Just into higher band - did I pay too much? Do I understand the system?

ed67812

I have always been a PAYE employee until this year. 

As a result, I have looked back over previous years just to try and understand a bit clearer. 

In the tax year 2022/2023 I earned from work £50303.76 taxable pay - after pension deducted at source. 

I earned £674 in interest reported to HMRC (not a normal amount for me but we were holding funds for a house extension in the bank).

As such, the total taxable income was £50,977.76 for the year. This is what HMRC records show on my online portal. 

My tax free amount was £12992 (allowance plus flat rate expenses plus prof subs). 

So my taxable income  was £37985.76, which is £215.76 above the £37700 band limit. 

As I entered the higher rate band, then my interest savings allowance was reduced to £500, meaning that I was taxed on £37485.76 - albeit because this is back below the upper limit then everything was taxed at the basic rate. This is consistent with what my online portal shows as I have paid. 

So my questions are: 

• Is my understanding of the ordering of the above correct? 

• Am I correct in saying that the reduction in interest allowance potentially sees massive marginal tax rates, where in an extreme case, an individual could earn £1 extra from work to take them into the higher band, so lose £500 allowance, and therefore pay £100 in additional tax on interest? 

• As I was only £215 over the higher rate band, I think that I should have filled in a tax return as my charitable gift aided donations were well in excess of that figure for that year, and so I could have avoided the loss of interest allowance. 

I realise the numbers involved are relatively low, and my query is as much about understanding the processes, and oddities of our tax system if I am right about the effective marginal rates. So any input or observations would be appreciated. 

Thanks

Dazed_and_C0nfused

Nothing you have posted suggests a tax return would be necessary.  Where have you got the idea that one might have been appropriate 🤔

Taking what you have posted at face value, and ignoring the Gift Aid as no figures have been provided, your tax position is as follows,

Total taxable earnings £50,303
Total untaxed interest £674
Total taxable income £50,977
Less Personal Allowance £12,570
Less expenses/professional subscriptions £422

Total taxable income to be taxed £37,985

There is no "allowance" for interest and as your income is sufficient that some would normally fall into the higher rate band you will get a £500 savings nil rate band.

Factoring in the £500 savings nil rate band your liability would be,

£37,311 x 20% (basic rate) = £7,462.20 
£389 x 0% (savings nil rate which uses the remaining basic rate band) = £0.00
£111 x 0% (savings nil using the first part of the higher rate band)
£174 x 40% (savings higher rate band) = £69.60

Total liability £7,531.80

Gift Aid donations (or relief at source pension contributions) for 2022-23 could have reduced that to £7,462.20, but not any lower than that.

How much tax did you pay under PAYE during 2022-23?

And yes, there can be cliff edge scenarios.

ed67812

Thanks for that response, seeing it explained in that way is helpful. 

I paid, according to the online portal, £7497 which is 20% of £37485, hence me thinking it was calculated the way I initially laid out. 

I thought that it would be

£37985 total taxable. 

£285 of nil band used at higher rate  £37700 to £37985
£215 remainder of nil band for basic rate between £37485 and £37700. 

So taxed at 20% on £37485 which is consistent with what I paid. 

I would estimate that I made approaching £1k in gift aided charity donations in 2022 to 23. 

Thanks 

Dazed_and_C0nfused

ed67812 said:

Thanks for that response, seeing it explained in that way is helpful. 

I paid, according to the online portal, £7497 which is 20% of £37485, hence me thinking it was calculated the way I initially laid out. 

I thought that it would be

£37985 total taxable. 

£285 of nil band used at higher rate  £37700 to £37985
£215 remainder of nil band for basic rate between £37485 and £37700. 

So taxed at 20% on £37485 which is consistent with what I paid. 

I would estimate that I made approaching £1k in gift aided charity donations in 2022 to 23. 

Thanks 

Assuming you are referring to your Personal Tax Account then I would ignore that. 

What does your P60 show as tax that was actually deducted?

And I have realised is I overlooked one thing, it would actually be more beneficial for part of your Personal Allowance (£174) to be allocated to the interest.  This forces you to pay more basic rate tax on your earnings (£7,497) but there would then be no tax payable on the interest.

So your liability (without Gift Aid) would be £7,497 rather than the £7,531.80 I originally said.

With Gift Aid of £1k (either gross or net) factored in then you could reduce that to £7,462.20.

But the tax you paid during the year is an important factor to consider before worrying about the Gift Aid.

ed67812

Right then, this confuses me even more......
The P60 says £7,460.80. 

On the online portal it says either, depending where you click - Annual Tax Summary of Tax and NI - the figure given is £7,497.00

But then on the tab for 6th April 2022 to 5th April 2023 which is on the account home page, clicking into that gives a figure of £7,460.80.

Dazed_and_C0nfused

ed67812 said:

Right then, this confuses me even more......
The P60 says £7,460.80. 

On the online portal it says either, depending where you click - Annual Tax Summary of Tax and NI - the figure given is £7,497.00

But then on the tab for 6th April 2022 to 5th April 2023 which is on the account home page, clicking into that gives a figure of £7,460.80.

Like I said, it is the tax actually deducted which is important.

As that is £7460.80 and the minimum you can get your liability to is £7462.20 then you may as well let sleeping dogs lie as contacting HMRC will result in either no change or, if you insist on a calculation, you will end up owing them £1.40.

It is quite normal for people on PAYE to owe small amounts each year.  Which HMRC usually ignore.

ed67812

@Dazed_and_C0nfused thankyou for your inputs and knowledge. Very much appreciated.