Tax Thresholds - Flexible?

Dazed_and_C0nfused

spider42 said:

Dazed_and_C0nfused said:

MrMoff said:

Dazed_and_C0nfused said:

MrMoff said:

Dazed_and_C0nfused said:

You are getting confused between your Personal Allowance, which with the exception of people with very high income, will be either £11,310 or £12,570, and your tax code allowances.

Your Personal Allowance can never be more than £12,570 and owing tax from a previous tax year does not change your Personal Allowance.

D and C, and BoGoF

Yes I see where you are coming from now.

The term "Personal Allowance" should not be confused with "Tax Free Amount"

Both are very different, one is fixed as you say and the other fluctuates dependant on various reliefs, add ons etc and/or underpayments from a previous Tax Year.

So if I can be so bold and apologise for the confusion I have caused and amend my previous questions and ask which of the following are correct.

Example 1 - My Tax Free Amount is £16,500

I pay no tax on the first £16,500 of my combined income.
I pay 20% tax on £33,770 (£16,500 to £50,270)
and then 40% on anything over £50,270 ?

Or is it --- 

I pay no tax on the first £16,500 of my combined income.
I pay 20% Tax on the next £37,700 over the £16,500.
And then 40% on anything over £54,200? (£16,500+£37,700)

Conversely, if I have a reduced Tax Free amount than normal,

Example 2 -  My Tax free Amount is £9,000
I pay no tax on the first £9,000 of my combined Income.
I would then pay 20% tax on the first £37,700 over the £9,000
And then pay 40% on anything over £46,770 (£9,000 + £37,700)

No one can answer that without knowing how you have derived those "tax free" amounts.

For example receiving Marriage Allowance does not give you any extra tax free amount.  It knocks £252 off your tax liability.

D and C,

I understand what you say however the Tax Free Amounts I use are just an example, it is principle of the calculation method which I have questions about.

I can amend it to reflect the normal Marriage Allowance as a further example.

Example 1 - My Tax Free Amount is £13,830

I pay no tax on the first £13,830 of my combined income.
I pay 20% tax on £36,440 (£13,830 to £50,270)
and then 40% on anything over £50,270 ?

Or is it --- 

I pay no tax on the first £13,830 of my combined income.
I pay 20% Tax on the next £37,700 over the £13,830.
And then 40% on anything over £51,530? (£13,830+£37,700)

Neither as Marriage Allowance does not give you any extra tax free amount.

You pay no tax on the first £12,570.

You pay 20% on the next £37,700.

You pay 40% above that (and then 45% if you are lucky 😉).

Then you knock £252 off what ever the total liability is (the Marriage Allowance credit).

The above assumes the income is all non savings non dividend income such as earnings or pension (so none of the 0% rates are relevant).

Except that Marriage Allowance transfers are only possible if both spouses pay no more than basic rate tax. So in the example given, if any tax is being paid at 40%, then the £252 wouldn't get deducted at all, as a Marriage Allowance transfer would not be valid in the first place.

Fair point but the op should understand the principle now.  But no £252 deduction for a higher rate payer.

eskbanker

Ocelot said:

eskbanker said:

Personal tax allowances don't get increased above the standard figure, so the question is moot - there are various allowances and reliefs that may reduce tax liability, but the PTA itself doesn't change, so you'd need to clarify your scenario in more detail in order to determine potential tax liabilities....

I thought moot meant debatable.

That is one meaning of the word, but it's also (perhaps confusingly) used to denote something where debate is no longer meaningful:

1.  subject or open to debate

a moot point

2. having no practical relevance

Definition 2 is what I meant, although this may be more widely associated with American English than British, apologies for any confusion!

MrMoff

Ocelot said:

Your HR threshold is PTA + 37,770. Anything above is taxed at 40%. 

I have been paying HR tax for years due to tax allowance being lowered.

Ocelot, many thanks, This is the crux of my question.

Lets forget about Marriage Allowance as its the Tax Free Amount which is bothering me, and how it effects the LR and HR thresholds

When calculating a Tax Year HMRC has stated that I owed them £1000 from a previous year - Fair enough, it was from additional income which wasn't expected.

So they stated that to get this £1000 back from me they would reduce my Tax Fee Amount for the next year

So basically instead of my Tax Free Amount being £12,570, they reduced it by £5000 to £7,570 to allow for the £1000 ( £1000 x 5)

Now then this is where I have major issues.

As in effect this now my Tax burden for the year -----

My Income is £50,000

I pay no tax on the first £7,570 ( this is my adjusted Tax free Amount)

I pay 20% on the next £37,700 = £7,540

I then pay 40% on the remaining £4,800 = £1,920

Giving me a total tax bill of £9,460

However if I didn't owe them the £1000 from the previous year my tax would just have been the following

I pay no tax on the first £12,570

I pay 20% on the next 37,500 = £7,500

I have nothing more to pay as I have nothing left to tax as I did not exceed the lower threshold of £37,700

But you can see owing them £1000 actually cost me £1,960

Surely this cannot be right? they have gained £960 from nowhere!

eskbanker

No, you're still not getting it - you're continuing to mix up the separate concepts of adjusted PAYE codings with actual allowances and liabilities to create a fictional 'tax free amount'!

