Higher rate tax question

matimage

Hi all,
Hopefully you can help with a bit of info.

My wife who works for council (teacher) has just got a letter saying from April she will be a higher rate tax payer because she is over £37500.

Now, reading this sites tax page I though it was £37500 plus her personal allowance which should give a total of £43875. Which by the way is not how much she is earning.

We are a bit worried because of the child benefits thing.

Am I right in thinking that child care vouchers and her pension comes out before the tax rate is calculated?

lisyloo

Am I right in thinking that child care vouchers and her pension comes out before the tax rate is calculated?

Some pensions schemes work as "salary sacrifice".
This means it's taken out first.
This is advantageous from an National Insurance point of view.

Some pensions are deducted from salary after tax.
Basic rate tax relief is then claimed by the scheme and goes into the pension.
Any higher rate tax relief can also be claimed back but that comes back to the individual.

So pension schemes work differently depending on how they are set up.

matimage

Thank you.

No knowledge on the PA part?

lisyloo

You are correct (almost).
It's 6,475 plus 37,400 when higher rate tax kicks in (it's 7475 from April 2011).

It sounds like they have it wrong.

Is she on PAYE (pay as you earn)?
If so then then 40% tax will never kick in.

I am assuming this is her only job and she has no other income?

matimage

Thank you.

Yeah, she is on PAYE I think, why would 40% never kick in then?

No other job and is on maternity leave at mo so have really low income this tax year.

Mikeyorks

The 40% band starts at £43875 as you indicate originally.

But I'd be curious as to why 'they' would write to her indicating she's about to go over the basic rate as most employers would consider that to be completely out of their jurisdiction? As the total income includes all pensions / gross interest etc ........ and external pensions / gross interest they would be unaware of

CLAPTON

who was the letter from?
and what exactly did it say?

lisyloo

why would 40% never kick in then?

Simply because she doesn't earn enough.
40% tax would only kick in if itlooks likesomeone will earn more than £43875.

This sound like a mistake (unless she gets an income from somewhere else like a pension).
If she has a second income then only one can use the personal allowance and the other has to assume a tax rate.
This can happen if you retire and have both an income and a pension in the same tax year.
PAYE calculates your tax dynamically on a monthly basis and can adapt to increases/decreases, but if you have a second income stream then one of them has to make an assumption.

This looks like a mistake, but best to query it in case she's been somehow mixed up with someone else.

zygurat789

However, next year, if the coalition survives higher rate tax starts at £42,475.

matimage

Thanks all. I shall dig out the letter.