Help me understand Tax

JulieGeorgiana

Sorry if this is in the wrong place, but I am trying to understand tax. It came up elsewhere that I have a gap in my education and after finally thinking I worked it out... the Tax calculator I was using threw up another question.

My understanding is that in 2011-12 the tax brackets are:

20% £0 - £35,000
40% £35,001 - £150,000

with a £7475 personal tax allowance.

So my understanding was if I earned £37,500 I would pay:

0% £0 - £7475 = £0
20% £7476 - £35,000 = £5505
40% £35,001 - £37,500 = £1000

TOTAL = £6505

However, my issue is that while using the tax calculator it tells me I would pay £6005 which means all of the tax is at 20%, it also states that for £37,500 taxable pay is £30,025.

So does this mean that you only pay 40% if you earn £35,000 after the personal tax allowance of £7475 has been deducted??? ie. you have to actually have a gross pay of more then £42,475 before paying the 40% tax rate???

This is just something I would really like to understand.

Please help... or post links to places that would help me understand.

However, please try not to get too technical as I am just a normal person who (although good at maths) is not trained in Finances!

Mikeyorks

JulieGeorgiana wrote: »

So does this mean that you only pay 40% if you earn £35,000 after the personal tax allowance of £7475 has been deducted??? ie. you have to actually have a gross pay of more then £42,475 before paying the 40% tax rate???

You got there in the end. That's exactly right.

The personal allowance is effectively a 0% tax band sitting under the 20% band. Which then starts at £7476.

The taxable bands - are just that. The bands at which you pay tax after your allowances are exceeded :

http://www.hmrc.gov.uk/rates/it.htm#2

JulieGeorgiana

You are a star! I feel so much better knowing this... I have seen your link before, but it aided in confusing me more this morning... it makes sense now!

This morning i thought you got taxed 40% on everything from £7475 - £37,500 so I have learned something valuable today!

Next... I am going to try and find out about NI!

AirlieBird

:T

Good on you for making the effort to learn about the tax you pay. If only more people were like you and made the effort instead of automatically whinging or wanting to be spoon fed answers.

Mikeyorks

The entity of tax is desperately complex. But - for the individual on PAYE - it's actually pretty straightforward. If you take the trouble to understand and check your tax Code at the start of each year (and that it's being applied) - you don't really need to do anything else.

JulieGeorgiana wrote: »

.. it makes sense now!

Excellent. Bit like riding a bike. Once you have the hang of it, it stays with you. So I trust you don't get grazed knees on the NI ride!

JulieGeorgiana

Mikeyorks wrote: »

Excellent. Bit like riding a bike. Once you have the hang of it, it stays with you. So I trust you don't get grazed knees on the NI ride!

I've managed to work out my husbands pay slip for taxes, and his new job

I am having trouble with the NI though!

Seems you pay 12% on your wages after the 'allowance' (£7228) or if you have a pension 10.4% (which ends April 2012!)

My Husband Pays into a pension before tax, so it lowers his taxable pay. The tax/NI calculators state he should be paying £x for national insurance, which is 12% of his gross pay, which is £35 a month more then he is paying!

This is because he is paying 10.4% of his 'taxable pay' (Wages minus Pension) I have no idea if this is right... i can't find literature which talks about NI coming from gross or taxable pay.

And i can't find rates for 2012/13!

Any ideas???

hugheskevi

Seems you pay 12% on your wages after the 'allowance' (£7228) or if you have a pension 10.4% (which ends April 2012!)

10.4% is only if you have a contracted-out [ie do not build up any State Second Pension, and in return pay less NI] Defined Benefit (eg final salary) pension, not any pension.

Contracting-out is only being abolished for Defined Contribution (eg personal pensions, Stakeholder penions) pension schemes, not Defined Benefit schemes.

NI allowances are calculated over the pay period (weekly, 4 weekly, monthly or whatever), not the financial year (unlike income tax).

The tax/NI calculators state he should be paying £x for national insurance, which is 12% of his gross pay, which is £35 a month more then he is paying!

Some (most?) calculators don't have a contracted-out option.

