax) of £500 in extra dividend tax = £162.50. So you pay £62.50 extra in tax.

    However if you allocate more than £500 of your savings against your personal allowance, then suddenly you end up paying 40% (higher rate tax) on the extra savings interest that produces, but only save yourself 32.5% in dividend tax.

    Discuss
    Last edited by SnowMan; 17-04-2017 at 4:50 PM.
    I came, I saw, I melted
    • polymaff
    • By polymaff 17th Apr 17, 5:49 PM
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    polymaff
    ...My starting assumptions are that you can't change the order of taxation
    Originally posted by SnowMan
    Agreed - although you'll have noticed Talexuser quoting a "tax expert" refuting this, yesterday.

    First allocate your savings to make full use of your personal savings allowance and any available part of the £5,000 savings band.
    Originally posted by SnowMan
    Now hang on, if you start with the column of taxable incomes onto which allowances are applied as in my model, you allocate allowances then aggregate personal allowances to the column, not vice versa.

    By the way, do we also agree that as aggregate personal allowances are allocated to their column segment, they are allocated segment-bottom-up?

    The way then to allocate your personal allowance most efficiently for 2016/2017 is roughly as follows
    Originally posted by SnowMan
    I have read and understood the case you make for a process - but it is an incomplete process, by your own admission, and the only working solution is a 100% one. A roughly 100% case - which I guess is where HMRC were in March - just isn't good enough.

    This works quite well as a principle until your total income is above the higher rate tax threshold, when some of the logic can break down.
    Originally posted by SnowMan
    Whilst you are below the higher-rate the original model works fine, just because the optimised personal allowances distribution happens to be the pre-existing one!


    As I said, you need a 100% solution. It is just how I see it, but the true 100% process has to work for all valid combinations of data. I don't think that you can construct a working process by validating examples - unless you validate ALL possible configuration. This isn't impossible, given massive computing power and/or plenty of time - and I expect that is the blind alley HMRC got stuck up. It is the long-standing debate about proving correctness by static versus dynamic methodology. I'm firmly in the static camp. You've got to develop rubricks which allow you to "refine" your way back from the dynamic, "brute force" method described above.

    First, the top level requirement, which I think is to achieve the maximum return per allocated £ of aggregated personal allowance. In terms of taxation saved, this can represent non-zero values in the range 7.5% to 60% - agreed?.

    Now, it is not too difficult to do this with everything but the Starting Rate. The dependency of the applicability of the SR on - well what? If there is no other tax on other than taxable savings or just whether there is no tax liability under non-taxable savings? I reckon the latter. Then there is the need to expend more of the aggregated personal allowances than is saved in qualifying for the SR if the non-savings taxable income is more than £5,000. This means that the benefit of the SR may drop from what could be as high as 60% right from the first £ allocated - and it may suddenly vanish with increasing taxable non-savings income unless you continue to allocate aggregated personal allowance on a poorer and poorer return rate in order to avoid the discontinuity in the SR process.

    It is an interesting challenge and - is currently beyond HMRC's ken. Wouldn't be the first time this situation has arisen and then been beaten. I remember a government ministry spending many man-years on a similar challenge and eventually falling back to a partial brute-force solution absorbing days of high-power computing each time it was used. My (independent company) team - by analysis of the requirement - found, stated and implemented a sequence of three algorithms which reduced the computing load to about one quarter of a second on a PC.
    • grey gym sock
    • By grey gym sock 17th Apr 17, 6:03 PM
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    grey gym sock
    A more complicated example is earnings of 9K, savings interest of 33.5K and dividends of 10K. Here the optimum position is to allocate £500 of your savings against your personal allowance.
    Originally posted by SnowMan
    i disagree with this example.

    IMHO, against the personal allowance, you should put: 9K earnings, 1.5K interest, & 0.5K dividends.

    then the remaining 32K of interest exactly fills the basic rate band. 5.5K of that is taxed at 0% (for 5K SRB + 0.5K PSA), and you pay 20% of 26.5K = 5.3K.

    the remaining 9.5K of dividends sits at the start of the higher rate band. but 5K is covered by the DA. so you pay 32.5% of 4.5K = 1.4625K.

    total tax: 5.3K + 1.4625K = 6.7625K.

    if you put slightly more dividends (instead of interest) against the PA, then you save 32.5% on those dividends, but pay 40% on the same amount of interest (because the interest starts to be pushed into the higher rate band).

