Tax code and Gift Aid

aroominyork

My tax code for 2013/14 includes £420 for higher rate relief on Gift Aided charity donations. How much does that assume I make in donations? Is the answer as easy as £420 or (as is usually the case...) is it not as straightforward as that?

System

It depends on the level of the income that tax code is used against. For example if you pay HR tax on that source alone, it would be (420 x 0.4) / 0.2 = 840.

Or if you had (for example) 2 income source of 25k each the calc would be (420 x 0.2) / 0.2 = 420.

In the latter example HR tax would be due on the combined income, but the Gift Aid figure would take into account the fact that each individual source will be taxed at basic rate under PAYE.

jem16

ceiberman wrote: »

In the latter example HR tax would be due on the combined income, but the Gift Aid figure would take into account the fact that each individual source will be taxed at basic rate under PAYE.

On a similar note but with a deduction, how is it calculated?

Basically 2 separate incomes, both of which are under the higher rate tax band but combined would see a total income of around £43k. HMRC apply a deduction to the tax code so that the extra tax will be collected.

How is it worked out?

nomunnofun

jem16 wrote: »

On a similar note but with a deduction, how is it calculated?

Basically 2 separate incomes, both of which are under the higher rate tax band but combined would see a total income of around £43k. HMRC apply a deduction to the tax code so that the extra tax will be collected.

How is it worked out?

I don't think that it ever is.

An interesting question and one that I do not think I have come across for a while. However, I suppose the same dilemma applies to all of the income from the second source. Codes 0T or BR would not collect enough tax and D0 would just be penal. Obviously the taxpayer would be assessed at the end of the tax year in any case.

However, if we have established a higher rate liabilty, is it appropriate to make a double deduction? For example, if we wish to collect £400 through the PAYE code, a deduction of £1000 is appropriate for a higher rate taxpayer. As there would appear to be no mechanism for applying higher rate tax in jem16's example, should the code at one source have a deduction of £2000 applied (£2000 @20%)?

Answers on a postcard.

System

jem16 wrote: »

On a similar note but with a deduction, how is it calculated?

Basically 2 separate incomes, both of which are under the higher rate tax band but combined would see a total income of around £43k. HMRC apply a deduction to the tax code so that the extra tax will be collected.

How is it worked out?

It's done in the same way. Work out the amount of HR tax due in cash terms and then divide by 0.2 if the source the code is operated against is taxable at basic rate. This gets complicated if the deduction means a source tips into HR bracket.

In a straightforward example

£2000 liable at HR.
Tax £2000 x 40%= £800.
Tax already paid £2000 x 20%= £400
Extra due £800 - £400=£400.

Adjustment £400 / 0.2 = 2000

The source currently taxed at basic rate doesn't change. The other has the tax free allowance reduced by the £2000 adjustment

talkinpeace

which is why I avoid having sundry tax return lines put through the PAYE code as far as possible

nomunnofun

ceiberman wrote: »

It's done in the same way. Work out the amount of HR tax due in cash terms and then divide by 0.2 if the source the code is operated against is taxable at basic rate. This gets complicated if the deduction means a source tips into HR bracket.

In a straightforward example

£2000 liable at HR.
Tax £2000 x 40%= £800.
Tax already paid £2000 x 20%= £400
Extra due £800 - £400=£400.

Adjustment £400 / 0.2 = 2000

The source currently taxed at basic rate doesn't change. The other has the tax free allowance reduced by the £2000 adjustment

Yes - but you cannot tax a source with a bit at 20% and a bit at 40% which, I think, jem16 was getting at - although I could be wrong

talkinpeace

nomunn
any source of iincome can be taxed at all the rates it covers :

employment can be taxed at 0%, 20%, 40% and 50% if the total is for a large enough amount.
and small increments of earning can tip part of that total income into higher bands.

for HR payers, the gift aid merely widens the 20% band rather than being taxed at a different rate per se

System

nomunnofun wrote: »

Yes - but you cannot tax a source with a bit at 20% and a bit at 40% which, I think, jem16 was getting at - although I could be wrong

My post is how it works. You don't tax a bit at 20% / 40% - you effectively withhold part of the tax allowance in order collect tax of the value equal to the HR tax needed. It used to be called Basic Rate Restriction back in the day. I think the current P2 coding notice calls it Adjustment to Rate Band (or something like that).

jem16

nomunnofun wrote: »

Yes - but you cannot tax a source with a bit at 20% and a bit at 40% which, I think, jem16 was getting at - although I could be wrong

No what I was getting at was that both sources of income lay within the basic rate band. One source has the personal allowance attached to it and the other source has BR.

The tax code has been lowered by an amount to take into account that part of the total income (around £1k) will have to be taxed at higher rate.

Both sources of income will still attract only basic rate tax.

What I was trying to find out was how the deduction was worked out.

So basically if the amount into higher rate tax was £1k, would the personal allowance be lowered by £1k?

jem16

ceiberman wrote: »

My post is how it works. You don't tax a bit at 20% / 40% - you effectively withhold part of the tax allowance in order collect tax of the value equal to the HR tax needed. It used to be called Basic Rate Restriction back in the day. I think the current P2 coding notice calls it Adjustment to Rate Band (or something like that).

It calls it Adjustment to Tax Rate band.

I was trying to see if the amount that they are witholding was higher than it really should be or if the calculation was done in some other way.

For example, I've worked out I should be about £1k over with my total income but they have witheld £2,473.