Income Tax Adjustment to Rate bands

Doctor_Sardonicus

I have telephoned the tax office about my notice of coding for 2016/17 and still don't understand the adjustment to rate band. Is anyone able to explain it to me in terms I might understand please? For the first time I'm straying into the 40 per cent tax bracket but the adjustment seems high to me. My annual earnings from my job will be £41811. I pay 6.80 per cent into the pension scheme at work which, I believe, is not taxed. Additionally I will also receive an annual pension of £5240 from a previous employment which became payable recently when I reached 60. The pension is taxed at 20 per cent with none of it tax free. The letter from the Revenue states that my personal allowance will be £11000 however an adjustment of £2620 will be made because I have a job and a pension thus providing a tax free amount of £8380. Try as I might I can't get this to make sense. If it is correct I would also ask if anyone knows how much I would need to pay extra into my work pension to keep below the 40 per cent tax threshold. A lot to ask and thank you in advance for your replies.

CLAPTON

Doctor_Sardonicus wrote: »

I have telephoned the tax office about my notice of coding for 2016/17 and still don't understand the adjustment to rate band. Is anyone able to explain it to me in terms I might understand please? For the first time I'm straying into the 40 per cent tax bracket but the adjustment seems high to me. My annual earnings from my job will be £41811. I pay 6.80 per cent into the pension scheme at work which, I believe, is not taxed. Additionally I will also receive an annual pension of £5240 from a previous employment which became payable recently when I reached 60. The pension is taxed at 20 per cent with none of it tax free. The letter from the Revenue states that my personal allowance will be £11000 however an adjustment of £2620 will be made because I have a job and a pension thus providing a tax free amount of £8380. Try as I might I can't get this to make sense. If it is correct I would also ask if anyone knows how much I would need to pay extra into my work pension to keep below the 40 per cent tax threshold. A lot to ask and thank you in advance for your replies.

is the 41881 before the pension is deducted or after it is deducted

dori2o

Basically what they are saying is that whilst you have an income in excessof £43k for 16/17 this is split over one or more sources,none of which themselves are in excess of £43000.

Therefore as both sources will only collect tax at a top rate of 20%, and you are due to pay tax at 40% on at least some of your income, a restriction needs to be placed into the tax code in orderto collect the additional 20% tax on the amount in excessof £43,000. Therefore the restriction represents the amount of income liable to tax at 40% and ensures that an additional 20% is collected on that amount of your income which is in excess of £43k.

From the figures that you have told us are on the coding notice, it's clear that HMRC assume (assumed at the time the code was calculated) that you will have an income of £45620 in 2016/2017. The 40% tax rate starts at £43000 from 6 April 16, so based on the estimates HMRC have you are £2620 over the 40% limit . This means you need to pay an additional 20% tax on £2620 of your income, hence the restriction.

As it stands, based on the figures you have given, this restriction is either too high or too low, based on what you have told us is your actual income.

If the £41811 is the figure AFTER your pension has been deducted, then the restriction is too low and you will underpay tax in 16/17.If this is the correctcase then the restriction should be £4051, giving you a balance of allowances of 6949 and a tax code of 694L.

However, if the £41811 is before taking off the pension contribution, then your actual taxable income would be £44207, meaning the restriction needs to be reduced to 1207.

Either way HMRC don't have an accurate estimated income figure for you so you need to ensure that this is updated.

Doctor_Sardonicus

Before pension.

Doctor_Sardonicus

dori2o wrote: »

Basically what they are saying is that whilst you have an income in excessof £43k for 16/17 this is split over one or more sources,none of which themselves are in excess of £43000.

Therefore as both sources will only collect tax at a top rate of 20%, and you are due to pay tax at 40% on at least some of your income, a restriction needs to be placed into the tax code in orderto collect the additional 20% tax on the amount in excessof £43,000. Therefore the restriction represents the amount of income liable to tax at 40% and ensures that an additional 20% is collected on that amount of your income which is in excess of £43k.

From the figures that you have told us are on the coding notice, it's clear that HMRC assume (assumed at the time the code was calculated) that you will have an income of £45620 in 2016/2017. The 40% tax rate starts at £43000 from 6 April 16, so based on the estimates HMRC have you are £2620 over the 40% limit . This means you need to pay an additional 20% tax on £2620 of your income, hence the restriction.

As it stands, based on the figures you have given, this restriction is either too high or too low, based on what you have told us is your actual income.

If the £41811 is the figure AFTER your pension has been deducted, then the restriction is too low and you will underpay tax in 16/17.If this is the correctcase then the restriction should be £4051, giving you a balance of allowances of 6949 and a tax code of 694L.

However, if the £41811 is before taking off the pension contribution, then your actual taxable income would be £44207, meaning the restriction needs to be reduced to 1207.

Either way HMRC don't have an accurate estimated income figure for you so you need to ensure that this is updated.

It's before taking off the pension contribution. I worked it out myself to roughly the same lower figure as you but the person in the tax office said she would check and phone me back. She did and disagreed with my sums. She said it was difficult to explain but the coding was correct and was because I am now paid from two sources.

I assume I am right in thinking that should I raise my pension contributions by the amount of coding difference (whatever that becomes) I would keep under the 40 per cent tax bracket.

Doctor_Sardonicus

CLAPTON wrote: »

is the 41881 before the pension is deducted or after it is deducted

Before the pension is deducted.

dori2o

Doctor_Sardonicus wrote: »

It's before taking off the pension contribution. I worked it out myself to roughly the same lower figure as you but the person in the tax office said she would check and phone me back. She did and disagreed with my sums. She said it was difficult to explain but the coding was correct and was because I am now paid from two sources.

I assume I am right in thinking that should I raise my pension contributions by the amount of coding difference (whatever that becomes) I would keep under the 40 per cent tax bracket.

Thats right.

Increase your pension contribuitions so they equal £4051 or more in total for the year and you would fall below the 40% tax threshold.

I make it to be approx 9.7% of your £41811 income in total.

Doctor_Sardonicus

dori2o wrote: »

[/B]Thats right.

Increase your pension contribuitions so they equal £4051 or more in total for the year and you would fall below the 40% tax threshold.

I make it to be approx 9.7% of your £41811 income in total.

As the salary I quoted was before the pension deduction I think my coding should be reduced by the lower figure. Your clear explanation has been really helpful and has given me the confidence to go back to the Revenue and question the level of the adjustment again. Thank you so much.