Completing my tax return when I become a higher-rate tax payer

Can_not_think_of_one

Just looking for some information on a situation I never thought I’d encounter. 

I have an amount of income generated from a rental property I own & so complete an online self-assessment each year. 

Rental income plus salary has always been well under the 40% tax threshold. 

I also have a very small amount of dividend income & an even smaller amount of interest from bank accounts.  Interest falls well under the 40% earner’s reduced tax-free amount, tax on dividend income will depend on when it’s calculated – before I hit the higher-rate tax band or after. 

However, this year I’ve done an eye-watering amount of overtime (eye firmly fixed on the CARE pension almost within touching distance) & strongly suspect I’ll tip over into the higher rate tax band by the time I complete my next self-assessment – but only when the rental income is added to my taxable pay. 

I think I remember the online self-assessment form saying something along the line of “If you owe any tax, do you want us to adjust your tax code?” (my words) but, ideally, I’d just continue paying the balance of tax due as I do now – we’ve recently recruited & I don’t anticipate the amount of overtime being the same throughout the next financial year.  But then, we always say that! 

So, a few questions – 

1.    Am I right in assuming that because I complete the self-assessment online, the tax owed calculation will automatically adjust to account for the amount that falls within the higher rate band?

2.    If not, how does it work?

3.    I’m reasonably sure I can elect to pay tax due in one lump sum/regular payments (so long as it’s all paid off before 31st January 2025) & NOT have my tax code adjusted, but am I right?

4.    I’m aware higher-rate tax payers have a reduced amount of bank interest they can earn tax-free – that’s not a problem for me, it’s a really minimal amount, but is there anything else I need to be aware of/careful about?

5.    There’s quite a bit of difference between the tax rate paid on dividend income between a 20% tax payer & a 40% tax payer.  Amount wise, it’s not going to make a lot of difference to me – I don’t think I’ve ever received anywhere near £100 across my shares – but I’m interested in how, & when it’s taken into account.  Does it go ‘Add up all income; ignore the bank account interest (last year I earned the grand sum of £18, rounded down by HMRC); the first £50,270 of that sum is taxed at 20% - that will take account of all salary, including overtime, plus a big chunk of the rental income; (using last year’s figures again) the next £30, rounded down again, is taxed at the higher tax rate of 33.75% for dividends; whatever is left, is taxed at 40%’?

6.    I donate to charity & gift aid where it’s available.  The Gov.UK website seems to say that I can claim some of that back through my tax return – have I understood that correctly?

7.    And, if I have, am I able to elect for that rebate to go to the relevant charities as an extra donation?  Or is it just simpler for me to claim it back and make another donation to the charities myself? 

Think that’s it.  Probably made it far more confusing/garbled than it needs to be so if you’ve got this far, thanks for reading.  Looking forward to learning from any replies.

CNTOO

RacingDriver

4. Child benefit reduction (HICBC), loss of marriage tax allowance

5. Employment income is taxed first, then savings, then dividends, then capital gains.  You also have the £1,000 (reducing to £500 from 6th April 2024) dividend allowance taxed at 0%

6. For a higher rate taxpayer Gift Aid donations increase your basic rate tax band so you pay more tax at 20% and less tax at 40%.  The charity reclaims the other 20%.

7. No, you can choose to make another donation to the charity if you choose.

Dazed_and_C0nfused

1.  There won't be any "adjustment".  The Self Assessment calculation is to calculate your total liability and then give credit for any tax deducted at source and that's what will happen.

2.  N/A

3.  Yes.  Near the end of the return there are two questions about collection of tax and you need to consider both of these.  One is about the tax owed for the tax year the return is for.  The other is about making an adjustment to your latest tax code to start collecting more tax during the year towards the next tax years liability.  For example if you were filing the 2023-24 return this would be about amending your 2024-25 code to collect more tax for 2024-25 so you have a smaller Self Assessment liability for 2024-25.  You need to consider both aspects when completing these boxes.

4.  Interest from cash ISA's is tax free, other interest will be taxable  As you have clearly used your Personal Allowance elsewhere the full amount will be taxed. But the first £500 or £1,000 will be at a 0% rate.

5.  For the current tax year the first £1,000 of dividend income is always taxed at 0%.  Dividends are taxed last, after non savings non dividend income like earnings and rental profits.  Next comes interest and then dividends.

6.  You simply include the relevant contributions like you always have done in the past.  Gift Aid has been an entry on tax returns since Self Assessment was introduced.  Your basic rate band will be increased by the gross Gift Aid contribution.

7.  I don't know if you can elect for that specific element of any tax reduction to go to a charity.  Personally I would say you are massively overcomplicating life there.  Particularly as you are unlikely to be due a "rebate" on the Gift Aid, it would be a reduction in your overall liability, there is no refund as such.

Can_not_think_of_one

RacingDriver said:

4. Child benefit reduction (HICBC), loss of marriage tax allowance

5. Employment income is taxed first, then savings, then dividends, then capital gains.  You also have the £1,000 (reducing to £500 from 6th April 2024) dividend allowance taxed at 0%

6. For a higher rate taxpayer Gift Aid donations increase your basic rate tax band so you pay more tax at 20% and less tax at 40%.  The charity reclaims the other 20%.

7. No, you can choose to make another donation to the charity if you choose.

Thank you. In reply -

4 - Not a consideration. Single, no children.

