Tax Rates 2012/13 Article Discussion

oldbikebloke

keef82 said:

Hi guys, sorry if this is obvious but I’m really struggling to understand the logic around higher tax band. I’m paying 40% on everything I earn over £34,501. However I’ve seen on the gov website that the higher rate is anything over £50k. This is a big difference. How is it calculated where you sit between £34k and £50k?

it is a common misunderstanding. The tax bands are AFTER the personal allowance has been deducted, ie the amounts are CUMULATIVE
so, at 19/20 tax rates:
£0 - £12,500 (personal allowance) of pre-tax ("gross") earnings is tax free 
Anything over 12,500 but below £37,500 is taxed at 20%, so you understand it, that means the cumulative gross earnings  is anything between 12,500 to (12.5+37.5) = 50,000. Hence people refer to higher rate "starting" at 50k. Technically it does not, it starts at 37,500 because the first 12,500 is tax free ie cumulative values must be considered...

any gross earnings over 50,000 (ie 12,500 + 37,500)  is taxed at 40%. The upper limit is £150,000 but note above gross £100,000 the PA is progressively reduced until it is finally completely removed (ie becomes £0) above gross earnings of £125,000.

the additional rate of 45% then applies above gross £150,000 and obviously there is no personal allowance at all at that level of income.

Tax Code
please understand the tax code is simply a way by which HMRC collects taxes from anyone who is in employment and therefore subject to PAYE (Pay As You Earn) taxation collection as that can only work for those who get paid via a payroll. It has nothing at all to do with how much tax you owe for the tax year, as that is based on the tax calculation for the year - you may, for example, have over or underpaid PAYE if your tax code does not reflect all the actual sources of income for that tax year and so your tax calculation is based on a different value to that assumed when your code was issued

You will still get your personal allowance for the purposes of the tax calculation (subject to any marriage allowance transfer you may have done) 

there are many websites that probably explain it more clearly than my attempt
https: //www.which.co.uk/money/tax/income-tax/tax-rates-and-allowances/how-to-calculate-your-tax-bill-asjlk3j4r0v6
https: //www.litrg.org.uk/tax-guides/tax-basics/how-do-i-work-out-my-tax
https: //www.gov.uk/guidance/rates-and-thresholds-for-employers-2019-to-2020

gaz3524

Please help!?
Are you a higher rate tax payer if your gross earnings are above £50000 OR if your taxable earnings are above £37500?
The reason I ask because pension contributions are deducted before tax is calculated. So you could earn £51000 but if you subtract the personal allowance (£12500) and pension contributions (say £4000 for example) then taxable pay would be £34500. In this case do you pay the higher rate of tax because your income is above £50000 or not because your taxable income is below £37500?!

Jeremy535897

The pension contribution is not deducted, unless it is paid gross (like a retirement annuity). The grossed up equivalent adds on to the basic rate band. This will explain it better than I can:
https://www.which.co.uk/money/pensions-and-retirement/personal-pensions/contributing-to-a-private-pension-explained/tax-relief-on-pension-contributions-explained-a27f53z7qg3f

oldbikebloke

gaz3524 said:

Please help!?
Are you a higher rate tax payer if your gross earnings are above £50000 OR if your taxable earnings are above £37500?
The reason I ask because pension contributions are deducted before tax is calculated. So you could earn £51000 but if you subtract the personal allowance (£12500) and pension contributions (say £4000 for example) then taxable pay would be £34500. In this case do you pay the higher rate of tax because your income is above £50000 or not because your taxable income is below £37500?!

you pay tax on your taxable income not your gross earnings hence the word used is taxable

unholyangel

gaz3524 said:

Please help!?
Are you a higher rate tax payer if your gross earnings are above £50000 OR if your taxable earnings are above £37500?
The reason I ask because pension contributions are deducted before tax is calculated. So you could earn £51000 but if you subtract the personal allowance (£12500) and pension contributions (say £4000 for example) then taxable pay would be £34500. In this case do you pay the higher rate of tax because your income is above £50000 or not because your taxable income is below £37500?!

It's anything over 50k (taxable income) thats 40%. Assuming you're entitled to a personal allowance (not everyone is). 

If your pension contributions are deducted before tax, then it forms part of your gross pay but does not form part of your gross taxable pay (ie you're not paying tax on those contributions and they won't be included in the figure on your p60 at the end of year either). 

Jeremy535897 said:

The pension contribution is not deducted, unless it is paid gross (like a retirement annuity). The grossed up equivalent adds on to the basic rate band. This will explain it better than I can:
https://www.which.co.uk/money/pensions-and-retirement/personal-pensions/contributing-to-a-private-pension-explained/tax-relief-on-pension-contributions-explained-a27f53z7qg3f

I presume the poster is referring to a workplace pension under a net pay arrangement rather than a relief at source or private pension. 

jon2205

If my pay and the two pensions combined i get puts me just over 52K do i pay the 40% tax

Dazed_and_C0nfused

jon2205 said:

If my pay and the two pensions combined i get puts me just over 52K do i pay the 40% tax

On a little bit yes (assuming you are Scottish resident).

eskbanker

jon2205 said:

If my pay and the two pensions combined i get puts me just over 52K do i pay the 40% tax

Yes, on the excess over £50,270, assuming standard personal tax allowance with no marriage allowance applied in either direction, and not being in Scotland.

eskbanker

Dazed_and_C0nfused said:

jon2205 said:

If my pay and the two pensions combined i get puts me just over 52K do i pay the 40% tax

On a little bit yes (assuming you are Scottish resident).

Surely assuming not Scottish resident (which would entail 42% above £43,662)?

Dazed_and_C0nfused

eskbanker said:

Dazed_and_C0nfused said:

jon2205 said:

If my pay and the two pensions combined i get puts me just over 52K do i pay the 40% tax

On a little bit yes (assuming you are Scottish resident).

Surely assuming not Scottish resident (which would entail 42% above £43,662)?

😭. Yes, was meant to be aren't