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Tax year end - pension conts

Practical Issues
melonfool
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Tax year end - pension conts

#129285

Postby melonfool » April 1st, 2018, 2:02 pm

Hi

Has anyone got 5 mins to check my tax workings before the end of the tax year please?

I'm just trying to work out if I need to make any further pension contributions to avoid 40% tax.

I think this is the summary:

Total taxable pay from employment £44,850.85
Dividends from own business (£5k ignored, divis from shares all in ISA) £1,000

Pension payments outside of employer scheme -£600
Charity donations -£332.14

I make that £44,918.71 and the 40% tax kicks in at £45k.

So, am I OK? Or have I missed anything? I can make other payments to my SIPP if necessary.

Ta

Mel

PinkDalek
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Re: Tax year end - pension conts

#129296

Postby PinkDalek » April 1st, 2018, 3:06 pm

Based on your figures, I'd agree that higher rate UK Income Tax should not apply for 2017-18.

PD

PS I'm assuming the charitable donations and pension conts are grossed-up but it would make no difference. Similarly I'm unsure if you've ignored the £5,000 or knocked it off, to get to the £1,000, but again it makes no difference to higher rate tax.

melonfool
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Re: Tax year end - pension conts

#129299

Postby melonfool » April 1st, 2018, 3:32 pm

PinkDalek wrote:Based on your figures, I'd agree that higher rate UK Income Tax should not apply for 2017-18.

PD

PS I'm assuming the charitable donations and pension conts are grossed-up but it would make no difference. Similarly I'm unsure if you've ignored the £5,000 or knocked it off, to get to the £1,000, but again it makes no difference to higher rate tax.


Those are the full charity contributions and the actual pension conts from post tax pay (tax reclaimed within the account. I made a large pension contribution within the employer scheme as it is salary sacrifice so worth it, c£20k for this tax year, but this other pension was a Virgin one where if you opened it for 12m and funded it with £50pm, then you get a £50 bonus. I'll be shutting it next week and transferring it to the SIPP).

The dividends - I paid myself £6k this year. £5k is tax-free I think? Obviously I will be paying corp tax on this.

I've just remembered I need to include other interest. So far I think this is £148.44 but I have two still to let me know. This takes me a bit over, so I might drop £500 in the SIPP to be sure.

Hmm.....

Ta
Mel

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Re: Tax year end - pension conts

#129306

Postby PinkDalek » April 1st, 2018, 4:11 pm

I nearly asked about interest! Don’t forget the £1,000 personal savings allowance for basic rate taxpayers (reducing to £500 for higher rate).

melonfool
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Re: Tax year end - pension conts

#129310

Postby melonfool » April 1st, 2018, 4:37 pm

PinkDalek wrote:I nearly asked about interest! Don’t forget the £1,000 personal savings allowance for basic rate taxpayers (reducing to £500 for higher rate).


Oh, yes, of course, in my haste I *had* forgotten that!

So, still OK, not going to get anywhere near £1k, not even £500. One of the as-yet-undeclared accounts looks like it will be c£30. The other......maybe max £50. So, total well under even £300.

This will be more next year and I need to keep an eye on it, as I have a few regular savers set up.

Thanks - I don't think I need to do anything.

Phew. :)

Mel

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Re: Tax year end - pension conts

#130056

Postby DeepSporran » April 4th, 2018, 8:30 pm

This is probably too late for you to act upon but my understanding of the £5000 dividend allowance is that, while dividend amounts up to that figure are taxed at 0%, they are still added on to your other income to determine whether you have exceeded the £45000 standard rate band.

So your figure of £44,918.71 in the OP actually becomes £49,918.71 which exceeds £45,000 and means you will pay higher rate tax. However, it will only be at the rate of 32.5% and it will only be applied to the top £1000 of dividends.The first £5000 do indeed get charged at 0%.

So that probably means you’ll pay £325 rather than £75 on your dividends (i.e. using 32.5% rather than 7.5%.)

In addition, you will only get the £500 personal savings allowance as you are classed as a higher rate taxpayer. Don’t think that makes any difference to you this year though based on the interest figures you’re expecting.

I have to say that HMRC labelling the £5000 as an “allowance” rather than as a “0% band” does encourage confusion.

