Situation around higher rate tax threshold

etienneg

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?

TheSpectator

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?

In both scenarios the basic rate band would be extended by  1) gross gift aid £2500 and 2) gross pension contribution of £3600.

Dazed_and_C0nfused

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 1 = increased basic rate band of £40,200, replacing the £37,700.

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 £37,700

etienneg

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?

[Deleted User]

would a suitable Gift Aid/SIPP contribution mean his PSA returned to £1,000?

It would