A simple, visual model of 2016/17

SnowMan

According to this excellent article (albeit written a while ago)

http://www.pruadviser.co.uk/content/knowledge/oracle_archive/oracle-technical/oracle-tech-january16/taxation/

In relation to taxation for 2016/2017

Order of taxation

Thankfully the chancellor has not changed the order in which income is taxed.

Broadly, the first slice of a person's income (non-savings income) comprises earnings, pensions, taxable social security payments, trading profits and income from property.

The next slice is savings income, and dividend income is the top slice.

The rules are set out in S16 ITA 2007 (it is very important to note that it is the full bond gain, not the top-slice, which is used when determining the income limit for reduction in the Personal Allowance).

Which is essentially saying that Polymaff's original model is correct, and has a link to the relevant (longstanding) legislation that I haven't checked out (?)

polymaff

SnowMan wrote: »

According to this excellent article (albeit written a while ago)

http://www.pruadviser.co.uk/content/knowledge/oracle_archive/oracle-technical/oracle-tech-january16/taxation/

In relation to taxation for 2016/2017

Which is essentially saying that Polymaff's original model is correct, and has a link to the relevant (longstanding) legislation that I haven't checked out (?)

Yes, but if the order of allowances has been disrupted it puts a hell of a dent in the long-standing, but ailing, concept of Order of Taxation.

And this is the Age of Tax Simplification :rotfl:

Dazed_and_confused

I think the pru article may just be talking about what happens after deducting the personal allowance as it is part of HMRCs own tax calculation guidance which mentions the ability to allocate the personal allowance in the most advantageous way.

So choose how to allocate the personal allowance but then follow the order of taxation when calculating the tax due on the income that is actually being taxed?

I'm also now beginning to doubt one aspect of my calculation on this thread, is the £500 savings interest taxed at 0% using the savings rate band or does it need to use the personal savings allowance rate band?????

Confused now as to whether the savings rate band is available or not in this example. Semantics really as it makes no difference to the actual tax due but it's another uncertainty!

SnowMan

Dazed_and_confused wrote: »

I think the pru article may just be talking about what happens after deducting the personal allowance as it is part of HMRCs own tax calculation guidance which mentions the ability to allocate the personal allowance in the most advantageous way.

So choose how to allocate the personal allowance but then follow the order of taxation when calculating the tax due on the income that is actually being taxed?

Thanks. That makes sense. I was thinking that the order of taxation effectively implied an order of allocation of the personal allowance.

But your earlier quote from the HMRC forms

Because it may be more beneficial for some customers to now have (some of) their deductions and allowances from box A125 allocated against dividend income before savings income etc. The savings income etc is at boxes A137 to A139 and at boxes A155 to A157. If it's more beneficial to move deductions and allowances to dividends in the higher rate range to increase tax at the basic rate, but reduce tax at the higher dividend rate this working sheet may not give the correct answer.

Overwrite the amounts in the middle column to deduct the reliefs and allowances in the way which will result in the greatest reduction in your liability to Income Tax.

essentially shows that there is some choice in how to allocate the personal allowance.

It does ring a distant bell in my memory that this (re)allocation of the personal allowance has always been possible, it is just that a different allocation to the normal one (as in polymaffs original visual model) would not have reduced the tax payable in past years. But the £5,000 dividend allowance changes that for 2016/2017.

(I think I'll head back to my book on quantum physics, easier to understand :beer:)

kidmugsy

Somebody's got to say it.

So the last shall be first, and the first last.

polymaff

SnowMan wrote: »

Thanks. That makes sense. I was thinking that the order of taxation effectively implied an order of allocation of the personal allowance.

But your earlier quote from the HMRC forms essentially shows that there is some choice in how to allocate the personal allowance.

That's what everyone thought. That's how SA110 (2017) own worksheet works it out. The first thing the SA110 worksheet does is to allocate as much of the personal allowance as it can to taxable non-savings income - as in the past. The new, radically disruptive process is alluded to, carelessly, in a belated edit of that document.

Why careless? Why belated? Well, apart from the criticisms I've made of its sentences, the one sentence I didn't critique says "The savings income etc is at boxes A137 to A139 and at boxes A155 to A157." Oh no they're not. A137 to A139 are for reporting "Lump sum payments".

This sort of shambles, from an organisation which, at least in 2010, cost us over £5billion to run, just isn't on.

kar999

The 16-17 Self Assessment pages are up and running on HMRC website so I will see how it calculates my circumstances.

MoneySavingUser

grey_gym_sock wrote: »

that the personal allowance works in a new way starting for 2016/17, viz. that it's applied against whichever kind of income makes your income tax bill the lowest, instead of applied against the income below the £11,000 line

Actually, you have always had the choice of using it any way you please, its just that in prior years you were never better off using it a different way, now you are.

polymaff wrote: »

Yes, but if the order of allowances has been disrupted it puts a hell of a dent in the long-standing, but ailing, concept of Order of Taxation.

And this is the Age of Tax Simplification :rotfl:

http://www.legislation.gov.uk/ukpga/2007/3/section/25

25Reliefs and allowances deductible at Steps 2 and 3: supplementary

(1)This section supplements the provisions about reliefs and allowances in Steps 2 and 3 of the calculation in section 23.

(2)At Steps 2 and 3, deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax.

Basically the default order is non-savings, then savings, then dividends.

However, you can allocate the personal allowance how you see fit (it just happens that 16/17 is the first year where it has been useful to do it in another way).

Example:
Salary £8k
Interest £3k
Dividends £10k

Default method: £8k + £3k = £11k covered by personal allowance
Dividends - £5,000@0% = 0;
£5,000 @7.5% = £375

But if the PA is set against dividends instead of savings then:
Interest: £3k @ 0% (Starting rate band for savings);

Dividends - £3,000 covered by personal allowance
£5,000@0% = 0;
£2,000 @7.5% = £150

Saving is £225.

It is only usually beneficial where your personal allowance is covering income that could be exempt (by say the savings allowances) and other income is being taxed which could be out of the tax net by being in the personal allowance instead.

kidmugsy

MoneySavingUser wrote: »

Basically the default order is non-savings, then savings, then dividends. .....

However, you can allocate the personal allowance how you see fit ...

It is only usually beneficial where your personal allowance is covering income that could be exempt (by say the savings allowances) and other income is being taxed which could be out of the tax net by being in the personal allowance instead.

Thank you. How about my hypothetical taxpayer. Salary £8k; taxable interest £600; dividends £40k?

polymaff

As I wrote previously. does one follow the legislation, HMRC's interpretation of the legislation, or HMRC's implementation of that interpretation?

Whilst those three differ - and, currently, by HMRC's own admission, the legislation and the implementation do differ - which is to be paramount? Stricly the legislation but, if you think that the implementation doesn't reflect the legislation, you'll have a battle proving it.

It seems to be that there are two unknowns in this:

1. What is HMRC's current algorithm for distributing allowances and reliefs.

2. What will be the algorithm when it is repaired to treat the Starting Rate Allowance correctly.

An Online Self-Assessment is the judge and jury, as far as HMRC is concerned, but that requires only one thing - that HMRC's algorithm is perfect.

We are some way from that.

If HMRC would release their programme's source then one could identify - after a lot of work - what is happening. In the absence of that, one can attempt to reverse-engineer the current HMRC system. This reveals what looks like a definite methodology for the distribution of allowance and reliefs but is it the perfect methodology?