Income tax - higher rate

r-shar

Help needed to understand tax calculations. On the reverse on my P2 tax code (08/09) letter it states:
If your employment income for the year is more than 6179 you will pay tax as follows:
at 20% on the first 34800
at 40% on anything over 34800.
.
My employer told me that I can earn 6179 + 34800 (40979) before I become a higher rate tax payer but HMRC have taxed me as a higher rate earner for earning 37106 gross (08/09). Who is correct?

dzug1

I'd say either HMRC have got it wrong or you are misunderstanding what they are telling you.
or there's info you have left out.

ManAtHome

Your last payslip for 08/09 (March 09?) should show a tax code - is this 617L?

r-shar

yes my code is 617L and my income was 37106 - I understood from my employer that my tax allowance would be taken from this figure and the balance woukld be used to ascertain my tax bracket (standard or higher rate earner)
Helpdesk at HMRC have told me that they take the earnings before the allowance is offset and use that to determine tax bracket.
Who is correct?

CLAPTON

post up
your gross earning
pension payments
how much tax you paid
how much NI you paid
total take home pay

and we can check what has been done.

suso

Are you on PAYE or Self Assessment.

If you are on PAYE then it is the employer who has been deducting tax from you. So they might have been taxing at the wrong rate.

If its SA then they would take all your earnings and then deduct your tax allowance and then work out your tax band.

trevormax

r-shar wrote: »

yes my code is 617L and my income was 37106 - I understood from my employer that my tax allowance would be taken from this figure and the balance woukld be used to ascertain my tax bracket (standard or higher rate earner)
Helpdesk at HMRC have told me that they take the earnings before the allowance is offset and use that to determine tax bracket.
Who is correct?

You take off the personal allowance, then (for 08/09) if the remaining income is more than £34,800, anything over that amount is taxed at 40%. If you are on PAYE, HMRC do not calculate your tax when you get paid, your employer does so any mistakes made in year should be taken up with them. As this is for last year, you will have to deal with HMRC to get any overpayment back.

Don't always trust what the HMRC contact centre tells you, many people there have had basic training at best, trust me, i've gone through it with them, its 8 weeks of boredom in which time you learn very little.

I work out that your tax should be:

£37,106 less PA 6179 = £30,927 taxable income
£30,927 @ 20% = £6,185.4 tax due
NI = £3,481.06

r-shar

The tax & NI paid is correct however I need to know if my earnings fall into the higher or lower tax bracket - in my coding I am being deducted for "savings income taxable at the higher rate" which indicates that I am a higher tax earner so they tax me again on the small amount of interest my saving get. I do not think I am a higher rate earner which I why I was asking if they include or exclude the personal allowance when deciding.

trevormax

Your earnings from employment do not take you into the higher rate tax band, but it is close. For the 08/09 tax year, if you had received more than £3,873 in bank interest (not including isa's), then some of the interest would be liable at 40%. Banks automatically deduct at the basic rate and as far as I am aware, there is no facility for the bank to tax at 40%

As employment income is taxed before bank interest (the interest would be known as the "top slice" income), your employment income would use up the basic rate first, and any of the basic rate band left, would then be used by the bank interest.

In cases such as this when the interest stradles the BR and HR bands, a coding restriction is placed onto your tax code so as to collect the shortfall through your employment income. This would show up in your coding notice as savings income taxable at ther higher rate.

If this restriction is used in your code for one year, and you do not tell HMRC otherwise, they will sometimes automatically include it in the following year.

It is possible that this is the case and HMRC have included it in this year becuase it was used in a previous year. If you are sure your combined employment and bank interest will not take you over the HR threshold for 09/10 then you can contact HMRC and ask for them to remove the restriction.

For 09/10 the standard PA is 6475, the HR threshold is £37,400, so if you have a standard tax code, your combined income would need to be £43,875 before you hit the higher rate band.

If, in the 08/09 tax year your combined income did not go above your tax allowance + £34,800, and you had the savings restriction in your tax code, then it is very likely you have overpaid tax.

r-shar

Thanks all for your help - I will tackle HMRC and tell them my earnings are not high enough for the extra taxation.

jem16

r-shar wrote: »

Thanks all for your help - I will tackle HMRC and tell them my earnings are not high enough for the extra taxation.

However as trevormax pointed out your earnings PLUS savings interest may make you a higher rate taxpayer.

You cannot take them in isolation.

Have you calculated the savings?