Tax calculation - payment on account seems unusually higher?!

400ixl

So your taxable income increased by £7k to be taxed at 40% as it is all in the higher tax bracket, so an additional £2.8k which tallies with your increased tax bill

Plus an additional £1k of child benefit to pay back due to the overall increase in taxable income.

If you don't want to be taxed on it then look at investing it into a pension and claim it back at the 40% rate. Pays it forward, but obviously less in your pocket today.

Bookworm105

icicat said:

Thanks guys. Here are the calculations for both years.

so in the section 'how we have worked out your income tax', If I deduct the CGT, then what remains is £6,241.87. Is this what I am being taxed for my self employment profit alone? As that is the same amount it is asking me to pay on account for the following tax year.

So for a self employment profit of £12,573 it's worked out the tax due is £6,241.87? so 50%?!?

Where as previous tax year my self employment profit was £9,030 and tax due was £3,326.20

So from my understanding for whatever reason, I earned an extra £3,543 for 23/24 and have been taxed an extra £3,326.20??

Seems a bit excessive, even with any UK bank interest or child benefit added on top. Is the payment on account assuming I will have the same amount of UK bank interest next year?

@icicat your understanding of the calculation is flawed, although your final sentence is correct. HMRC assume the actual info declared in the previous year will remain the same for the current year so the POA is based on previous year's (actual) data 

1. POA is designed to collect what HMRC expects to be your tax liability for the entire year. However, partially offsetting that liability will be any tax you have already paid during the year under PAYE. 
2. It is crucial to understand HMRC has no idea what your actual total liability will be until you submit a tax return. But as that could up to 9 months after the end of the tax year (ie on 31 Jan against the previous 5 April), they are not going to wait until then to start collecting your money owed. Hence POA 
3. The amount of POA calculated in one year has no bearing on the calculation in the next year as each calculation is based on actual figures for the previous year.  POA is not your liability, it is just a way to get cash out of you during the year that goes someway towards paying what you are expected to owe .

CGT is excluded from the POA calculation as that tax has to be paid to different time limits. It is however shown on the annual calculation as you must report your CGT on your tax return to show if anything has changed since you did the calculation - ie you might owe underpaid CGT

In your actual situation you have several sources of income that lead to your total annual tax bill value upon which the POA is then calculated.

22/23
employment + benefits + self employment = 55,000 less PA = taxable income 42,430.00
as that makes you a higher rate tax payer there is then an adjustment made for HICB resulting in total tax liability 9,987.00
during 22/23 you paid 6,660.80 via PAYE leaving 3,326.20 shortfall still to be paid 

For 23/24 HMRC therefore assumes you will once again underpay your tax for 23/24 by 3,326.20 and so to collect some of that before 31 jan they levy POA of 3,326.20 / 2 =  1,613.10

23/24 
TAXABLE total income: employment + dividends + interest + self employment = 49,663.00
note, as that is above the higher rate threshold, the tax liability needs to be increased by the HICB charge so the final liability is 13,364.27
against that liability you have paid 7,122.40 via PAYE leaving a shortfall of 6,241.87

This time HMRC assumes for next year 24/25 you will underpay by 6,241.87, so sets the POA as 50% of that = 3,120.94

the reason your POA has increased by 2,915.67 (6241.87-3,326.20) is because in 23/24 you had not only more self employment, but also you had interest, dividends and HICB which were not present in 22/23 and no tax had already been deducted from them at source hence the need to collect more tax in 23/24 POA

in summary: Each POA payment is half of the total o/s unpaid tax you owed last year.(subject to the 1,000 total annual tax owed threshold)
 Understand your Self Assessment tax bill: Payments on account - GOV.UK

icicat

Thanks for your replies all. Yes I'm aware of the other fsctors like savings interest and child benefit etc. I think I need to understand how child benefit is taxed. Can anyone work out how much I have been taxed on the child benefit? Because when I use HMRC HICB tax calculator the figure of tax I owe is the same as the child benefit I've been paid?! Doesn't make sense.

@Bookworm105 Thanks for the lengthy info. I think will need to read it a few times until my brain can process I'm not sure Im understand when you mention I have underpaid tax from 22/23? Is there something in the calculation that states that? I paid my tax from that year as well as the POA for the 23/24 year. One thing I did recently was to amend my 22/23 return as I forgot to add some capital gains (about £700) which I did a few days back. Though hopefully re-submitting the return it's not assuming I have to repay the full amount again?

