Tax for dummies (well, me)

Knowhere

Hi,
I'm struggling to understand something I'm sure is quite basic... but its just not 'clicking' with me...
I know the higher rate (40%) tax band starts at £50,271.
The better half is a Nurse with a salary this year of £52,809 and I believe her pension contribution rate is 10.7%.
If I stick those figures into the MSE tax calculator it gives me a result 'Taxable Wage=£40,111'.
So... does that mean she has £10,160 (£50,271-£40,111) to play with (e.g. interest off savings etc) before she starts to hit the 40% or am I missing something ?
Thanks in advance - and please be kind  

Dazed_and_C0nfused

You cannot answer that without understanding the method to make those pension contributions. 

Salary is often irrelevant for tax purposes and assuming she's an NHS nurse in the NHS pension scheme then her 10.7% will be made using the net pay method.

This means her taxable pay (the amount she will see on her P60) is only £47,158.  Which outside of Scottish taxpayers is a fair way short of being liable to higher rate tax.

Assuming she hasn't applied for Marriage Allowance the first £12,570 would be covered by her Personal Allowance, leaving £34,588 to be taxed.  So just over £3k unused basic rate band.

She may also be claiming work related expenses which could slightly reduce the amount taxed.

Knowhere

Thanks for the quick reply, to confirm yes she is indeed an NHS Nurse in the NHS pension scheme in England and no work related expenses.
I’ve understood all you’ve said, except for the “…just over £3k unused basic rate band” - I can’t see where that comes from with the figures quoted.
Can you possibly explain that bit please?
Thank you

Dazed_and_C0nfused

Knowhere said:

Thanks for the quick reply, to confirm yes she is indeed an NHS Nurse in the NHS pension scheme in England and no work related expenses.
I’ve understood all you’ve said, except for the “…just over £3k unused basic rate band” - I can’t see where that comes from with the figures quoted.
Can you possibly explain that bit please?
Thank you

Taxable income £47,158

Less Personal Allowance £12,570

= Income to be taxed £34,588

Standard basic rate band £37,700

Unused basic rate band £3,112

Knowhere

Got it I think, thank you!

So if I understand correctly and say she received £4000 in taxable savings interest, I presume she still gets a £1000 personal savings allowance, so the remaining £3000 would still be within the basic rate band?

What would happen if she received £5000 or more instead? Would that tip her over into the higher rate band and to make matters worse reduce her PSA to £500 ?

Dazed_and_C0nfused

Knowhere said:

Got it I think, thank you!

So if I understand correctly and say she received £4000 in taxable savings interest, I presume she still gets a £1000 personal savings allowance, so the remaining £3000 would still be within the basic rate band?

What would happen if she received £5000 or more instead? Would that tip her over into the higher rate band and to make matters worse reduce her PSA to £500 ?

No, you're missing a key factor there.

If she receives £4,000 in untaxed interest her total taxable income will be £51,158.  So unless there is some missing information (say Gift Aid donations or relief at source pension contributions) she would be deemed a higher rate payer and the interest will be taxed like this.

£500 x 0% (savings nil rate) = £0.00
£2,612 x 20% (savings basic rate) = £522.40
£888 x 40% (savings higher rate) = £355.20

Total tax payable on interest = £877.60

Also, are you certain about her not claiming expenses?  Assuming she is a uniformed nurse that would be fairly unusual, although maybe her employer provides laundry facilities or reimburses the costs?

If her tax code is higher than 1257L that's a sign some expenses could already have been claimed (possibly many years ago).

SacredStephan

To the OP, in your first post you have given the wrong input to the calculator re: pension contributions - you need to specify % rather than £.

And see here for extra tax allowances for uniform etc:
https://www.rcn.org.uk/membership/Membership-fees/Tax-relief

--Edit--
And here:
https://www.nmc.org.uk/registration/your-registration/paying-your-fee/tax-relief/

Knowhere

SacredStephan said:

To the OP, in your first post you have given the wrong input to the calculator re: pension contributions - you need to specify % rather than £.

Doh! Where’s the ‘facepalm’ smiley when you need it….

Knowhere

Dazed_and_C0nfused said:

Knowhere said:

Got it I think, thank you!

