Calculating Income Tax

JuanToomany

Hi all, this my first post and I hope I’m in the right place. It regards the HMRC income tax calculations. My latest tax estimate from HMRC has just nudged me into the higher tax band but I’m struggling to understand how it works. 

My income, less interest from savings, is below the threshold of £50270 (above this is taxable at 40%). My interest from saving (£1400) however takes me to £200 above this threshold. What HMRC have done in their calculation is to tax the £200 at 40%, take the £500 savings allowance off the remaining £1200 and tax the remaining £700 at 20%.

So, then I started wondering what happens if your income, less interest from savings, is at the threshold £50270 and interest from your savings is £500. This means that you are in the higher income bracket and would pay 40% of the £500. My dilemma is how do they give you the first £500 of your interest tax free.

Would they take the allowance off the savings before adding it to the income. In which case, in the first example, if they took off the allowance before adding it to your income then the total income would be less than the threshold and no higher tax to pay.

Anyone any ideas, please.

eskbanker

If you had exactly £50,270 of non-savings income then you'd pay 20% tax on the £37,700 above your £12,570 personal allowance, and the £500 savings would be covered by the PSA, i.e. taxed at 0%.

The taxable income is totalled in order to determine the allowances available and then the allocation of those follows.

FrugaiMacDugal

Have a play with this wee gadget, using figures for your different scenarios.

Dazed_and_C0nfused

You look at your income without factoring in the savings nil rate band first.

So with income of £50,770 and no Gift Aid or RAS pension contributions you will classed as a higher rate payer. 

So you have just £500 interest taxed at 0%. 

Which can mean you don't actually pay any higher rate tax but you are still deemed a higher rate payer for the savings nil rate band purpose

Bookworm225

legislation sets out a rigid order in which income is "assembled" for tax purposes
1 earned income
2 savings income
3 dividend income 

the allowances for 2 and 3 are applied accordingly if your cumulative 1+2+3  total tips a tax band threshold at any point giving rise to the phrase "top slicing" (3 is highest)

JuanToomany

Thanks everyone. It was the order of doing the calculation I wasn't understanding. I do now.