A simple, visual model of 2016/17

polymaff

Here's an update of last April's posting. Nothing has needed to be corrected, but I've added, in italics, extra steps to take if you're affected by the most common topics raised on MSE in the last year.

Draw a, to-scale, vertical column representing your taxable income. The top part of the column is any dividend income, the middle part is any taxable savings income, and the bottom part is any other taxable income (e.g. earnings, pensions).

Now, prepare to draw lines across the column at £11,000, £16,000 and £43,000.

Make any of these alterations, if applicable, in the order given

*If you make qualifying pension and/or charitable contributions, raise the £43,000 line by that amount.

*If you donate a Marriage Allowance Transfer, lower all lines by £1,100. N.B. if you're the recipient of an MAT, do nothing.

*If the column exceeds £100,000, lower all lines by half of the excess, with the qualification that you stop lowering when the £11,000 line reaches the bottom of the taxable income column.

Draw the three lines. The following statements apply, in the order given:-

* Anything below the £11,000 line is taxed at 0%.

* Any taxable savings income below the £16,000 line is taxed at 0%.

* If the total column exceeds the £43,000 line then up to a further £500 of taxable savings income is taxed at 0%. If the column doesn't exceed the £43,000 line then make that £500 of taxable savings income £1,000.

* The first £5,000 of dividend income above the £11,000 line is taxed at 0%.

What is left is taxable - below the £43,000 line at the applicable basic rate, above at the applicable higher rate.

I hope that this model covers the great majority of tax-payers.

(puts tin hat on )

WARNING: The results you get from the above will, in certain circumstances, not match those resulting from your submitting an online self-assessment via HMRC. This is because, by their own admission, and after over 20 attempts, HMRC's own software does not correctly address certain scenarios, the most serious of which is "Non-savings income of less than the Personal Allowance (PA) & Savings Starting Rate (SSR) plus savings income not covered by the Personal Savings Allowance (PSA)". They suggest that you make a paper return as their current timescale for addressing this and other bugs in their own software is: "Planned fix for 17/18".

And, yes, I know that it is April 1st - but the above is not a leg-pull.

SnowMan

That's interesting. Thanks.

So if earnings are £39,000, (non-ISA) dividends are £4,000 and (non-ISA) savings interest is £1,000 (and no pension contributions or other complications etc) then in terms of the personal savings allowance you are deemed to be a higher rate tax payer, as your total income is deemed to be £44,000, and so have a personal savings allowance of £500 (not £1,000)?

So you would end up paying £100 tax on your savings interest (£500 x 0.2).

And that is despite the fact that you aren't actually paying 40% tax (or 32.5% in relation to dividends) on any part of your income.

I realised that you couldn't simply deduct the first £5,000 of dividends in working out your tax, because the bit above £5,000 could be pushed into a higher band by the first £5,000 that isn't taxed, but I hadn't cottoned on to the affect on the personal savings allowance of both the first £5,000 of dividends, and first £1,000 of savings interest.

Flobberchops

That was neither simple nor visual! Interesting though.

Apodemus

Flobberchops wrote: »

That was neither simple nor visual! Interesting though.

Interesting. For me it was highly visual! As I read through it, the bar chart grew in my mind and the lines came across, almost as if it had been portrayed as a YouTube video. Just shows that we all vary in the connections to our visual cortex and a reminder that information can't simply be provided in one format to work across all people!

TheTracker

Flobberchops wrote: »

That was neither simple nor visual! Interesting though.

You may need to consult an Individual Visual Advisor. Personally, the DIY method sufficed.

SnowMan

Apodemus wrote: »

Interesting. For me it was highly visual! As I read through it, the bar chart grew in my mind and the lines came across, almost as if it had been portrayed as a YouTube video. Just shows that we all vary in the connections to our visual cortex and a reminder that information can't simply be provided in one format to work across all people!

What made me laugh was that I actually have a bit of paper with bars marked off at £11,000, £16,000 and £43,000 (which gets updated each year), which I've been using to explain simple tax issues to people for the past few years.

I'm not a tax expert by the way. So the original post (assuming it is right) really does clarify some of the finer points of how it works.

I mark off people's different income on the bars and explain things from there.

It works a treat. Most people get this visual description, but are completely confused by the HMRC tax calculation which is just a list of calculations that they can't understand.

Perhaps if HMRC were to change the tax calculation they provide into a visual representation of the type above, then more people would understand their tax calculation :beer:

polymaff

SnowMan wrote: »

I'm not a tax expert by the way. So the original post (assuming it is right) really does clarify some of the finer points of how it works.

http://forums.moneysavingexpert.com/showpost.php?p=70422918&postcount=9

It has survived unscathed in the pretty critical environment of MSE Forums for a year now, so I'm pretty confident that it is right. These models are intended to help both those who don't like too much arithmetic and those - amateur and professional - who like to get a "feel" for how Income Tax in 2016/17 actually works.

polymaff

SnowMan wrote: »

That's interesting. Thanks.

So if earnings are £39,000, (non-ISA) dividends are £4,000 and (non-ISA) savings interest is £1,000 (and no pension contributions or other complications etc) then in terms of the personal savings allowance you are deemed to be a higher rate tax payer, as your total income is deemed to be £44,000, and so have a personal savings allowance of £500 (not £1,000)?

So you would end up paying £100 tax on your savings interest (£500 x 0.2).

And that is despite the fact that you aren't actually paying 40% tax (or 32.5% in relation to dividends) on any part of your income.

I realised that you couldn't simply deduct the first £5,000 of dividends in working out your tax, because the bit above £5,000 could be pushed into a higher band by the first £5,000 that isn't taxed, but I hadn't cottoned on to the affect on the personal savings allowance of both the first £5,000 of dividends, and first £1,000 of savings interest.

This is exactly what both amateurs and professionals - and a lot of staff in HMRC - don't understand. A fundamentally different way of processing is required: Create a clearly differentiated (by type of income) model of the taxable; get the thresholds in place and then process correctly - i.e. the right steps in the right order. The old idea that computing liability as the sum of three stand-alone calculations was starting to ail a few years ago. Now it is dead.

One effect that particularly nailed the old idea was, as you note, that you can be classed as a higher-rate tax payer - and so taxed be more punitively - without paying a penny at higher rate.

As someone commented on the original thread. "HMRC should employ you"

kidmugsy

polymaff wrote: »

As someone commented on the original thread. "HMRC should employ you"

I hope somebody else replied "But only if HMRC wants the mug punters to understand income tax."

polymaff

kidmugsy wrote: »

I hope somebody else replied "But only if HMRC wants the mug punters to understand income tax."

Now how on earth would HMRC recognise anyone who knew how the income tax system works? :rotfl:

EnglishMohican

polymaff wrote: »

*If you donate a Marriage Allowance Transfer, lower all lines by £1,100. N.B. if you're the recipient of an MAT, do nothing.
.......................
* Anything below the £11,000 line is taxed at 0%.

* Any taxable savings income below the £16,000 line is taxed at 0%.

OK, I will be the idiot who does not think this is right/complete.

It cannot be right to just ignore the MAT if you receive it. For earned income, the 11000 must become 12100 (or some such). It would be logical if the 16000 became 17100 but government and logic may not compute.

This also seems to ignore the £1000 savings allowance (wrong words?) unless you wish to claim that interest below £1000 is not taxable and therefore covered by the "taxable interest" line. Nicer to be clear about this if so. I took it that "taxable" meant non-ISA for instance.

Sorry if I have it all wrong or have missed the point but it seems worth trying to get it clear.