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Re: Tax year end - pension conts

#130061

Postby PinkDalek » April 4th, 2018, 8:41 pm

DeepSporran wrote:This is probably too late for you to act upon but my understanding of the £5000 dividend allowance is that, while dividend amounts up to that figure are taxed at 0%, they are still added on to your other income to determine whether you have exceeded the £45000 standard rate band.

So your figure of £44,918.71 in the OP actually becomes £49,918.71 which exceeds £45,000 and means you will pay higher rate tax. However, it will only be at the rate of 32.5% and it will only be applied to the top £1000 of dividends.The first £5000 do indeed get charged at 0%.

So that probably means you’ll pay £325 rather than £75 on your dividends (i.e. using 32.5% rather than 7.5%.)

...

I have to say that HMRC labelling the £5000 as an “allowance” rather than as a “0% band” does encourage confusion.


Ughh, I queried what the total dividend income was but didn't check the reply nor did I give my first reply enough thought.

Your summary of the dividend position effectively follows 2.6 Example 6 here:

https://www.gov.uk/government/publicati ... -factsheet

melonfool
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Re: Tax year end - pension conts

#130068

Postby melonfool » April 4th, 2018, 10:21 pm

Thank you both!

I don't have enough liquid funds to offset the £1k with pension contributions (shame!) so I'll have to suck it up.

I wasn't 100% sure it was kept separate. I knew the interest was dealt with that way, in that if it tipped you over, you lose the £500 immediately - you don't have to be over already. But I had assumed the £5k was a separate allowance.

Oh well.

I looked at my March payslip today and actually that alone took me over the 40% band by about £80 so I popped £100 into the SIPP, so took that back under.

Mind you, the 32.5% is one thing, of course I have already paid (well, set aside for now) 19% for corporation tax! Hmm, if I recategorise it as salary I'd actually pay less on it I think (40% tax, NI, employer's NI). But not sure I can be bothered to go through the admin as I've not made any salary payments in the company this year.

if I *could* scrape together money to put in the pension tomorrow (! - I could take it from the ISA, to ave me over £300 it's possibly worth it), how much would it need to be, the £1K?

Must pay more attention in future.

(I know - earning too much is a nice problem to have. It's just I will be 55 in 5 years so I may as well stuff the pension as a savings plan)

Mel

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Re: Tax year end - pension conts

#130071

Postby DeepSporran » April 4th, 2018, 10:59 pm

It may be that all is not lost even if you take no more action this tax year. Can’t you carry forward unused SIPP contribution allowances to future tax years and get the tax benefits later ? Not an area I know anything about but I think I’ve seen something about making SIPP contributions for previous years where you didn’t contribute as much as you were allowed at the time ? So maybe you could make a SIPP payment after April 6th and allocate it to tax year 17-18. Thus getting back the “overpaid” tax ?

Can’t be too sure about this idea but maybe worth exploring.

melonfool
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Re: Tax year end - pension conts

#130074

Postby melonfool » April 4th, 2018, 11:26 pm

DeepSporran wrote:It may be that all is not lost even if you take no more action this tax year. Can’t you carry forward unused SIPP contribution allowances to future tax years and get the tax benefits later ? Not an area I know anything about but I think I’ve seen something about making SIPP contributions for previous years where you didn’t contribute as much as you were allowed at the time ? So maybe you could make a SIPP payment after April 6th and allocate it to tax year 17-18. Thus getting back the “overpaid” tax ?

Can’t be too sure about this idea but maybe worth exploring.


I definitely have extra headroom in my pension conts, yes (loads!).

But I am not 100% sure it works like that, I think that while you can bring forward unused pension allowance (on a rolling 3 years), that applies to the tax year it is used in. I know friends who have done that using last year's pension allowance to offset this year's tax. Presumably correctly.....

I will try and investigate further.

If only I knew how much I was going to earn in the coming year, it would all be easier!

Thanks

Mel

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Re: Tax year end - pension conts

#130081

Postby greygymsock » April 5th, 2018, 2:35 am

"carry forward" doesn't help here. it involves carrying unused annual allowance for pension contributions (currently, usually £40,000) forward to later years. but the band and rates calculation happens in the year the pension contribution is made. there used to be something called "carry back", which did do what you might want it to do here, but that was abolished some years ago.

now: the effective tax rate on the £1,000 dividends over the "dividend allowance" may be 20% rather than 32.5%. this is because you can (when it reduces the income tax due) set part of the personal allowance against dividends, instead of against salary. and in a case where the salary (if not set against PA) would be taxed at 20% (basic rate) but dividends (if not set against PA) would be taxed at 32.5% (higher rate), it does reduce income tax. however, this doesn't apply if salary would be taxed at higher rate (since 40% on salary is higher than 32.5% on dividends).

