End of Year Tax Code & Calculation Questions

tigerspill

Hi,

While I fill in a Tac SA each year, I have never really understood the calculation of Tax Free Allowance, BRT and HRT.

As I understand it (14/15) -
1. The first £x is tax free and this is identified by my tax code? If my tax code is 732L - this means I get the first £7320 of income tax free?
2. I then get £31,865 at 20% tax?
3. I then pay 40% on any income after the sum of 1 and 2 - £39,185. Have I got this right (ignoring 45% rate)?

So if I has £50,000 if income - I would pay 40% on £50,000-£39,185 = £10,815?

Now if I paid £10,000 into my company pension (cheque payment and not salary sacrifice) and NO tax was added on.
Then on my tax form that £10K would be subtracted from the £50K income, leaving only £815 of income attracting 40% tax rather than the £10,815.
That means the tax calculation on my SA would show an over payment of £4000 of tax and they would pay that back to me.

One last question - is it only my tax code at the end of the tax year that matters. It seems to change slightly every few months. I assume I can ignore all earlier updated and only use the one on 5th April?

Does this make sense.

Not sure if this was the right forum to post on.

jem16

tigerspill wrote: »

Hi,

While I fill in a Tac SA each year, I have never really understood the calculation of Tax Free Allowance, BRT and HRT.

As I understand it (14/15) -
1. The first £x is tax free and this is identified by my tax code? If my tax code is 732L - this means I get the first £7320 of income tax free?
2. I then get £31,865 at 20% tax?
3. I then pay 40% on any income after the sum of 1 and 2 - £39,185. Have I got this right (ignoring 45% rate)?

Yes it's correct as far as PAYE is concerned.

So if I has £50,000 if income - I would pay 40% on £50,000-£39,185 = £10,815?

Yes.

Now if I paid £10,000 into my company pension (cheque payment and not salary sacrifice) and NO tax was added on.
Then on my tax form that £10K would be subtracted from the £50K income, leaving only £815 of income attracting 40% tax rather than the £10,815.

On your SA tax return, what actually happens with the £10k pension contribution is that the basic rate band is increased by £10k. So instead of it being £31,865 it's £41,865.

Your Personal Allowance is always the full PA - for this tax year £10k. The tax code of 732L and therefore £7320 tax-free is only used for PAYE purposes. However what has reduced your tax code in the first place would have been added on to your total income.

So the actual calculation would have been £50k plus £2680 (the amount your code has been reduced by) so total income is £52680.

£52680 minus £10k PA = £42680.

£42680 minus £41,865 = £815.

As you'll see it's what you got earlier but the SA return just shows it differently.

That means the tax calculation on my SA would show an over payment of £4000 of tax and they would pay that back to me.

Yes.

One last question - is it only my tax code at the end of the tax year that matters. It seems to change slightly every few months. I assume I can ignore all earlier updated and only use the one on 5th April?

As I said the tax code is just a means of collecting tax via PAYE. You can ignore all tax codes as the tax return won't even mention them.

Your best bet is to add up all taxable income through salary, interest, taxable benefits and dividends. The subtract gross pension contributions and Personal allowance.

tigerspill

Thanks jem16 for taking the time to explain this.

Re your last point - I got tied in knots over tax codes and came to the same conclusion to ignore it as far as my tax calculations are concerned.

jem16

tigerspill wrote: »

Re your last point - I got tied in knots over tax codes and came to the same conclusion to ignore it as far as my tax calculations are concerned.

if you're going to ignore the tax code just be sure to include whatever taxable benefit reduced the tax code in the first place. Otherwise your calculations may be out.