So if I understand correctly and say she received £4000 in taxable savings interest, I presume she still gets a £1000 personal savings allowance, so the remaining £3000 would still be within the basic rate band?

What would happen if she received £5000 or more instead? Would that tip her over into the higher rate band and to make matters worse reduce her PSA to £500 ?

No, you're missing a key factor there.

If she receives £4,000 in untaxed interest her total taxable income will be £51,158.  So unless there is some missing information (say Gift Aid donations or relief at source pension contributions) she would be deemed a higher rate payer and the interest will be taxed like this.

£500 x 0% (savings nil rate) = £0.00
£2,612 x 20% (savings basic rate) = £522.40
£888 x 40% (savings higher rate) = £355.20

Total tax payable on interest = £877.60

Also, are you certain about her not claiming expenses?  Assuming she is a uniformed nurse that would be fairly unusual, although maybe her employer provides laundry facilities or reimburses the costs?

If her tax code is higher than 1257L that's a sign some expenses could have been claimed (possibly many years ago).

Thank you once again.  It is sinking in…. I’ll need to read and digest a few times but much appreciated.

Dazed_and_C0nfused

Knowhere said:

Dazed_and_C0nfused said:

Knowhere said:

Got it I think, thank you!

So if I understand correctly and say she received £4000 in taxable savings interest, I presume she still gets a £1000 personal savings allowance, so the remaining £3000 would still be within the basic rate band?

What would happen if she received £5000 or more instead? Would that tip her over into the higher rate band and to make matters worse reduce her PSA to £500 ?

No, you're missing a key factor there.

If she receives £4,000 in untaxed interest her total taxable income will be £51,158.  So unless there is some missing information (say Gift Aid donations or relief at source pension contributions) she would be deemed a higher rate payer and the interest will be taxed like this.

£500 x 0% (savings nil rate) = £0.00
£2,612 x 20% (savings basic rate) = £522.40
£888 x 40% (savings higher rate) = £355.20

Total tax payable on interest = £877.60

Also, are you certain about her not claiming expenses?  Assuming she is a uniformed nurse that would be fairly unusual, although maybe her employer provides laundry facilities or reimburses the costs?

If her tax code is higher than 1257L that's a sign some expenses could have been claimed (possibly many years ago).

Thank you once again.  It is sinking in…. I’ll need to read and digest a few times but much appreciated.

A key thing to understand is that whether it's £500 or £1,000 the savings nil rate (aka Personal Savings Allowance) uses up any remaining basic rate band.

Which can give a slightly higher tax liability than could be expected as it can push income into the higher rate band.

Albermarle

Knowhere said:

Dazed_and_C0nfused said:

Knowhere said:

Got it I think, thank you!

So if I understand correctly and say she received £4000 in taxable savings interest, I presume she still gets a £1000 personal savings allowance, so the remaining £3000 would still be within the basic rate band?

What would happen if she received £5000 or more instead? Would that tip her over into the higher rate band and to make matters worse reduce her PSA to £500 ?

No, you're missing a key factor there.

If she receives £4,000 in untaxed interest her total taxable income will be £51,158.  So unless there is some missing information (say Gift Aid donations or relief at source pension contributions) she would be deemed a higher rate payer and the interest will be taxed like this.

£500 x 0% (savings nil rate) = £0.00
£2,612 x 20% (savings basic rate) = £522.40
£888 x 40% (savings higher rate) = £355.20

Total tax payable on interest = £877.60

Also, are you certain about her not claiming expenses?  Assuming she is a uniformed nurse that would be fairly unusual, although maybe her employer provides laundry facilities or reimburses the costs?

If her tax code is higher than 1257L that's a sign some expenses could have been claimed (possibly many years ago).

Thank you once again.  It is sinking in…. I’ll need to read and digest a few times but much appreciated.

You are not the only one who gets confused !

I think most people think that the Personal savings allowance of £1000 means you can earn £1000 in interest without it registering in your tax calculations.
However the interest is still added to your other income, but then taxed at 0%.
In most cases it makes no difference, but it can do in cases like that of your better half, who is hovering around the higher rate trigger limit.
She may wish to consider putting some savings into a cash ISA, where the interest will be fully protected from tax.