to see if you are in 20%, rather than 32.5%, territory, for that £1,000 of dividends, check whether you have £1,000 clearance below higher rate threshold, when you calculate:

gross salary
+ gross interest (this must be included, even though it is below £500, so not itself taxed)
- gross pension contributions
- gross gift aid

note that, in that calculation, if you pay £80 into a pension, and the pension provider is going to claim £20 from HMRC which will be added to the pension (whether or not that claim actually happens in the same tax as your contribution or in the next tax year), then the gross pension contribution is £100, not £80. i wonder whether you have that right, because you mention paying £50 a month into a virgin pension, and have a figure of £600 for "pension payments"; but if virgin are adding tax relief onto that, it would come to £750 gross pension contribution.

and gift aid is similar. i.e. if you pay £80 directly to a charity, they will claim £20 from HMRC, and the gross value of gift aid is £100.

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Re: Tax year end - pension conts

#130170

Postby melonfool » April 5th, 2018, 1:36 pm

Hi

Yes, the amounts are net. They are the actual physical amounts that left my bank account.

These are the actual figures now:

total taxable pay 44953.31
Dividends 6000
Interest 175
Pension payment Virgin £50pm -600
Pension payment SIPP -100
charity donations -332.14

50096.17

So, pension grossed up would be £875? Charity grossed up is £415 = £1,290

total taxable pay 44953.31
Dividends 6000
Interest 175
Pension gross -875
Charity gross - 415

49838.31

So, £838, netted down to £662? paid to the pension would do it?

Ta
mel

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Re: Tax year end - pension conts

#130179

Postby greygymsock » April 5th, 2018, 2:12 pm

i make it: no more pension contributions needed. that's to say: you'll effectively only get 20% relief on any extra pension contributions.

the tax calc should say:

for pensions + gift aid, the basic rate band is extended by £1,290, from £33,500 to £34,790.

the £11,500 personal allowance is used by setting £10,500 of it against salary, and £1,000 against dividends.

that leaves £34,453 of salary, which is all taxed at 20%, since that fits within the £34,790 extended basic rate band, with £337 to spare.

next, there is £175 of interest, taxed at 0% due to the PSA. this also falls within basic rate, leaving £162 of basic rate remaining.

and lastly, there's £5,000 of dividends, taxed at 0% due to the dividend allowance. the first £162 of this is within basic rate, the remaining £4838 within higher rate, but it is all taxed at 0% anyway.

(if you had only received £5,000 of dividends, not £6,000, you'd have paid £200 less income tax, because all the personal allowance could have been set against salary.)

melonfool
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Re: Tax year end - pension conts

#130207

Postby melonfool » April 5th, 2018, 4:20 pm

Thank you so much - I think that all looks right.

I don't do my own SA but will check how the accountant has declared it all when she does it.

I always send her the stuff around the end of May (running own co too, year end April 30th, just have to wait for any outstanding invoices or expenses etc) and lickety spick, just by around the end of October, there is my SA...... Yes, I am considering getting a new accountant! I want all this stuff out of my hair in June, I hate debts etc hanging around.

Last year she said I was due a rebate of Corp tax but I've not seen any sign of it, she said it would be paid to the company bank account.

Anyway, I digress....

Many thanks.

Mel

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Re: Tax year end - pension conts

#130209

Postby pochisoldi » April 5th, 2018, 4:29 pm

greygymsock wrote:the £11,500 personal allowance is used by setting £10,500 of it against salary, and £1,000 against dividends.

that leaves £34,453 of salary, which is all taxed at 20%, since that fits within the £34,790 extended basic rate band, with £337 to spare.


You've got that wrong, the personal allowance always gets used up against salary first, so for anyone with "earned income" (aka salary/pension) which exceeds the personal allowance won't have any left to use against dividends.

PochiSoldi

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Re: Tax year end - pension conts

#130213

Postby melonfool » April 5th, 2018, 4:38 pm

pochisoldi wrote:
greygymsock wrote:the £11,500 personal allowance is used by setting £10,500 of it against salary, and £1,000 against dividends.

that leaves £34,453 of salary, which is all taxed at 20%, since that fits within the £34,790 extended basic rate band, with £337 to spare.


