will
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Post by will on Mar 26, 2017 20:58:26 GMT
After looking at this very interesting thread. I was having a play with the tax calculator mentioned in that thread and put in £100,000 of earnings from savings interest with no other earnings, this lead to £28,100.00 of tax. I then upped the earnings to £100,100 and this lead to £28,160 of tax, so that's a 60% tax on the extra £100. Looking into the details, it's taxing £57,000.00 at 40% in the first calculation and £57,150.00 at 40% in the second. This has left me slightly baffled - can anyone explain to me what's going on. Thanks. |
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SteveT
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Post by SteveT on Mar 26, 2017 21:06:35 GMT
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hazellend
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Post by hazellend on Mar 26, 2017 21:26:15 GMT
I'm still not understanding the tax on savings income:
Taxation By Income Type
Income Type Gross Taxation Net Rate
PAYE+Redundancy = £8,060.00 £0.00 £8,060.00 0%
Savings Income £11,000.00 £0.00 £11,000.00 0%
How is savings income as above taxed at 0 pounds when it has used up the starting rate, personal allowance and personal savings allowance?
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will
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Post by will on Mar 26, 2017 21:30:05 GMT
I'm still not understanding the tax on savings income: Taxation By Income Type Income Type Gross Taxation Net Rate PAYE+Redundancy = £8,060.00 £0.00 £8,060.00 0% Savings Income £11,000.00 £0.00 £11,000.00 0% How is savings income as above taxed at 0 pounds when it has used up the starting rate, personal allowance and personal savings allowance? That one I do understand. If you look at this. The important bit being
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will
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Post by will on Mar 26, 2017 21:30:40 GMT
Thanks for that - that explains it.
I've also been playing with pension contributions. Again, with £100,000 of earnings, so paying a higher rate of tax, my understanding was that you'd get tax back on pension contributions.
Putting in a £10,000 pension contribution, I was expecting the tax payable to drop by £4,000, but it only dropped by £2,500.
Looking at the details, the £10,000 pension contribution seems to increase the amount of tax payable at 20% by £13,000 and decrease the amount of tax payable at 40% by the same amount.
My understanding of tax rules isn't wonderful, and I have absolutely no idea what's going on here!
An explanation would be appreciated. Thanks.
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jonah
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Post by jonah on Mar 27, 2017 4:57:17 GMT
At that level my (limited, not advice etc) understanding is that you get your basic rate tax paid via pension contributions into the pension but higher rate tax via reduced tax. So the reduction you see in tax is probably correct, but you also get a grossed up amount in your pension pot.
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will
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Post by will on Mar 27, 2017 7:04:04 GMT
At that level my (limited, not advice etc) understanding is that you get your basic rate tax paid via pension contributions into the pension but higher rate tax via reduced tax. So the reduction you see in tax is probably correct, but you also get a grossed up amount in your pension pot. It looks like you might be correct, as if I put in the earnings from savings as £40,000, so I'm only paying basic rate, there's no tax deduction for a pension. That still leaves some confusion though. If I'm getting 20% paid into the pension and a £2,500 tax reduction, then that's £4,500, which is obviously 45% of £10,000. Why's that?
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pikestaff
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Post by pikestaff on Mar 27, 2017 7:37:43 GMT
At that level my (limited, not advice etc) understanding is that you get your basic rate tax paid via pension contributions into the pension but higher rate tax via reduced tax. So the reduction you see in tax is probably correct, but you also get a grossed up amount in your pension pot. It looks like you might be correct, as if I put in the earnings from savings as £40,000, so I'm only paying basic rate, there's no tax deduction for a pension. That still leaves some confusion though. If I'm getting 20% paid into the pension and a £2,500 tax reduction, then that's £4,500, which is obviously 45% of £10,000. Why's that? The calculator is assuming that you pay £10,000 cash to your pension provider. That amount is net of basic rate tax. Your pension provider will reclaim £2,500 basic rate tax on your behalf making a gross contribution of £12,500. You claim an additional 20% of £12,500 = £2,500 back through your tax return. If your intention is to make a gross contribution of £10,000 you need to reduce the cash payment to £8,000. Your pension provider will then reclaim £2,000 basic rate tax leaving you to claim the other £2,000 through your tax return. In case relevant, you should be aware that the annual allowance is calculated by reference to gross contributions.