    OTOH, if you put slightly more interest (instead of dividends) against the PA, then you save 20% on that interest, but pay 32.5% on the same amount of dividends (because some dividends are now within the basic rate band, but the DA covers the lowest 5K on dividends (other than dividends set against the PA), so for every extra £1 of dividends in the basic rate band, there is £1 less of DA available to cover the (unchanged) amount of dividends in the higher rate band).

    (i think we're almost on the same page here. our explanations overlap a bit.)

    in general, i agree this process (of how to allocate the PA) could be captured in unambiguous rules, but it's rather complicated.
    • SnowMan
    • By SnowMan 17th Apr 17, 7:13 PM
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    SnowMan
    Agreed - although you'll have noticed Talexuser quoting a "tax expert" refuting this, yesterday.
    Originally posted by polymaff
    I think that was just bad wording in the article perhaps to make the article readable. The examples seemed to conform with the order of taxation, but flexibility to choose which income to allocate against the personal allowance

    Now hang on, if you start with the column of taxable incomes onto which allowances are applied as in my model, you allocate allowances then aggregate personal allowances to the column, not vice versa.
    Point taken. But you have to change the visualisation to allow for the complications of choosing how you allocate earnings, savings and dividends against the personal allowance in the most favourable way or at least in away that comes close to optimising the tax, at which point the next tweek should be obvious.

    It's like you've got two filing cabinets. One is the height of your personal allowance and the other is the height of your total income above your personal allowance. The second cabinet is also divided at two points the top of the savings band and the top of the higher rate band, and some coloured drawers are better placed above or below the 2 lines.

    Each filing cabinet can be filled with red, blue or green drawers. The different colours represent the different sources of income earnings, savings, dividends respectively.

    You are trying to fill the 2 cabinets with drawers subject to an optimisation exercise based on different colour drawers being better placed at different heights.

    All same coloured drawers must be next to each other in each cabinet. The green drawers must be at the top and the red drawers at the bottom.

    However you can choose how many red, blue or green drawers you place in each cabinet.

    Your algorithm to optimise the set up may involve having a go at putting in the drawers, but then step 2 you may want to switch some over, and step 3 some more switches.

    By the way, do we also agree that as aggregate personal allowances are allocated to their column segment, they are allocated segment-bottom-up?
    I don't have any real expertise in tax but I think that has to be taken as correct.

    I have read and understood the case you make for a process - but it is an incomplete process, by your own admission, and the only working solution is a 100% one.
    I doubt that there is a simple solution to work out the optimised allocation of allowances. My thought is that you have to identify all the candidate allocations that might work given the large number of possible allocations and work from there. I don't think it is that difficult but it is messy. I think an algorithm based on my drawer analogy should make the optimisation search manageable and thorough.

    You would like to think that HMRC would be able to do this. I wouldn't expect them to show the working, but you would expect their documentation to say something like

    'we have calculated that allocating (say) £5,000 of your earnings and £6,000 of your savings to cover your personal allowance minimises the tax you pay. Here is the tax calculation on that basis.....'

    At the moment HMRC seem to be saying

    "we have calculated your tax by allocating your earnings, savings and dividends in a similar way to how we've always done it. That used to optimise your tax minimization, but doesn't this year because of the complicated way the new allowances interact. You need to tell us if you want income allocated against your personal allowance in a different way"

    That seems to me to be unsatisfactory.
    Last edited by SnowMan; 17-04-2017 at 7:25 PM.
    I came, I saw, I melted
    • polymaff
    • By polymaff 17th Apr 17, 7:37 PM
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    polymaff
    I think that was just bad wording in the article perhaps to make the article readable. The examples seemed to conform with the order of taxation, but flexibility to choose which income to allocate against the personal allowance

    Point taken. But you have to change the visualisation to allow for the complications of choosing how you allocate earnings, savings and dividends against the personal allowance in the most favourable way or at least in away that comes close to optimising the tax, at which point the next tweek should be obvious.

    It's like you've got two filing cabinets. One is the height of your personal allowance and the other is the height of your total income above your personal allowance. The second cabinet is also divided at two points the top of the savings band and the top of the higher rate band, and some coloured drawers are better placed above or below the 2 lines.

    Each filing cabinet can be filled with red, blue or green drawers. The different colours represent the different sources of income earnings, savings, dividends respectively.

    You are trying to fill the 2 cabinets with drawers subject to an optimisation exercise based on different colour drawers being better placed at different heights.