If your 2023/24 income is £50K then you have no tax liability on that.

However, if you have an outstanding liability of £1K from a previous year then they're simply adjusting your PAYE coding in order to collect that - this doesn't create an arbitrary 'adjusted tax free amount' as such!

RG2015

MrMoff said:

Ocelot said:

Your HR threshold is PTA + 37,770. Anything above is taxed at 40%. 

I have been paying HR tax for years due to tax allowance being lowered.

Ocelot, many thanks, This is the crux of my question.

Lets forget about Marriage Allowance as its the Tax Free Amount which is bothering me, and how it effects the LR and HR thresholds

When calculating a Tax Year HMRC has stated that I owed them £1000 from a previous year - Fair enough, it was from additional income which wasn't expected.

So they stated that to get this £1000 back from me they would reduce my Tax Fee Amount for the next year

So basically instead of my Tax Free Amount being £12,570, they reduced it by £5000 to £7,570 to allow for the £1000 ( £1000 x 5)

Now then this is where I have major issues.

As in effect this now my Tax burden for the year -----

My Income is £50,000

I pay no tax on the first £7,570 ( this is my adjusted Tax free Amount)

I pay 20% on the next £37,700 = £7,540

I then pay 40% on the remaining £4,800 = £1,920

Giving me a total tax bill of £9,460

However if I didn't owe them the £1000 from the previous year my tax would just have been the following

I pay no tax on the first £12,570

I pay 20% on the next 37,500 = £7,500

I have nothing more to pay as I have nothing left to tax as I did not exceed the lower threshold of £37,700

But you can see owing them £1000 actually cost me £1,960

Surely this cannot be right? they have gained £960 from nowhere!

The threshold for HR tax is £50,270 so if your income is £50,000 you do not pay any HR tax at 40%.

Your personal tax allowance is still £12,570 as the £5,000 deduction does not change this.

You say you pay £1,920 HR tax, but it is actually only £960. (20% BR tax)

The difference is your "missing" £960.

MrMoff

RG2015 said:

The threshold for HR tax is £50,270 so if your income is £50,000 you do not pay any HR tax at 40%.

Your personal tax allowance is still £12,570 as the £5,000 deduction does not change this.

You say you pay £1,920 HR tax, but it is actually only £960. (20% BR tax)

The difference is your "missing" £960.

RG2015,

I am sorry, but as others have stated, your statement "The Threshold for HR tax is £50,270" is incorrect.

The HR Threshold is actually anything over your Tax Free Amount + £37,700.

Now I agree, this for many this will be the standard £50,270.

However if like me, and I guess for thousands of others, the Tax free Amount is not equal to your Personal Allowance.

It can be lower or higher, and therefore affects when your own personal HR threshold begins.

MrMoff

eskbanker said:

No, you're still not getting it - you're continuing to mix up the separate concepts of adjusted PAYE codings with actual allowances and liabilities to create a fictional 'tax free amount'!

If your 2023/24 income is £50K then you have no tax liability on that.

However, if you have an outstanding liability of £1K from a previous year then they're simply adjusting your PAYE coding in order to collect that - this doesn't create an arbitrary 'adjusted tax free amount' as such!

So what does the HMRC do to collect my £1000 that I owed from a previous year?

Do they add the £5000 to my salary for the next year in order to get it back?

eskbanker

MrMoff said:

eskbanker said:

No, you're still not getting it - you're continuing to mix up the separate concepts of adjusted PAYE codings with actual allowances and liabilities to create a fictional 'tax free amount'!

If your 2023/24 income is £50K then you have no tax liability on that.

However, if you have an outstanding liability of £1K from a previous year then they're simply adjusting your PAYE coding in order to collect that - this doesn't create an arbitrary 'adjusted tax free amount' as such!

So what does the HMRC do to collect my £1000 that I owed from a previous year?

Do they add the £5000 to my salary for the next year in order to get it back?

They'll have adjusted your PAYE tax coding by £5K, which has the effect of collecting that £1K.

This doesn't reduce your 2023/24 personal tax allowance, on which your 2023/24 tax liability is based.

Dazed_and_C0nfused

MrMoff said:

RG2015 said:

The threshold for HR tax is £50,270 so if your income is £50,000 you do not pay any HR tax at 40%.

Your personal tax allowance is still £12,570 as the £5,000 deduction does not change this.

You say you pay £1,920 HR tax, but it is actually only £960. (20% BR tax)

The difference is your "missing" £960.

RG2015,

I am sorry, but as others have stated, your statement "The Threshold for HR tax is £50,270" is incorrect.

The HR Threshold is actually anything over your Tax Free Amount + £37,700.

Now I agree, this for many this will be the standard £50,270.

However if like me, and I guess for thousands of others, the Tax free Amount is not equal to your Personal Allowance.

It can be lower or higher, and therefore affects when your own personal HR threshold begins.

So far you haven't provided an example where your Personal Allowance is anything other than £12,570.

Receipt of Marriage Allowance does not change your Personal Allowance.  Owing some tax does not change your Personal Allowance.  Having (untaxed at source) State Pension does not change your Personal Allowance.

Until you grasp the difference between the Personal Allowance and your tax code allowances you will never understand this.

boingy

I like the idea of flexible tax thresholds. Where do I apply?