5 - Just to clarify - I have no expectation of savings interest being measurably more than last year & will think myself lucky if I get anywhere near £100 let alone £500 so that'll presumably be tax free.  Dividends may rise since at least 1 company resumed paying dividends during the last tax year following their suspension during the pandemic, but they would have to pay considerably more to even approach the £500 you say is tax free for the next financial tax year. So would you say I could, to all intents & purposes, disregard interest/dividends when doing my rough calculations of income?

Capital gains - I'm a little confused, but that's easily done. My understanding is CGT is payable on disposing of an asset & I have no intention, at least for the foreseeable, in disposing of my rental property.  Is my rental income being considered as a potential capital gain & so taxed last?  To keep it simple for me, would continuing to think of employment income + rental income as just 'income' have the same result tax wise?

6 - I'm clearer on this one but how much does gift aiding increase the basic tax band by?  Say over the various charities I donate £1,000 over the year.  Does the 20% tax band increase by £1,000?  More?  Less? 

7 - Pity. Electing for it to go direct to the charities would ensure they got it.  I can see it getting forgotten about if it's absorbed into a lower tax bill.

[Deleted User]

Just as an aside and the comment on the CARE pension. 

You do know that this is based on normal 37.5 p.w. earnings? Any earnings in excess of that in ANY week does not attract pension contributions and does not, therefore, count towards your CARE. 

That is, of course, if I have understood your comment. Of course, you could just be indicating that you are earning as much as you can before you draw the pension.

Dazed_and_C0nfused

6 - I'm clearer on this one but how much does gift aiding increase the basic tax band by? Say over the various charities I donate £1,000 over the year. Does the 20% tax band increase by £1,000? More? Less? 

It's increased by the gross contribution so it all depends on what you referring to with the £1,000.

If that is the money that has come out of your pocket then the gross amount would be £1,250.

But if the £1,000 includes the basic rate relief claimed by the charity then your basic rate band would be increased by £1,000.

Can_not_think_of_one

Thank you @Dazed_and-C0nfused. Great name – it would have been particularly apt for me in this situation!

1 – I think I’m overthinking things & also not clearly explaining myself in my original post. Your answer though makes things clearer. Using imaginary figures, if total taxable income, from all sources, = £53,000 & I’ve already paid tax through PAYE on £47,000 of that, the SA calculation of tax due will be based on £6,000 extra income, just over half of that at 20% & just under half at 40%. There’ll be a big gulp when I see that final figure, but I can live with that.

3 – Thank you. I can’t say that I’ve noticed the 2nd box before – just shows how observant I am. I’ll keep my eye open when I complete the 2023-24 return but don’t think I’ll opt for them to adjust my tax code to collect more tax through PAYE – if I end up in the same situation next year, I’ll think myself fortunate, but I really do think the days of doing excessive amounts of overtime are over & I’ll fall back under the higher-rate threshold.

4 & 5 – ISA income I’ve always disregarded for the tax return knowing it’s tax free &, for the purposes of this post, I’m going to forget about my interest & dividends. It’s clear they’re both well under the 0% rate ceiling.

6 & 7. Thank you. Before last night I misunderstood & thought I (or possibly the charities concerned) was/were responsible for claiming the extra tax I’d paid on donations I’d made. I now know my basic rate tax band grows by the amount I donate. The £1,000 was a nice round example figure but, yes, that’s the amount out of my pocket. You’re right about me overcomplicating things – it’s one of my many failings!

Dazed_and_C0nfused

1.  You are overcomplicating things!  In the scenario you describe there will be no £6,000 element.  Your tax calculation will show what tax is due on £53,000.  And then tax deducted under PAYE will be deducted, leavings an amount over or underpaid.

3.  We get fairly regular posts on here from people who take no notice of the question about adjusting the current year's tax code and then get upset/confused when HMRC react to what they requested, albeit unwittingly, via their tax return.

6 & 7.  The charities are responsible for claiming the basic rate tax relief i.e. you donate £800 net and they sort out the £200 basic rate relief with HMRC but you can then claim higher rate relief on the gross donation of £1,000.

Can_not_think_of_one

[Deleted User] said:

Just as an aside and the comment on the CARE pension. 

You do know that this is based on normal 37.5 p.w. earnings? Any earnings in excess of that in ANY week does not attract pension contributions and does not, therefore, count towards your CARE. 

That is, of course, if I have understood your comment. Of course, you could just be indicating that you are earning as much as you can before you draw the pension.

You understood right, but I don’t think what you’ve said is right. At least, not regarding my pension with the LGPS. A normal working week for me, before overtime, is 42 hours. According to the website, all the paperwork, even HR (though take their information with a healthy dose of cynicism), my pension increases by 1/49th of my actual salary for that year, overtime included. All pension statements from 2014 onwards would seem to support that with my yearly pension contributions going up & down depending on the amount of overtime I’ve worked & whether I’ve been working in a higher paid role, & with the amount of my ‘CARE main section pay’ reflecting ALL my pay, not just the normal 42hrs/week pay.

I’ll be seriously annoyed if that’s not the case.

The extra towards my pension is the main attraction of all the overtime but I won’t deny the extra each month is helping me prepare for retirement. I’m looking forward to it.

Dazed_and_C0nfused

This is from the LGPS website,

Pensionable pay

Pensionable pay is the pay that pension contributions are deducted from. Pensionable pay includes:

• your normal salary or wages

• bonuses

• overtime – both contractual and non-contractual

•  pay for additional hours if you work part time

•  maternity, paternity, adoption and shared parental pay

• shift allowance

• any other taxable benefits specified as pensionable in your contract.

Can_not_think_of_one

@Dazed_and_C0nfused

Phew! I thought so but you never know. I'll carry on overtiming while I can then.