    All same coloured drawers must be next to each other in each cabinet. The green drawers must be at the top and the red drawers at the bottom.

    However you can choose how many red, blue or green drawers you place in each cabinet.

    Your algorithm to optimise the set up may involve having a go at putting in the drawers, but then step 2 you may want to switch some over, and step 3 some more switches.

    I don't have any real expertise in tax but I think that has to be taken as correct.

    I doubt that there is a simple solution to work out the optimised allocation of allowances. My thought is that you have to identify all the candidate allocations that might work given the large number of possible allocations and work from there. I don't think it is that difficult but it is messy. I think an algorithm based on my drawer analogy should make the optimisation search manageable and thorough.

    You would like to think that HMRC would be able to do this. I wouldn't expect them to show the working, but you would expect their documentation to say something like

    'we have calculated that allocating (say) £5,000 of your earnings and £6,000 of your savings to cover your personal allowance minimises the tax you pay. Here is the tax calculation on that basis.....'

    At the moment HMRC seem to be saying

    "we have calculated your tax by allocating your earnings, savings and dividends in a similar way to how we've always done it. That used to optimise your tax minimization, but doesn't this year because of the complicated way the new allowances interact. You need to tell us if you want income allocated against your personal allowance in a different way"

    That seems to me to be unsatisfactory.
    Originally posted by SnowMan
    I agree, in fact your final comment is the understatement of the year.

    And it is also my conclusion that you need more than the column. At presenr I've a jar full of "zero-percent paint" alongside the column

    Perhaps some thought to its application should constrain the gimmicks chancellors - especially George Osborne - introduce. I bet that that is HMRC's view, anyway.
    Last edited by polymaff; 17-04-2017 at 7:43 PM.
    • polymaff
    • By polymaff 17th Apr 17, 8:12 PM
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    polymaff
    [ earnings of 9K, savings interest of 33.5K and dividends of 10K ]

    i disagree with this example.

    IMHO, against the personal allowance, you should put: 9K earnings, 1.5K interest, & 0.5K dividends.

    then the remaining 32K of interest exactly fills the basic rate band. 5.5K of that is taxed at 0% (for 5K SRB + 0.5K PSA), and you pay 20% of 26.5K = 5.3K..
    Originally posted by grey gym sock
    How confusing! If you believe that the Order of Taxation still applies it is the first £500 of Dividend Income which "fills the BRB".
    Last edited by polymaff; 17-04-2017 at 8:18 PM.
    • polymaff
    • By polymaff 17th Apr 17, 8:32 PM
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    polymaff
    I think that was just bad wording in the article perhaps to make the article readable. The examples seemed to conform with the order of taxation, but flexibility to choose which income to allocate against the personal allowance

    Point taken. But you have to change the visualisation to allow for the complications of choosing how you allocate earnings, savings and dividends against the personal allowance in the most favourable way or at least in away that comes close to optimising the tax, at which point the next tweek should be obvious.
    Originally posted by SnowMan
    One point not taken, though! The semantics matter. You apply allowances to pre-existing income, not vice versa. If you don't get the semantics right then you end up slipping allowances relieving dividend income in before you've processed even the savings income - completely confusing simpletons like me (Eh, GGS?)
    • talexuser
    • By talexuser 18th Apr 17, 10:19 PM
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    talexuser
    It looks like someone at the Telegraph has read this thread:
    http://www.telegraph.co.uk/tax/income-tax/hmrc-struggles-cope-tax-changes-hope-rest-us/

    However explaining exactly what the problem is also beyond them
    • kidmugsy
    • By kidmugsy 18th Apr 17, 11:58 PM
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    kidmugsy
    It's been a long time since I thought about this sort of thing, but could this allocation problem be modelled as a Linear Programming problem, with the objective function being the amount of tax to be paid, and the constraints being the allowances? (At least if you excluded the horrors of rental income, and pension contributions subject to tapering, and anything else that is independently nastily intricate. And pension contributions and withdrawal of Personal Allowance, and child benefit, and .....)

    Or would the objective function turn out to be piecewise linear or otherwise objectionable? But even then, even if it turned out to be an NLP problem, surely it would be a doddle to solve? For most people there just aren't many variables, are there? x1 = earned income + pension income, x2 = dividend income, x3 = savings income. A three-variable problem, but you could perhaps reduce it to a two variable problem by incorporating total income as a given constant, TOT, and replacing x1 by TOT - x2 - x3.