You've got that wrong, the personal allowance always gets used up against salary first, so for anyone with "earned income" (aka salary/pension) which exceeds the personal allowance won't have any left to use against dividends.

PochiSoldi


I did wonder if greygymsock hadn't realised my main earnings are PAYE actually. So, I can't reallocate them anywhere anyway, they are where they are, already taxed at source.

So, am I back to needing to pay a bit into the pension to save the tax [well, defer it I suppose!]? As going over costs me disproportionately more when it is by a small amount.

Mel

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Re: Tax year end - pension conts

#130214

Postby greygymsock » April 5th, 2018, 4:40 pm

pochisoldi wrote:You've got that wrong, the personal allowance always gets used up against salary first, so for anyone with "earned income" (aka salary/pension) which exceeds the personal allowance won't have any left to use against dividends.


no: see "2.6 Example 6" in the link PinkDalek provided earlier - https://www.gov.uk/government/publicati ... -factsheet ... where it says:

"The Personal Allowance should be allocated in the most beneficial way but dividend income is treated as the ‘top slice’ of income."

the fixed "order of taxation" - viz. first non-savings (salary/pension/self-employment/property income/other), second savings (i.e. interest), third dividends - is not used to decide how the personal allowance is allocated. the order of taxation is used (after the PA has been allocated in the most beneficial way) to determine how rates/bands apply (and the "personal savings allowance" and "dividend allowance" are really zero-rate bands, not allowances).

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Re: Tax year end - pension conts

#130215

Postby greygymsock » April 5th, 2018, 4:46 pm

melonfool wrote:I did wonder if greygymsock hadn't realised my main earnings are PAYE actually. So, I can't reallocate them anywhere anyway, they are where they are, already taxed at source.


your tax code (presumably) assumes the whole personal allowance will be allocated against salary. but the code doesn't determine how the PA is actually allocated; it's just an estimate, in an attempt to deduct the correct tax at souce. the real allocation will become clear in the tax calculation after your tax return is submitted. and a balancing payment (or repayment) will correct any error.

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Re: Tax year end - pension conts

#130219

Postby melonfool » April 5th, 2018, 5:06 pm

It's all slightly confused by the fact I started the tax year on £60k (minus whatever pension % I decided at that point), had a £9k bonus (which I put in the pension via salary sacrifice), then went part time down to £43k, at which point I had essentially already paid too much tax (the system assumes salary will remain the same so evens out the bands over 12m). I changed my pension cont to 20% and the PAYE system gave me a monthly mini rebate of the overpaid tax.

Looking at how my tax works out this coming year, that was c£170pm as a rebate. Though of course the outcome of the PAYE system is presumably correct.

My employer doesn't know anything about other income and when HMRC has tried to split my code between employer and my own Ltd co I have always asked them not to, to just issue it all to the employer as my company income changes so much. The code is 1140L

It's gone 5pm now anyway, so I doubt anything will credit to my SIPP even if I paid it over. :)

Thank you all - it's clearly not very straightforward. I think I need to design a spreadsheet ready for next year.

Mel

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Re: Tax year end - pension conts

#130226

Postby pochisoldi » April 5th, 2018, 5:29 pm

greygymsock wrote:
pochisoldi wrote:You've got that wrong, the personal allowance always gets used up against salary first, so for anyone with "earned income" (aka salary/pension) which exceeds the personal allowance won't have any left to use against dividends.


no: see "2.6 Example 6" in the link PinkDalek provided earlier - https://www.gov.uk/government/publicati ... -factsheet ... where it says:

"The Personal Allowance should be allocated in the most beneficial way but dividend income is treated as the ‘top slice’ of income."

the fixed "order of taxation" - viz. first non-savings (salary/pension/self-employment/property income/other), second savings (i.e. interest), third dividends - is not used to decide how the personal allowance is allocated. the order of taxation is used (after the PA has been allocated in the most beneficial way) to determine how rates/bands apply (and the "personal savings allowance" and "dividend allowance" are really zero-rate bands, not allowances).


If you assign £1000 of personal allowance to dividends you save £1000 *7.5% tax = £75
If you assign £1000 of personal allowance to salary you save £1000 * 20% tax = £200 - you gain £125

(For a higher rate tax payer the rates are 40%/32.5% and you gain £75)

No brainer - if you have a choice use your personal allowance against salary not dividends.

Pochisoldi


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