Income tax 2019 calculation

John_Nimi

Hi,
I am trying to understand how the Income tax calculation works for the next fiscal year (2019-20).
I was using the tax calculator at the uktaxcalculators.co.uk site (sorry can't post links as yet) and trying to understand how the reduction in tax free allowance affects the tax calculations for that year.

For amounts less than 100k I am able to calculate the tax myself and it matches the one shown on the site, however when I try an amount like 100010 I see that the higher rate tax (40%) comes out to 20006 on the site but by my own calculations I end up with 20004 for the same bracket (i.e. 100010 - 50000 * 40%) and can't figure out what I'm doing wrong here :mad:

Could someone please help me understand how the formula for this tax calculation works?

Thanks!

Dazed_and_confused

The Personal Allowance can be reduced in two situations,

1). An application for Marriage Allowance is made
2). Adjusted net income exceeds £100,001.

If we assume your £100,010 is the adjusted net income then the Personal Allowance due would only be £12,495, not £12,500

John_Nimi

I'm trying to figure out why the higher rate tax (40%) tax calculation comes out to 20006 on the site. Because as far as I can tell it should be (100010 - 50000) * 40% i.e. 20004 unless I'm doing something wrong here?

Dazed_and_confused

Your £50,000 is wrong.

If adjusted net income is £100,010 then the Personal Allowance would be £12,495.

Personal Allowance of £12,495 plus standard basic rate band of £37,500 = £49,995 not £50,000.

So an extra £5 is liable to be taxed at 40%. Income between £100,001 and £125,000 can have an effective tax rate of 60% due to the reduction in the Personal Allowance.

John_Nimi

Dazed_and_confused wrote: »

Your £50,000 is wrong.

If adjusted net income is £100,010 then the Personal Allowance would be £12,495.

Personal Allowance of £12,495 plus standard basic rate band of £37,500 = £49,995 not £50,000.

So an extra £5 is liable to be taxed at 40%. Income between £100,001 and £125,000 can have an effective tax rate of 60% due to the reduction in the Personal Allowance.

Ah! thank you!

does this mean that the bands change accordingly above 100,000?

• 0% -- 0 to 12495
• 20% -- 12495 to 49995
• 40% -- 49995 to 149995
• 45% -- 149995 to Infinity

and with 150,000 the bands become ,

• 0% -- 0 to 0
• 20% -- 0 to 37500
• 40% -- 37500 to 137500
• 45% -- 137500 to Infinity

Dazed_and_confused

does this mean that the bands change accordingly above 100,000?

0% -- 0 to 12495
20% -- 12495 to 49995
40% -- 49995 to 149995
45% -- 149995 to Infinity

and with 150,000 the bands become ,
0% -- 0 to 0
20% -- 0 to 37500
40% -- 37500 to 137500
45% -- 137500 to Infinity

Sort of, the bands themselves don't change, just the Personal Allowance. So in your example the basic rate band is still £37,500 but the Personal Allowance is just £12,495. Which means higher rate tax kicks in at £49,996.

There are two things which can change (extend) the rate bands, gift aid and relief at source pension contributions.

and with 150,000 the bands become ,

It is true that if adjusted net income was £150,000 then Personal Allowance would be £0 but it would also be £0 if adjusted net income was £125,000 (in 2019:20 tax year).

There can be significant differences between taxable income and adjusted net income so you might want to research this a bit further.

Dazed_and_confused

And you might want to look again at the higher rate band, this isn't £100k

John_Nimi

Thanks! Going to research this further. It's already got me interested (and confused) with the way the tax is being calculated because of the > 100k "adjustment"

Dazed_and_confused

It is a nice problem to have, needing to understand the Personal Allowance being reduced!

polymaff

Dazed_and_confused wrote: »

It is a nice problem to have, needing to understand the Personal Allowance being reduced!

Quite. I sometimes feel that those with £100k+ looking for free advice should agree to make an accountant-equivalent donation to DEC


And claim gift aid - natch

John_Nimi

Dazed_and_confused wrote: »

It is true that if adjusted net income was £150,000 then Personal Allowance would be £0 but it would also be £0 if adjusted net income was £125,000 (in 2019:20 tax year).

There can be significant differences between taxable income and adjusted net income so you might want to research this a bit further.

Could you please explain this a little more? Is the higher rate bracket now 125k in the 2019-20 year?