    If it is (for most people) a two-variable problem you could solve it graphically.

    Hm. On second thoughts it's probably a bit too intricate for a graphical solution to be elegant, and maybe using all three variables makes sense; but still, just writing it down as an optimisation problem ought to bring clarity.

    Come to think of it, writing it down as an optimisation problem, and including all the nastily intricate points mentioned above, would mainly just reveal what an appalling pig's breakfast our income tax system has become.

    There must be a good final year undergraduate research project in this.
    Last edited by kidmugsy; 19-04-2017 at 12:08 AM.
    • grey gym sock
    • By grey gym sock 19th Apr 17, 12:22 AM
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    grey gym sock
    But you have to change the visualisation to allow for the complications of choosing how you allocate earnings, savings and dividends against the personal allowance in the most favourable way or at least in away that comes close to optimising the tax, at which point the next tweek should be obvious.

    It's like you've got two filing cabinets. One is the height of your personal allowance and the other is the height of your total income above your personal allowance. The second cabinet is also divided at two points the top of the savings band and the top of the higher rate band, and some coloured drawers are better placed above or below the 2 lines.

    Each filing cabinet can be filled with red, blue or green drawers. The different colours represent the different sources of income earnings, savings, dividends respectively.

    You are trying to fill the 2 cabinets with drawers subject to an optimisation exercise based on different colour drawers being better placed at different heights.

    All same coloured drawers must be next to each other in each cabinet. The green drawers must be at the top and the red drawers at the bottom.

    However you can choose how many red, blue or green drawers you place in each cabinet.
    Originally posted by SnowMan
    hmmm, IMHO the personal allowance is a bin, not a filing cabinet, because there's no right or wrong order for the drawers you put inside it. the order of taxation only applies to whatever you don't put in the bin.

    more trivially, i'd rather swap the colours red and blue round, because red is the colour of debt.

    on these lines, i've tried to adapt/plagiarize polymaff's model, using a bin and column. this will follow in a separate post.

    to keep the model from becoming horrifically complicated, i've moved 1 decision into a separate appendix - viz. how many green bricks to throw in the bin (= how much of the personal allowance is applied against dividend income).

    i've written an attempt at the appendix, but i'm at all not confident it's correct yet, so will probably delay posting it. (it is longer than the rest of the model put together. and it's just a lot of simple arithmetic, not a visual thing at all.)
    • grey gym sock
    • By grey gym sock 19th Apr 17, 12:28 AM
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    grey gym sock
    this is my rearrangement of polymaff's model (pushing 1 complicated calculation into a separate appendix, which will follow at a later date) ...

    Imagine you have 1 brick for each pound of your taxable income. Green bricks for any dividend income, red bricks for any taxable savings income, and blue bricks for any other taxable income (e.g. earnings, pensions).

    Now, prepare to throw as many bricks as will fit into a bin, which has a capacity of 11,000 bricks. Except that:-

    *If you donate a Marriage Allowance Transfer, the bin's capacity is reduced by 1,100 bricks. N.B. if you're the recipient of a MAT, there is no change here.

    *If you have in excess of 100,000 bricks, then the bin's capacity is reduced by half of the excess, with the qualification that it cannot go below 0.

    When throwing bricks into the bin, if you cannot fit in all your bricks, and you have bricks of more than one colour, then:-

    *To determine the exact number of green bricks to throw in, see the separate Appendix.

    *If you are not completely filling the bin with green bricks, then you should always prefer to throw in blue bricks in preference to red bricks.

    When you have completely filled the bin, form your remaining bricks into a vertical column. The top part of the column is any remaining green bricks, the middle part is any remaining red bricks, and the bottom part is any remaining blue bricks.

    Now, draw lines across the column at the 5,000 and 32,000 levels. Except that:-

    *If you make qualifying pension and/or charitable contributions, raise the 32,000 line by that amount.

    The following statements apply, in the order given:-

    * Anything in the bin is taxed at 0%.

    * Any taxable savings income below the 5,000 line is taxed at 0%.

    * If the total column exceeds the 32,000 line then up to a further 500 of taxable savings income is taxed at 0%. If the column doesn't exceed the 32,000 line then make that 500 of taxable savings income 1,000.

    * The first 5,000 of dividend income in the column is taxed at 0%.

