Tax bands when adjusted net income above £125,140

intalex

I think you meant 40% and I get that it ends up in this way, but I guess I'm trying to find out what's unique in the policy about the HR threshold being flexible (eligible PA + £37,700 I think) whereas the AR threshold is firmly fixed at £125,140 - something to that effect is what is essentially landing the lost PA to the 40% bracket.

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/81952246#Comment_81952246

Hence why it's known as the '60% tax trap' and best avoided if possible.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81952246#Comment_81952246

I suspect to understand this you would need to work your way through the Income Tax Act 2007. In particular section 23 which sets out how you calculate income tax liability (I think the personal allowance comes off at step 3). Then at step 4 you apply the tax rates to what is left.

The tax rates and bands are in section 10. The basic rate limit in subsection (5) is a nice simple figure of £37,700. So it doesn't move up and down according to how much personal allowance you have available. The personal allowance has simply been deducted from your taxable income before you get to the bit about how much tax you pay on how much income. So if you have nothing deducted you pay basic rate on the first £37700.

The higher rate limit is defined in section 10 also subsection (5A) - a formula which gets you to £125140. It is interesting the way they set out the formula. Twice the personal allowance plus £100k. Maybe there is a story there?

But anyway it is not a case of the thresholds being flexible. They are fixed. It is just the way you work out how much tax you pay.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81952395#Comment_81952395

It's presumably linked to the tapering of the Personal Allowance, where each £2 of adjusted net income above £100,000 reduces the Personal Allowance by £1.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81952420#Comment_81952420

Yes I was wondering if it was deliberate to make sure the 40% band would always apply (which might support @intalex's theory) but I couldn't seem to make that make sense.

They could easily just name a figure in the same way as for the basic rate limit. Or maybe they were afraid someone would forget how to work it out?

intalex

In practice, it appears that the HR threshold is variable and set at eligible PA + £37,700 whereas the AR threshold is fixed at £125,140 even if this doesn't appear to be explicitly stated or easily implied from anything worded, and maybe I'm unique in digging around for this, especially considering it's been in place for a while.

For me, the whole thing could be simplified by allocating tapered away PA to the 20% bracket (and extend the HR threshold just like pension contributions and gift aid do) and accordingly set the tapering away to £1 of PA per £1 above £100k - from my initial thoughts it would appear to yield the same effect in terms of taxation, but might appear less harsh and easier to track in terms of mental math.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81952716#Comment_81952716

Why do you think the next threshold is fixed at £125,140?

Have you tried adding Gift Aid or relief at source pension contributions to the return?

intalex

https://forums.moneysavingexpert.com/discussion/comment/81952772#Comment_81952772

TBH, I've not tried it even with dummy numbers for either, as no gift aid and pension was maxed out via salary sacrifice.

So is it a case that both HR and AR thresholds both extend out from relief at source pension contributions and gift aid?

Whereas HR threshold gets pegged back from PA loss but AR threshold stays fixed?