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Situation around higher rate tax threshold
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etienneg
Posts: 576 Forumite


in Cutting tax
I am interested in the details of what happens around the higher rate tax threshold.
Consider a hypothetical taxpayer in England with no complications (such as marriage allowance transfer), with a gross income from state and DB pensions of £47,000 and interest from banks/building societies (excluding ISAs) of £3,000. If I understand correctly, his total taxable income is £50,000, which is less than the higher rate threshold of £50,270, so he is a basic rate taxpayer. As such, his PSA is £1,000. He will therefore pay tax at 20% on £36,430 (£50,000 - £12,570 - £1,000), which is £7,286.
He is £270 below the higher rate threshold, so there is very little room for more income (such as a withdrawal from a SIPP) without making him a higher rate taxpayer, when his PSA would go down to £500.
Scenario 1: Now suppose he gives £2,000 to charity with Gift Aid. The charity reclaims £500 tax, making a total for them of £2,500. Does this affect the situation described? If so, exactly how? In other words, does it enable him to withdraw more from the SIPP whilst remaining a basic rate taxpayer?
Scenario 2: Suppose he contributes £2,880 to his SIPP (which will then reclaim £720 tax, making a gross pension contribution of £3,600). Does this affect the situation described? If so, exactly how, again particularly as regards withdrawing from the SIPP?
Consider a hypothetical taxpayer in England with no complications (such as marriage allowance transfer), with a gross income from state and DB pensions of £47,000 and interest from banks/building societies (excluding ISAs) of £3,000. If I understand correctly, his total taxable income is £50,000, which is less than the higher rate threshold of £50,270, so he is a basic rate taxpayer. As such, his PSA is £1,000. He will therefore pay tax at 20% on £36,430 (£50,000 - £12,570 - £1,000), which is £7,286.
He is £270 below the higher rate threshold, so there is very little room for more income (such as a withdrawal from a SIPP) without making him a higher rate taxpayer, when his PSA would go down to £500.
Scenario 1: Now suppose he gives £2,000 to charity with Gift Aid. The charity reclaims £500 tax, making a total for them of £2,500. Does this affect the situation described? If so, exactly how? In other words, does it enable him to withdraw more from the SIPP whilst remaining a basic rate taxpayer?
Scenario 2: Suppose he contributes £2,880 to his SIPP (which will then reclaim £720 tax, making a gross pension contribution of £3,600). Does this affect the situation described? If so, exactly how, again particularly as regards withdrawing from the SIPP?
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etienneg said:I am interested in the details of what happens around the higher rate tax threshold.
Consider a hypothetical taxpayer in England with no complications (such as marriage allowance transfer), with a gross income from state and DB pensions of £47,000 and interest from banks/building societies (excluding ISAs) of £3,000. If I understand correctly, his total taxable income is £50,000, which is less than the higher rate threshold of £50,270, so he is a basic rate taxpayer. As such, his PSA is £1,000. He will therefore pay tax at 20% on £36,430 (£50,000 - £12,570 - £1,000), which is £7,286.
He is £270 below the higher rate threshold, so there is very little room for more income (such as a withdrawal from a SIPP) without making him a higher rate taxpayer, when his PSA would go down to £500.
Scenario 1: Now suppose he gives £2,000 to charity with Gift Aid. The charity reclaims £500 tax, making a total for them of £2,500. Does this affect the situation described? If so, exactly how? In other words, does it enable him to withdraw more from the SIPP whilst remaining a basic rate taxpayer?
Scenario 2: Suppose he contributes £2,880 to his SIPP (which will then reclaim £720 tax, making a gross pension contribution of £3,600). Does this affect the situation described? If so, exactly how, again particularly as regards withdrawing from the SIPP?0 -
etienneg said:I am interested in the details of what happens around the higher rate tax threshold.
Consider a hypothetical taxpayer in England with no complications (such as marriage allowance transfer), with a gross income from state and DB pensions of £47,000 and interest from banks/building societies (excluding ISAs) of £3,000. If I understand correctly, his total taxable income is £50,000, which is less than the higher rate threshold of £50,270, so he is a basic rate taxpayer. As such, his PSA is £1,000. He will therefore pay tax at 20% on £36,430 (£50,000 - £12,570 - £1,000), which is £7,286.
He is £270 below the higher rate threshold, so there is very little room for more income (such as a withdrawal from a SIPP) without making him a higher rate taxpayer, when his PSA would go down to £500.
Scenario 1: Now suppose he gives £2,000 to charity with Gift Aid. The charity reclaims £500 tax, making a total for them of £2,500. Does this affect the situation described? If so, exactly how? In other words, does it enable him to withdraw more from the SIPP whilst remaining a basic rate taxpayer?
Scenario 2: Suppose he contributes £2,880 to his SIPP (which will then reclaim £720 tax, making a gross pension contribution of £3,600). Does this affect the situation described? If so, exactly how, again particularly as regards withdrawing from the SIPP?
Scenario 2 = increased basic rate band of £41,300, replacing the £37,700
Scenario 3 (1+2) = increased basic rate band of £43,800, replacing the £37,7001 -
Many thanks for the above replies. I'm now a little further forward in understanding this, but there are still things I don't understand. Sorry if I appear dense - I don't mean to be!
What happens to the PSA? Does this depend on the Gift Aid/SIPP contribution or not? In other words, if our hypothetical taxpayer gets a small increase in pension income (or savings interest), pushing him over the threshold into higher rate tax and therefore his PSA falls from £1,000 to £500, would a suitable Gift Aid/SIPP contribution mean his PSA returned to £1,000? Or is the PSA determined once-and-for-all before Gift Aid/SIPP contributions are taken into account, and therefore remains at £500?0 -
would a suitable Gift Aid/SIPP contribution mean his PSA returned to £1,000?0
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