This is because he is paying 10.4% of his 'taxable pay' (Wages minus Pension) I have no idea if this is right... i can't find literature which talks about NI coming from gross or taxable pay.

It is right, but he is only paying 10.4% on a band of earnings not the whole salary. NI is levied on gross pay (so that means NI is paid on pension contributions), but if his pension scheme uses salary sacrifice (read about what that is on the pension board, it is a sticky thread) that effectively means that he does not pay NI on his pension contributions.

NI is much harder to accurately calculate than income tax for Defined Benefit contracted-out people. If he is a higher-rate tax payer, there are 4 elements to the calculation - a band of income on which 0% is paid, a band on which 10.4% is paid, a band on which 12% is paid, and a refund for a bit of income that you don't pay NI on, but accrue pension on nonetheless (don't ask the logic, there is one, but it only amounts to about £3 a month).

If you want to calculate it accurately yourself, you will need to become familiar with the following:

Lower Earnings Limit
Primary Threshold
Upper Accrual Point
Upper Earning Threshold

Then the calculation is:

Income between Primary Threshold and Upper Accrual Point pays NI at 10.4% [10.6% next year]
Income between Upper Accrual Point and Upper Earning Threshold pays NI at 12%
Income above Upper Earning Threshold pays NI at 2%
You get a refund of 1.6% [1.4% next year] on income between the Lower Earning Limit and the Primary Threshold

And i can't find rates for 2012/13!

Here

antonic

Tax Rates http://www.hmrc.gov.uk/rates/it.htm

National Insurance : http://www.hmrc.gov.uk/rates/nic.htm

As for pension contributions, they are usually calculated as a % of the GROSS Pay (ie before the deduction of tax & NI) and deducted BEFORE your husband gets paid.

For example I pay 1.5% Widows & Orphans contributions from my GROSS Pay so I normally pay £19724/12 x 0.015 = £295.86 per year of £24.65 per month.

National Insurance I dont know about !

Hope this helps !

JulieGeorgiana

hughheskevi I think a lot went over my head. I do so appreciate the fact that you took the time to try and explain.

My husband is a lower tax payer but he is about to move jobs which is why I am trying to educate myself. He currently pays 5% into a 'final salary' pension and is on 'salary sacrifice' for this scheme. So from what you say he should be paying 10.4% on his 'taxable pay'.

He also has a small amount 'refund' of around £3 you mentioned!

Question: if he stayed in this job would be be paying 12% in April??

His new job, his pension is also 'final salary' at 7.5% contribution. I know they said that it will come out of his wages 'before tax' and I am under the impression that it's salary sacrifice too.

I will admit this is all very confusing, but it would be nice to know how much we will have... I am a planner you see

hugheskevi

hughheskevi I think a lot went over my head. I do so appreciate the fact that you took the time to try and explain.

Feared it might - everything you need to work it out correctly is there, so as you learn more come back to it and it will make more sense.

Sadly NI and contracting-out has been made rather complicated, so for precision there isn't any way around it.

Here is an example for monthly salary, assuming £20,000 annual salary, based on 2012/13 rates. As long as he earns under £40,000 but more than £8,000 you can just change £20,000 to his income and it should all work:

(£20,000 /12 ) less £633, multiplied by 10.6%=£109.57

less

(£633 - £465) * 0.014=£2.35

equals

£107.22 NI payable per month

So from what you say he should be paying 10.4% on his 'taxable pay'.

Remember he pays nothing on the first £146 p/w of income, then 10.4% on income above that.

He also has a small amount 'refund' of around £3 you mentioned!

I'm quite surprised it would be listed in that much detail - I've never seen salary statements break NI down into so much detail, but I suppose it's possible

Question: if he stayed in this job would be be paying 12% in April??

No. Unless the employer changes the scheme, he would pay 10.6% rather than 10.4%, as the Govt is changing the rates slightly.

JulieGeorgiana

I found this out about the new pension:

We are proud to offer a defined benefit pensions scheme – more commonly known as a ‘final salary scheme’
Reduced NI contributions as the scheme is contracted out of the state pension

What I can work out from your link it means in 2012/13 in his new job he will pay 10.6% of his 'taxable pay' (gross - pension)

And I thought Tax was hard to get my head around!