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bigfoot12
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Post by bigfoot12 on Mar 27, 2017 8:03:29 GMT
I'm still not understanding the tax on savings income: Taxation By Income Type Income Type Gross Taxation Net Rate PAYE+Redundancy = £8,060.00 £0.00 £8,060.00 0% Savings Income £11,000.00 £0.00 £11,000.00 0% How is savings income as above taxed at 0 pounds when it has used up the starting rate, personal allowance and personal savings allowance? I don't know the exact number, but something like the first £30k of redundancy is tax free. Is that is what is happening above?
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will
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Post by will on Mar 27, 2017 8:51:55 GMT
The calculator is assuming that you pay £10,000 cash to your pension provider. That amount is net of basic rate tax. Your pension provider will reclaim £2,500 basic rate tax on your behalf making a gross contribution of £12,500. You claim an additional 20% of £12,500 = £2,500 back through your tax return. If your intention is to make a gross contribution of £10,000 you need to reduce the cash payment to £8,000. Your pension provider will then reclaim £2,000 basic rate tax leaving you to claim the other £2,000 through your tax return. In case relevant, you should be aware that the annual allowance is calculated by reference to gross contributions. Aah yes. That makes sense, so just to clarify one thing. If I'm a 40% tax payer, then to earn £10,000 after tax, I need to earn £16666.67, but HMRC are only giving £5,000 back because they're using the basic rate tax rate to calculate the gross amount that needs to be earned to receive £10,000, landing them on £12,500 instead of the £16,666.67. They then calculate the higher rate tax contribution as 20% of the £12,500, therefore giving a £2,500 tax reduction and pocketing £1,666,67 themselves?
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stevio
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Post by stevio on Mar 27, 2017 17:28:16 GMT
Thanks for that - that explains it. I've also been playing with pension contributions. Again, with £100,000 of earnings, so paying a higher rate of tax, my understanding was that you'd get tax back on pension contributions. Putting in a £10,000 pension contribution, I was expecting the tax payable to drop by £4,000, but it only dropped by £2,500. Looking at the details, the £10,000 pension contribution seems to increase the amount of tax payable at 20% by £13,000 and decrease the amount of tax payable at 40% by the same amount. My understanding of tax rules isn't wonderful, and I have absolutely no idea what's going on here! An explanation would be appreciated. Thanks. You didn't say what 'earnings' entails - salary, savings, dividends etc are treated differently Personal pension contributions generally increase your basic rate tax band. So you would generally move some income from higher rate 40% (or 45% is it) to 20% There maybe some tapering of allowances at that level too (not sure as I keep well below the basic rate band)
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will
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Post by will on Mar 27, 2017 17:31:03 GMT
You didn't say what 'earnings' entails - salary, savings, dividends etc are treated differently Personal pension contributions generally increase your basic rate tax band. So you would generally move some income from higher rate 40% (or 45% is it) to 20% There maybe some tapering of allowances at that level too (not sure as I keep well below the basic rate band) I'm assuming all earnings here are from interest.
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stevio
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Post by stevio on Mar 27, 2017 18:02:58 GMT
You didn't say what 'earnings' entails - salary, savings, dividends etc are treated differently Personal pension contributions generally increase your basic rate tax band. So you would generally move some income from higher rate 40% (or 45% is it) to 20% There maybe some tapering of allowances at that level too (not sure as I keep well below the basic rate band) I'm assuming all earnings here are from interest. Might be worth checking amount savings allowance calculator says receive as amount based on adjusted net income which involves pension contributions Also you might not get 5k savings starting rate band
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amphoria
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Post by amphoria on Mar 27, 2017 19:02:23 GMT
You didn't say what 'earnings' entails - salary, savings, dividends etc are treated differently Personal pension contributions generally increase your basic rate tax band. So you would generally move some income from higher rate 40% (or 45% is it) to 20% There maybe some tapering of allowances at that level too (not sure as I keep well below the basic rate band) I'm assuming all earnings here are from interest. Pension contributions are limited to the greater of 100% of relevant UK earnings or £3,600. Interest does not count as relevant UK earnings.
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will
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Post by will on Mar 27, 2017 19:12:33 GMT
Pension contributions are limited to the greater of 100% of relevant UK earnings or £3,600. Interest does not count as relevant UK earnings. Thanks, that's good to know. This was a hypothetical question, I don't really earn £100k in interest! (It would be nice though).
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