Tax calculation - payment on account seems unusually higher?!

eskbanker

icicat said:

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

Correct - for many years now, child benefit has been means-tested, i.e. anyone earning enough to take them into higher rate tax is no longer entitled to the full unadjusted child benefit and has to repay the High Income Child Benefit Charge.  The current guidance is https://www.gov.uk/child-benefit/what-youll-get and https://www.gov.uk/child-benefit-tax-charge but the guidance applying to 2023/24 is:

If you or your partner earn over £50,000

If either your or your partner’s ‘adjusted net income’ is over £50,000 a year, you may have to pay the High Income Child Benefit Charge.

Your adjusted net income is your total taxable income before any personal allowances and less things like Gift Aid. Your total taxable income includes interest from savings and dividends.

[..]

If either you or your partner has an individual income of £60,000 or over, you’ll be charged the same amount as you make through Child Benefit payments. You’ll end up with no extra money from Child Benefit.

https://web.archive.org/web/20231107103838/https://www.gov.uk/child-benefit/what-youll-get

The charge operates on a sliding scale, so it was only £555 in your 2022/23 self-assessment, but when your income exceeded £60K in 2023/24, the charge reclaimed everything you'd received.

400ixl

It is worth it if your other half is not working as they can claim the National Insurance yearly contribution towards their state pension.

Otherwise it is as you say an interest free loan, but don't forget the previous government have changed the level it is set at for future years, so you may well be fully under the new limit or at least partially.

Bookworm105

icicat said:

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

use google to learn how things work for yourself
High income child benefit charge | Low Incomes Tax Reform Group
For tax years up to and including the year ended 5 April 2024, child benefit is effectively withdrawn at a rate of 1% for each £100 earned over £50,000 a year by the partner with the higher adjusted net income. Therefore, the benefit is fully withdrawn where income of the higher-income partner reaches £60,000 a year.

We have no idea how many children you claim for and thus how much you get, but surely you can read the lines on the 2 calculations you have posted that show your total income before personal allowance deduction. Surely you can see that 22/23 is less than 60 and 23/24 is more 

PS the threshold changes for 25/26 tax year so i suggest you look that up yourself so you will understand it next year as well 

Dazed_and_C0nfused

And your calculation for 2023-24 is a perfect example where putting some money into a pension would have been fantastic value.

Not only would you have had 25% added to whatever you contributed (which is 20% of the gross contribution) but it would have mean more of your income would be taxed at 20% and, with a large enough contribution, the HICBC would have been less (or even £0).

Sadly that boat has now sailed for 2023-24 but it's something you should think about before the current tax year ends.  

NB.  HICBC only applies in 2024-25 on your  adjusted net income exceeds £60k.  And it's 100% when adjusted net income hits £80k.

icicat

Thanks folks for all your following replies. I took a bit of a break from this as I had other matters to sort out, now I need to jump back on it. Ok I will need to be real careful with what I earn in terms of going over the threshhold.

Regarding pensions, someone suggested increasing my salary sacrifice at work, so more of my wage goes into my work pension and therefore lowering my yearly profit. It means I have less money, though as you mention it's taxed at a much lower rate. Only issue I see is if we apply for a mortgage or re-apply on the current one it will show less income.

Dazed_and_C0nfused

icicat said:

Thanks folks for all your following replies. I took a bit of a break from this as I had other matters to sort out, now I need to jump back on it. Ok I will need to be real careful with what I earn in terms of going over the threshhold.

Regarding pensions, someone suggested increasing my salary sacrifice at work, so more of my wage goes into my work pension and therefore lowering my yearly profit. It means I have less money, though as you mention it's taxed at a much lower rate. Only issue I see is if we apply for a mortgage or re-apply on the current one it will show less income.

I think you are getting even more confused or maybe just your terminology is confusing.

Salary sacrifice will mean you have less taxable earnings from your PAYE employment. But that won't change any "profit" you have from self employment (or letting property).

I think some mortgage companies will take into account income you are sacrificing into a pension but if it could be important in the future you should check that out in more detail before agreeing to a reduced salary and finding you have mortgage difficulties!

icicat

The whole idea would be to lower my taxable PAYE income and keep an eye on my SE earnings to ensure I am just under the higher tax band with my total annual profit. Then yes I would definitely need to figure out if that amount will still cover mortgage, bills etc.

It's not great for the short term as I will have less money in the bank, though long term it will mean money that money that would have just gone to tax is back in my pocket when I'm a pensioner and need it

icicat

Sorry if this has been answered already, though just to double check. I'm at a section of the return that asks 'Are you claiming to reduce your 2024-25 payments on account?' I'm not sure if my SE earnings will be the same this year as last year, though is it best to put 'No' and then just fill in my return in April so before making the second POA I pay in what I owe? Then I wouldn't need to make the second POA in July correct?

[Deleted User]

icicat said:

Sorry if this has been answered already, though just to double check. I'm at a section of the return that asks 'Are you claiming to reduce your 2024-25 payments on account?' I'm not sure if my SE earnings will be the same this year as last year, though is it best to put 'No' and then just fill in my return in April so before making the second POA I pay in what I owe? Then I wouldn't need to make the second POA in July correct?

Absolutely the correct thing to do. In July you would pay the total amount due for 2024/25 less the amount paid by way of the first payment on account.

Dazed_and_C0nfused

icicat said:

Sorry if this has been answered already, though just to double check. I'm at a section of the return that asks 'Are you claiming to reduce your 2024-25 payments on account?' I'm not sure if my SE earnings will be the same this year as last year, though is it best to put 'No' and then just fill in my return in April so before making the second POA I pay in what I owe? Then I wouldn't need to make the second POA in July correct?

Filing the return before the second POA is payable is a good plan.

But you need to remember that POA are not just related to a particular source of income, it is your overall liability which is considered, not just the self employment.