Tax bands when adjusted net income above £125,140

intalex

Hi, a relative has for the first time (simultaneously) exceeded adjusted net income levels of both £100,000 and £125,140 and we just keyed in the relevant figures into a self assessment to get a calculation of tax liability (to start early with saving up for the liability due next January), and to my surprise, the HMRC tax bands when there is zero personal allowance are:

£37,700 @ 20%
£87,440 @ 40%

instead of what I expected to be:

£50,270 @ 20%
£74,870 @ 40%

Is HMRC's version correct and has it always been done this way?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6662872/tax-bands-when-adjusted-net-income-above-125-140

Why do you think it would be £74,870?

If the basic rate band is £37,700 and the higher rate band ends at £125,140 isn't the difference £87,440 🤔

intalex

I expected:

£12,570 @ 0%
£37,700 @ 20%
£74,870 @ 40%

To become

£12,570 @ 20%
£37,700 @ 20 %
£74,870 @ 40 %

Simplified as

£50,270 @ 20 %
£74,870 @ 40 %

Why does that first £12,570 append into the 40% band and not the 20% band (or the 45% band for that matter)?

HappyHarry

The basic rate tax band is £37,700 in size. It does not change in size because of a change in the personal allowance.

It could, however, change due to pension contributions.

intalex

Ok, so the BR band width stays at £37,700 and only extends by personal pension contributions.

But then why does the 40% band get the honour of extending by the personal allowance, and not the 45% band instead?

In simple terms, looking at the bands horizontally as follows (not drawn to scale):

←0%→,←20%→,←40%→,←45%→…

Simply removal of the 0% bracket means everything else should shift to the left retaining the widths of both BR and HR bands and extending the AR band by starting it earlier as follows:

←20%→,←40%→,←45%→…

But instead it becomes

←20%→,←40%→←40%→,←45%→…

Is there something specific in the policy that pushes the personal allowance into additional HR band width?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81951628#Comment_81951628

You seem to be seeing things that just aren't there.

Neither rate band has changed.

The basic rate band was always £37,700 and the span from that to £125,140 was always £87,440.

intalex

Neither rate band has changed.

Not sure I can agree, as the 40% rate band was £74,870 (£50,270 - £125,140) with the full personal allowance, and is now £87,440 (£37,700 - £125,140) without any personal allowance, so the width of the 40% band has in fact changed, and whilst I can accept that this is how it has always been done, it still doesn't answer the question why it is the 40% band that changes and not the 20% band or 45% band.

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/comment/81951604#Comment_81951604

Or Gift Aid donation

sheramber

https://forums.moneysavingexpert.com/discussion/comment/81951665#Comment_81951665

The basic rate band is not £50,270 with the personal allowance.

The personal allowance is zero tax and the following £37,700 is the basic rate band.

I think there would be a lot of disgruntled taxpayers if the their personal allowance was charged at basic rate instead of being tax free.

intalex

https://forums.moneysavingexpert.com/discussion/comment/81951844#Comment_81951844

Appreciate the comment, but doesn't really answer the question - why does that £12,570 land in the 40% bracket and not in the 20% or 45% bracket?

sheramber

Basic rate band 37,700

45% rate band covers the difference between

125,140 and 37,700.

If there is no personal allowance then the first 37,700 are charged at basic rate

The balance is charged at 45%. Up to 125, 140

The basic rate does not increase because the personal allowance is not available.

You do not get extra basic rate band because your personal allowance is not available.

The income tax acts do not provide that option.

The amount over 37,700 is charged at the next appropriate rate.

.