Best Middle Class Salary To Reduce Tax

Murdina

If you have children, do not overlook the interaction with tax credits in doing any calculations of the effect of an increase in salary.
On the other hand, do not overlook the fact that salary increases are typically percentages - so even if your salary went up (gross) but went down (net) a small amount you are increasing the bench mark for future increases and indeed for negotiation when you came to change your job. (ie so if you turned it down now then you could be doing yourself out of income in years to come).

CLAPTON

mikewebs wrote: »

Here's how the tax works (I don't know about NI):

You earn £40,000 p/a

Take of your personal allowance of £5,035

Therefore your Taxable income is £34,965

Then:

First £2150 is taxed at 10% £215.00

Next £31150 is taxed at 22% £6,853.00

Finally £1665 is taxed at 40% £666.00

Total tax liability for the year £7,734.00

This is a very basic example but shows how the tax works anything above the £33,300 taxable income (after your personal allowance is taken off) will render you liable to 40% tax - but you can extend the basic rate (the band in which tax is paid at 22%) by choosing to donate by gift aid or put money into your personal pension thus reducing the amount that will be hit by the 40% tax. (I think this is right) Remember that income tax is worked out on your Non savings Income first then on Savings income and then Dividend income. So if you earn £40,000 you can still be hit for a tax bill even if you PAYE because interest on savings (except ISAs) is usually taxed at basic rate (20%) and dividends at basic rate of 10%. You then have to pay the difference between the basic rate and the higher rate tax on yur savings and dividend income.

just to say for this tax year 2007-8

the personal tax allowance is 5225
the 10% level is 2230
then the 22% level is 32370

then 40% tax

chrisbur

Murdina wrote: »

If you have children, do not overlook the interaction with tax credits in doing any calculations of the effect of an increase in salary.
On the other hand, do not overlook the fact that salary increases are typically percentages - so even if your salary went up (gross) but went down (net) a small amount you are increasing the bench mark for future increases and indeed for negotiation when you came to change your job. (ie so if you turned it down now then you could be doing yourself out of income in years to come).

As I understand it the reduction to tax credits for earnings over the threshold is 37 pence for each pound.
Quote from working tax credit booklet
If you receive Working Tax Credit, whether on its own or in addition to Child Tax Credit, and your annual income (or you and your partner's income) is below £5,220, you will receive the maximum amount of all the elements that you qualify for. If your income is over that threshold, the maximum amount is reduced by 37 pence for every pound of income over the threshold ([FONT=Arial,Arial]rounded down [/FONT]to the nearest penny).
This then gives us a total tax NI and tax credit reduction of 40% 1% and 37% that is 78% This is still not enough to cause a reduction in net pay for an increase in gross pay.

mikewebs

CLAPTON wrote: »

just to say for this tax year 2007-8

the personal tax allowance is 5225
the 10% level is 2230
then the 22% level is 32370

then 40% tax

Oh yeas well erm um I forgot that bit I've been doing tax computations for 2006/07

housebuyer_abc

mikewebs wrote: »

Oh yeas well erm um I forgot that bit I've been doing tax computations for 2006/07

Thats okay you'll probably get a refund then, and its not often that happens.