    What is left is taxable - below the 32,000 line at the applicable basic rate, above at the applicable higher rate.
    • dales1
    • By dales1 19th Apr 17, 1:16 AM
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    dales1
    * If the total column exceeds the 32,000 line then up to a further 500 of taxable savings income is taxed at 0%. If the column doesn't exceed the 32,000 line then make that 500 of taxable savings income 1,000.
    Originally posted by grey gym sock
    Personally, I would turn this sentence around. It has already confused a few people, because MOST people's cases are dealt with LAST under this terminology.
    I would say - If the column doesn't exceed 32k, then up to 1,000 is at 0 %. Otherwise...

    Dales
    • grey gym sock
    • By grey gym sock 19th Apr 17, 3:28 PM
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    grey gym sock
    a slight change of tack ...

    WARNING: The results you get from the above will, in certain circumstances, not match those resulting from your submitting an online self-assessment via HMRC. This is because, by their own admission, and after over 20 attempts, HMRC's own software does not correctly address certain scenarios, the most serious of which is "Non-savings income of less than the Personal Allowance (PA) & Savings Starting Rate (SSR) plus savings income not covered by the Personal Savings Allowance (PSA)". They suggest that you make a paper return as their current timescale for addressing this and other bugs in their own software is: "Planned fix for 17/18".
    Originally posted by polymaff
    a practical point with this: how is making a paper return supposed to make this work? don't they just read the paper return into the appropriate computer system, after which the data is treated in exactly the same way as data submitted online (via HMRC's site, or via third-party software)?

    is the point that there is a box in the full paper return in which you can (optionally) enter the amount of tax you owe (instead of just letting HMRC calculate it)? but surely they won't just accept any figure you enter there.

    or is the point that you should explicitly submit an election (perhaps in the additional information box) for how you want your personal allowance allocated against different kinds of income?

    how on earth is this supposed to work? have HMRC said anything about this?
    • Richard 1963
    • By Richard 1963 19th Apr 17, 3:33 PM
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    Richard 1963
    Use of Tax Allowances
    Many thanks for the information provided as I'm struggling to sort out my lowest tax bill for 2016/17.

    I've used the HMRC website and a software package from Andica and both default to (i) employment (ii) savings (iii) dividends for use of allowances. By my reckoning using the dividends allowance first would reduce the tax bill. Andica won't allow any alternative or overwriting and it seems from this thread that HMRC would advise a paper submission.

    Is there a software package that advises the optimal use of allowances?
    • Dazed and confused
    • By Dazed and confused 19th Apr 17, 4:01 PM
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    Dazed and confused
    Richard 1963

    This may just be the way you've worded this but you could have misunderstood something here,

    By my reckoning using the dividends allowance first would reduce the tax bill.


    The "dividend allowance" doesn't really exist, it's actually a 0% rate band which you cannot, as far as I'm aware choose how to allocate.

    The allowance referred to in this thread is the Personal Allowance, once that is used the 9 different rate bands applicable to 2016:17 come into play and have a specific order which is basically non savings income followed by savings interest and finally dividends.

    As far as i know calculating this is (currently) a manual process to play around and get the best result. If you can provide the income details there's a few on here who will have a bash at the best outcome
    • Richard 1963
    • By Richard 1963 19th Apr 17, 5:21 PM
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    Richard 1963
    Use of Tax Allowances
    Dazed and confused (very apt)

    I did really mean use of the personal allowance and the basic rate. Round numbers

    Employment £17,000
    Savings Interest £12,000
    Dividends £90,000
    Total = £119,000
    Personal allowance reduced from £11,000 to £1,500
    Basic Rate = £32,000

    HMRC and Andica calculate tax due as
    Employment £15,500 @ 20% = £3,100
    Savings £500 @ 0% + £11,500 @ 20% = £2,300
    Dividends £5,000 @ 0% + £5,000 @ 7.5% + £80,000 @ 32.5% = £26,373
    Total tax = £31,775

    Alternative
    Dividends £5,000 @ 0% + £32,000 @ 7.5% + £53,000 @ 32.5% = £19,625
    Employment £0 @ 20% + £15,500 @ 40% = £6,200
    Savings £500 @ 0% + £11,500 @ 40% = £4,600
    Total tax = £30,415

    Is the alternative a valid method and, if so, how do you ensure HMRC use this method?

    Any comments gratefully received
    Last edited by Richard 1963; 19-04-2017 at 6:55 PM. Reason: Correct typo
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