What is definition of a 'higher rate taxpayer'?

getwinrej

Hi there!

My first post (although I've been an avid moneysaver for years!)...

I would like to know what it means to be a higher rate (40%) tax payer. For childcare vouchers, I can get £124 per month as a higher rate taxpayer or double that if I am in the 20% bracket. But... I don't know how much my total taxable income will be in any year as I receive a performance related bonus in December. I find it hard to plan (for example with salary sacrifice pension contributions) as I don't know if I will be just below or just above the higher rate threshold.

What if I state to my childcare voucher provider that I am (plan to be) in the 20% bracket and get £243 each month and then it transpires that the end of the year that I earn £1 over the higher rate income tax threshold? Do I have to hand half of them back?!!

Sorry if I haven't explained this well. I don't think it's that complex but I can't find any examples online and there must be many people in the position of being near income tax thresholds and not really be able to predict, to the pound, what they will earn in any year!

Thanks!

agrinnall

In your circumstances I think I would ensure that I was not a higher rate tax payer at the end of the tax year by making enough addition payment into my pension to have my taxable income come under the threshold.

getwinrej

Hi agrinall,

Thanks for the quick reply. I was thinking that may be an option. There are only a few 'windows of opportunity' to adjust pension contributions in the year but hopefully the timing works out.

Do you know if the same principle applies to other taxband-based qualification (for things other than childcare vouchers)? Seems crazy that earning an extra few pounds could put someone out by hundreds in terms of lost benefit. All too similar to the old stamp duty rules there!

booksurr

"simple" definition of Higher rate tax threshold:

you gets the first 11,000 pa tax free
the NEXT £32,000 you earn is taxed at 20%

therefore "Higher" rate (ie 40%) starts when you earn more than £43,000

if you pay into a pension via deduction from salary that deduction is made before you pay tax so for example say you pay £2,500 per year into a pension via salary deduction the 40% tax bracket effectively starts at 43 + 2.5 = 45,500

Childcare vouchers
having said the above it is largely irrelevant in the context of childcare vouchers because it is the responsibility of your employer (not you) to decide what rate of voucher you are entitled to. They must do a "basic earnings assessment" at the start of each tax year and using that figure decide what rate of voucher they can give you that year.

adjustments are then made in the following year

i suggest you do you own reading so you understand it yourself:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/368483/employer-qa.pdf

Pennywise

getwinrej wrote: »

Seems crazy that earning an extra few pounds could put someone out by hundreds in terms of lost benefit.

Some unbelievably high marginal tax rates with the new £1000/£500/£0 tax free interest too. A pound over a threshold and you are taxed on £500 of interest at 40% instead of a pound less income and getting all £1,000 tax free. That's a £200 tax bill on a pound more of income!

What with the interest tax free allowance, the dividend £5k free threshold, and now the new de-minimis limits for casual trading and property letting, personal tax is becoming more complex than ever and lots of new tax-traps coming out of the woodwork.

getwinrej

Hi booksurr,

Thanks for the link. Not sure where you got that but it makes it all a lot clearer.

The guidance doesn't really take into account mid-year changes to pension, earnings or other factors but I accept it is based on a 'best estimate' assessment.

What doesn't seem to be considered at all is taxable income that isn't from the employer (eg rental property income). There is no way your employer could be expected to know that and so can't really be in a position to predict your tax band!

Thanks again!

getwinrej

Hi Pennywise,

I thought this principle would apply to more than just childcare vouchers. I appreciate it would complicate the equations further to have a tapering loss of benefit/relief but it seems fairer.

Agreed that it is getting so, so complex - which also makes it near impossible to do 'perfect' tax planning.

Pennywise

getwinrej wrote: »

The guidance doesn't really take into account mid-year changes to pension, earnings or other factors but I accept it is based on a 'best estimate' assessment.

What doesn't seem to be considered at all is taxable income that isn't from the employer (eg rental property income). There is no way your employer could be expected to know that and so can't really be in a position to predict your tax band!

That's the reason for the new "digitisation" where annual returns are being scrapped for most and replaced with a "live" system where taxpayers are to log in and tell HMRC their tax figures as they happen during the year, which should result in live tax-due figures on the system.

By the way, employers have never been the ones to consider your other income - they concern themselves only with your payroll as measured against your PAYE tax code as given to them by HMRC. HMRC are the ones who consider your total income and set your tax code as best they can, but not perfect because the info is always so out of date, hence why they're moving on to real-time live data.

booksurr

getwinrej wrote: »

Hi booksurr,

Thanks for the link. Not sure where you got that but it makes it all a lot clearer.

simple google search "childcare vouchers higher rate taxpayer" and then picking the HMRC result rather than results related to individual company schemes

have you read MSE's own guide as well? (caveat - inevitably it will be a bit dumbed down)

http://www.moneysavingexpert.com/family/childcare-vouchers

cmj306

getwinrej wrote: »

What doesn't seem to be considered at all is taxable income that isn't from the employer (eg rental property income). There is no way your employer could be expected to know that and so can't really be in a position to predict your tax band!

Hopefully not hijacking the thread, but this is the exact problem I have. The income from my employer after pension contributions is just under the threshold. However I have a buy to let which pushes the income over it.

I was just over it with my employment, so I currently get the higher-rate amount. However my employer has told me that I can now get the full (ie. basic-rate) amount of vouchers. I have not yet taken them up on it - should I?