Dazed_and_C0nfused

icicat said:

Thanks for your replies all. Yes I'm aware of the other fsctors like savings interest and child benefit etc. I think I need to understand how child benefit is taxed. Can anyone work out how much I have been taxed on the child benefit? Because when I use HMRC HICB tax calculator the figure of tax I owe is the same as the child benefit I've been paid?! Doesn't make sense.

@Bookworm105 Thanks for the lengthy info. I think will need to read it a few times until my brain can process I'm not sure Im understand when you mention I have underpaid tax from 22/23? Is there something in the calculation that states that? I paid my tax from that year as well as the POA for the 23/24 year. One thing I did recently was to amend my 22/23 return as I forgot to add some capital gains (about £700) which I did a few days back. Though hopefully re-submitting the return it's not assuming I have to repay the full amount again?

At no point has @Bookworm105 said that though.  You are inferring things that simply aren't there.  How much have you already paid for 2022-23 (via Self Assessment, not tax deducted at source)?

Also, as your total income was > £60k and you have no pension contributions or Gift Aid donations to reduce your adjusted net income the High Income Child Benefit Charge will be 100% of the Child Benefit.

400ixl

Yep, at that income the HICB answer is simple, all of it is claimed back by the government.

Bookworm105

icicat said:

Thanks for your replies all. Yes I'm aware of the other fsctors like savings interest and child benefit etc. I think I need to understand how child benefit is taxed. Can anyone work out how much I have been taxed on the child benefit? Because when I use HMRC HICB tax calculator the figure of tax I owe is the same as the child benefit I've been paid?! Doesn't make sense.

@Bookworm105 Thanks for the lengthy info. I think will need to read it a few times until my brain can process I'm not sure Im understand when you mention I have underpaid tax from 22/23? Is there something in the calculation that states that? I paid my tax from that year as well as the POA for the 23/24 year. One thing I did recently was to amend my 22/23 return as I forgot to add some capital gains (about £700) which I did a few days back. Though hopefully re-submitting the return it's not assuming I have to repay the full amount again?

good luck, it seems understanding simple wording is your problem.

sheramber

icicat said:

Thanks for your replies all. Yes I'm aware of the other fsctors like savings interest and child benefit etc. I think I need to understand how child benefit is taxed. Can anyone work out how much I have been taxed on the child benefit? Because when I use HMRC HICB tax calculator the figure of tax I owe is the same as the child benefit I've been paid?! Doesn't make sense.

@Bookworm105 Thanks for the lengthy info. I think will need to read it a few times until my brain can process I'm not sure Im understand when you mention I have underpaid tax from 22/23? Is there something in the calculation that states that? I paid my tax from that year as well as the POA for the 23/24 year. One thing I did recently was to amend my 22/23 return as I forgot to add some capital gains (about £700) which I did a few days back. Though hopefully re-submitting the return it's not assuming I have to repay the full amount again?

You are not taxed on the child benefit. You are pay back what you have received. 

For convenience it is reclaimed by HMRC  through the tax system. 

icicat

Thanks guys. @Bookworm105 sorry I misunderstood first time reading. Upon reading it again I understand what you are saying, outlining the POA.

Sorry guys, I find tax stuff very difficult to understand (maybe I'm dyslexic) but thanks to your help it's becoming clearer.

Though I'm still not clear on being taxed the higher rate. My total income for 2024 after allowance was £49,663. Wouldn't that keep me on the basic rate of 20%? So anything over £50,271 like the child benefit would be taxed 40%? Sorry if that sounds totally wrong, but that's my current understanding of it. I think that's what I couldnt understand in the calculation, why £10,495 of that is being taxed at higher rate?

I also declared child benefit 2023, so not sure why it's not coming up in that calculation.

eskbanker

icicat said:

Though I'm still not clear on being taxed the higher rate. My total income for 2024 after allowance was £49,663. Wouldn't that keep me on the basic rate of 20%? So anything over £50,271 like the child benefit would be taxed 40%? Sorry if that sounds totally wrong, but that's my current understanding of it. I think that's what I couldnt understand in the calculation, why £10,495 of that is being taxed at higher rate?

Your total income for 2023/24 was £62,233, which takes you nearly £12K into the higher rate, as that starts at £50,270 as you recognise (or £37,700 if you prefer to deduct your personal tax allowance first).

icicat

Thanks eskbanker. I get now why I was so confused as I thought the allowance somehow excludes from the final earnings, though it's pretty much just a non-taxable profit and the whole amount is what's taken into account. So the numbers add up now. I'll need to reread everything with that in mind.

I still don't understand why I have to pay 100% of the child benefit back in tax? I declared child benefit for 2023 return so did the same apply for that? Is child benefit just not worth claiming if your salary goes into the higher tax rate? At this point it feels like an interest free loan