Tax question UK income tax

Sazzie23

Hi All

Apologies for what is probably a really dumb question but I can't seem to find the answer anywhere.
What exactly does 'Basic rate threshold' - 2013 £32,010
and 'Higher rate threshold' - 2013 £41,450
mean?

I understand the idea of personal allowance - i.e. don't start paying tax until earned £9440 annually but these other terms are defeating me.

Thanks for a link to the answer if already posted

jem16

Sazzie23 wrote: »

Hi All

Apologies for what is probably a really dumb question but I can't seem to find the answer anywhere.
What exactly does 'Basic rate threshold' - 2013 £32,010
and 'Higher rate threshold' - 2013 £41,450
mean?

I understand the idea of personal allowance - i.e. don't start paying tax until earned £9440 annually but these other terms are defeating me.

Thanks for a link to the answer if already posted

Up to £9440 you pay 0% tax.
From £9441 to £41,450 you pay tax at 20%
From £41,451 to £150k you pay tax at 40%.

The £32,010 is taxable income. The higher rate threshold starts at £32,010 + £9440 = £41,450.

Sazzie23

Brilliant thank you


Just to be clear then I don't actually start paying 40% until I've earned £41,450.

Thank you that wasn't at all clear on the HMRC site.
Will inform my other colleagues as we are in 30-40k income bracket

CLAPTON

Sazzie23 wrote: »

Brilliant thank you


Just to be clear then I don't actually start paying 40% until I've earned £41,450.

Thank you that wasn't at all clear on the HMRC site.
Will inform my other colleagues as we are in 30-40k income bracket

yes that is correct assuming

a. you have no benefits in kind (which will reduce your tax free allowance

and

b. to don't pay into a pension or have any other allowances which reduce your taxable income

John_Pierpoint

........and you don't have "unearned" income (rents interest dividends....) that need to be added to your earned income when doing the calculation.

zygurat789

jem16 wrote: »

Up to £9440 you pay 0% tax.
From £9441 to £41,450 you pay tax at 20%
From £41,451 to £150k you pay tax at 40%.

The £32,010 is taxable income. The higher rate threshold starts at £32,010 + £9440 = £41,450.

And of course, you only pay 20% tax on the £32,010 from £9,440 to £41,450
and 40% on the £108,550 from £41,450 to £150,000.

But if you should have a taxable income of over £100,000 then your personal allowance will be progressively reduced to zero at £118,880 giving an effective tax rate of 60%.
The PAYE tax tables can't cope with this and it is achieved by a reduction in the tax code, so beware the first year this happens could result in an underpayment.

Sazzie23

Hi all

Thanks for the replies

If we are paying pension contributions this reduces the amount we can earn before paying tax or increases it?

zygurat789 wrote: »

And of course, you only pay 20% tax on the £32,010 from £9,440 to £41,450
and 40% on the £108,550 from £41,450 to £150,000.

But if you should have a taxable income of over £100,000 then your personal allowance will be progressively reduced to zero at £118,880 giving an effective tax rate of 60%.
The PAYE tax tables can't cope with this and it is achieved by a reduction in the tax code, so beware the first year this happens could result in an underpayment.

Think I've got that 0-9440 - 0% tax,
9441 - 41450 @ 20%
and anything over that @ 40 % (unless there are variations as stated in other posts)

As it happens, the chances of getting an income of over £100k in the near future are as likely as winning the lottery, but just to enlighten me, its not actually as 'advertised' 40 % at 150 k its 40 % to 100k then sort of 41+% etc upwards from £100k to £118k and 60% at £118k+ , almost sort of glad I don't earn that sort of money I'd really begrudge giving up 60% on tax.

Thanks to everyone that has replied, been really useful.

jem16

Sazzie23 wrote: »

Hi all

Thanks for the replies

If we are paying pension contributions this reduces the amount we can earn before paying tax or increases it?

It increases it.

As it happens, the chances of getting an income of over £100k in the near future are as likely as winning the lottery, but just to enlighten me, its not actually as 'advertised' 40 % at 150 k its 40 % to 100k then sort of 41+% etc upwards from £100k to £118k and 60% at £118k+ , almost sort of glad I don't earn that sort of money I'd really begrudge giving up 60% on tax.

Thanks to everyone that has replied, been really useful.

You still pay 40% tax. However because of having less personal allowance you have to pay that 40% and 20% tax earlier so it has the effect of being taxed higher.

CLAPTON

40% tax starts at 41,450

however if e.g. you paid 5,000 gross into a pension scheme then 40% tax would start at 46,450pa; so from a tax point of view paying into a pension is very tax efficient

Sazzie23

zygurat789 wrote: »

And of course, you only pay 20% tax on the £32,010 from £9,440 to £41,450
and 40% on the £108,550 from £41,450 to £150,000.

But if you should have a taxable income of over £100,000 then your personal allowance will be progressively reduced to zero at £118,880 giving an effective tax rate of 60%.
The PAYE tax tables can't cope with this and it is achieved by a reduction in the tax code, so beware the first year this happens could result in an underpayment.

CLAPTON wrote: »

40% tax starts at 41,450

however if e.g. you paid 5,000 gross into a pension scheme then 40% tax would start at 46,450pa; so from a tax point of view paying into a pension is very tax efficient

Yup I can see that is very true, one day I hope to be in a position to take more advantage.

John_Pierpoint

..........however it is when you take it out again as an annuity that things might not be so rosy.

Artificially low interest rates created by quantitative easing.
Inflation caused by ditto plus a poor economy, deficit financing and a falling GDP per head.
A 30% tax trap (as age allowance is left to wither below the rate of inflation).

I am not saying you should not do it but don't book the world cruise yet; that might be reserved for senior members of the state sector, when retirement time comes.