low paid, pensioners, savings and tax

gadgetmind

innovate wrote: »

The personal allowance does not change as a result of your income. It just is your personal allowance.

No longer the case due to the claw back above £100k of income.

innovate

I stand corrected

crisp

Im not sure how many people out there are fully versed with all this gubbins. Moral of the story, we need a SIMPLE tax system easy to understand and less costly to administer but then again we might be stepping on some toes there.

bigadaj

gadgetmind wrote: »

Does anyone know how this will work for dividend income?

My understanding that allowances are applied first against earned income, next against interest, then dividends, and finally capital gains.

So, if Mrs Gadgetmind has £10k income from a pension, £5k from interest (including bonds and PIDs), and then £10k from dividends, my understanding is that she'll pay £0 in tax. Is this correct?

That confused me for a minute, but I think you're right in terms of no additional tax. The interest and divis will be taxed at source so tax will be paid on them but before they are received, so your numbers means that pension value is gross but the other two are net.

gadgetmind

The interest won't be taxed at source as we'll send in the relevant forms, but yes, the dividends will come with the 10% tax credit.

My understanding is that Mrs G's pension income will use personal allowance, her interest her 0% savings tax band (but not sure if bond/PID income counts as savings?) and her dividends slot into basic rate so no more tax.

zagfles

gadgetmind wrote: »

The interest won't be taxed at source as we'll send in the relevant forms, but yes, the dividends will come with the 10% tax credit.

My understanding is that Mrs G's pension income will use personal allowance, her interest her 0% savings tax band (but not sure if bond/PID income counts as savings?) and her dividends slot into basic rate so no more tax.

Sounds right according to http://www.hmrc.gov.uk/manuals/saimmanual/saim1090.htm

zagfles

crisp wrote: »

Im not sure how many people out there are fully versed with all this gubbins. Moral of the story, we need a SIMPLE tax system easy to understand and less costly to administer but then again we might be stepping on some toes there.

Yes this is stupidly complicated. Under this new scheme some low income workers with savings income will have a 40% marginal tax rate! Same for pensioners with some pension income and some savings income.

bowlhead99

You do get anomolies here and there.

Like people who go over the income threshold to get child benefit and it gets clawed back from them. Or individuals who go over 100k income and their personal allowance gets clawed back from them. They face an effective 60% marginal rate on a pay rise or bonus (and that's ignoring national insurance!)

The response to those who query the anomolies, is - well would you have preferred to pay us more tax in the first place on a nice smooth rate? Or keep a low rate for as far as we judge you need it, and then play catch-up?

The government in their wisdom thinks that someone who doesn't earn much and is only in the 10-15k bracket because they have some passive savings income, does not need to pay tax.

Similarly they say if you "only" earn 50k you can have he 10k annual allowance and child benefits. If you "only" earn 90k you can have a full 10k annual allowance.

You can argue the wisdom of any of these "schemes".

But if you earn 18k that is a reasonable income and you have to pay us some tax. And if we have let you off tax before by widening the band to accommodate your "just a bit of passive savings income", you might be paying a higher rate to get you to the amount of tax that we think is right for someone that we now can see earns 18k. The "no tax on interest" thing was supposed to be for pensioners or low income-ers on 10-14k. Give it back.

If you earn 62k that is a reasonable income and you don't need all them child benefits. Look you had it before but fair's fair, look at where your total income ends up, you don't need it. Give it back.

If you earn 115k that is a reasonable income and you don't need a personal free allowance. Look at where your income ends up, you don't need it, give it back.

So sure, there are anomalies that come out of accommodating different groups along the way. If you don't want someone on 120k to get a personal allowance, the only way for it to be less of a shock to them when they hit 100k and lose the allowance and go into 60% marginal, is to ask them to start giving it back earlier, and perhaps have them face a really wide 48% marginal rate band from 70k to 120k. Similarly you could prevent someone hitting a nasty marginal rate from the child benefit payback band at 60k by taking a bit of it off them at 40k instead. One suspects those groups would prefer NOT to have that.

Or for someone coming out of the 'savings interest is free for low income-ers' band, make it less wide in the first place so they have less to give back. You could make it less of a shock by paying back gradually; but that only works if you allow them to keep some of the benefit of it up to quite a high overall income level, which we don't want to do because it is not supposed to be helping someone earning 20k+, they are not the most hard up members of society.

zagfles

All examples of stupid unnecessary complications in the tax system. If they want to take more money off people on higher incomes, then do it in an honest and fair way and raise tax rates. Instead of having silly marginal humps like the child ben tax or the personal allowance clawback.

But of course raising tax rates gets bad headlines.

As for this savings tax, why not just abolish all tax on savings, at least for basic rate taxpayers? After all how many basic rate taxpayers are going to save over £15k a year (ISA allowance), and it's always been a tax on a tax, ie it's taxed income people save so why should they pay tax on it again, particulary when rates are generally lower than inflation.

It's basically a wealth tax at the moment - the real value of most people savings aren't rising yet they pay tax on it if it's not in an ISA...

Archi_Bald

zagfles wrote: »

it's taxed income people save so why should they pay tax on it again

If you take this logic further, than VAT should also be abandoned since we pay for it with money that has already been taxed. And council tax. And car tax.