Am I a higher rate taxpayer

[Bouleversee]

If my income (state pension plus annuity) minus interest and dividends is under £33,500, after deducting the personal allowance for 2017-18, but adding savings and dividends (before deducting the allowances for them) would take me over the £33,500 will I have to pay higher rate tax and lose some of the allowances for the investment income. I can't really tell from the previous year as my income was very much lower, well below £33,500 and HMRC deducted the personal allowance from the non-investment income, taxed the balance at basic rate and then deducted the allowances from the investment income and taxed the balances at the lowest rates applicable. Will they do that again for l7-18 or will they add everything together and decide I am a higher rate taxpayer and tax the investment income accordingly?

I never used to find my tax returns difficult but they have made things very complicated with so many different allowances and my income is suddenly much higher in the first full year following my husband's death. I know I could find out by doing the return online but there are one or two odd bits of interest or dividends to check on and I haven't worked out my capital gains situation yet (I think I may have slightly exceeded the allowance for that but can use some c/f loss) and I would like to know how the allowances are applied and the appropriate rate calculated in order to do some tax planning for the future.

TIA.

[Urbandreamer]

Unless you are doing something that you have not said, or decide to do so, then you will be a higher rate tax payer for this tax year.
However if you gift aid money to a charity then you can extend your basic rate band, maintaining your dividend and investment allowances.
I believe that the new tax bands may make things for you easier next year.

[scrumpyjack]

Dividends are always treated as the highest part of your income when allocating income to tax bands

CGT will not make you a higher rate taxpayer

[Bouleversee]

Thanks, both. I was actually talking about the l7-18 tax year. Sorry to be dim, but does that mean that even if without dividends and interest I would be a basic rate taxpayer, I will only get £500 allowance on interest and will have to pay tax at 40% on interest above that and 32.5% on dividends above £5k? Or would I still pay some of the investment income at basic rate? How exactly do they set it out? Are there are any examples I could see? I haven't totted up and knocked off my charitable donations yet but they won't be sufficient to make the difference. Am I right in thinking I could set back into the l7-18 tax year donations I have made in this one? The current year is likely to be lower in terms of interest and dividends though I don't yet know by how much. I need to find time to do more bed-and-ISAing and give and spend more. It's surprising how it mounts up if you don't have time for holidays or social life and therefore don't need any new clothes and can't find anyone to help in the garden!

[mike]

... I know I could find out by doing the return online ...

Sorry to have to tell you, but the deadline for paper returns for the 17-18 tax year was 31 October.

[Bouleversee]

Yes, I know that, thanks. My son did it online with me for 16-17 (when my income was much lower)as I am hopeless with computers but he's abroad at the moment and I haven't quite finalised the figures, esp. cgt, so am not quite ready to do it. I just meant that I would get the answers when I did it but I am trying to make some decisions regarding the current year and future years and need to know how these allowances work. Seems they give with one hand and take away with the other.

[chas49]

Yes, I know that, thanks. My son did it online with me for 16-17 (when my income was much lower)as I am hopeless with computers but he's abroad at the moment and I haven't quite finalised the figures, esp. cgt, so am not quite ready to do it. I just meant that I would get the answers when I did it but I am trying to make some decisions regarding the current year and future years and need to know how these allowances work. Seems they give with one hand and take away with the other.

You can (if you want) start the online return using whatever figures you currently have and see the calculation without actually submitting the return. Just in case you didn't realise this.

[pochisoldi]

You can be a "higher rate taxpayer" and not pay 40% tax:

Using allowances/bands from 2017-18:
Earned income/pension income: £43500 (taxed at 0% and 20%)
Dividends: £5000 (Taxed at 0%)
Interest: £500* (Taxed at 0%)

None of this income would be taxed at 40%, however total income is within the higher rate tax band (so personal savings allowance goes down).

The key to understanding this is that the "dividend allowance" is not a "tax free allowance", in reality it is a "taxed at 0% band"
Same goes for the "personal savings allowance" - not tax free, just taxed at 0% rate.

Put another way "tax free" and "taxed at 0%" are not the same thing. "Tax free" means "never taxed". "Taxed at 0%" means liable to be taxed, but nothing is taken.

PochiSoldi

[Lootman]

I never used to find my tax returns difficult but they have made things very complicated with so many different allowances and my income is suddenly much higher in the first full year

If you find it stressful, and I do as well, have you considered having an accountant do your tax return? I started doing that back when I had BTL properties, but retained him even after I sold them and my only income was dividends, interest and gains (I am deferring my pensions).

It's 200 to 300 quid a year, but worth it for the ease and peace of mind. I know that if there is an allowance, exemption or deduction that I can claim then it won't be missed. And he is available throughout the year if I have any questions.

[Bouleversee]

Pochisoldi -

God help us! Hailing from Yorkshire, I don't appreciate semantics. We go in for plain speaking and simplicity, which is probably why I can never make head or tail of the Gov.Uk website re tax.

I understand those bald figures but let us take a hypothetical example:

Say someone's pension/earnings/profit (which I presume means from a business rather than share dealings) is £38,500, interest is £2,700, dividends £7,200, charitable donations £300 * and the personal allowance is £11,500. I presume the £300 and £11,500 are taken from the £38,500, leaving £26,700, taxable at 20% = £5340

leaving £6,800 of the b.r. band which is £33,500

£500 rather than £1000 is then deducted from interest of £2700, leaving £2,200, taxable @ 20% =
leaving £4,600 of b.r. band
or is it taxable at 40%?

Dividends were £7200 minus £5k allowance = £2,200 taxable at ??? 7.5%, 20% or 32.5% ???

Perhaps someone whose brain isn't as decrepit as mine could fill in the gaps.

*If anyone has the answer about donations being able to be set back into the previous year, I should be very grateful.

[Bouleversee]

Lootman -

You are right. I probably do need an accountant though getting the info. together is the worst part of it all and one needs to understand it all in order to organise one's affairs in the best way possible, though since they move the goalposts that's not so easy. Also I wouldn't know who to go to at the moment. I found local ones useless re estate tax. My daughter just paid someone for some advice re IHT and it left a lot out, e.g. no mention of gifting AIM shares or the possibility of the concession on those being removed. I need to take some urgent action on the IHT front.

[scrumpyjack]

If you get a package such as Taxcalc, put the basic figures in and see the calculation.

That's a lot cheaper than using an accountant and you would have to gather the data either way. At least then you can see and understand how your figures affect tax bands etc.

[GPhelan]

If you have Microsoft Excel, then even cheaper than Taxcalc is SA2000 from Quality Management Software.
This is free to download and use to calculate your tax, but you need to pay for the ability to file online.
See http://www.sa2000.co.uk

I found it invaluable a few years ago when the online HMRC calculator said I would need to pay my tax in advance installments. So I did not finalise my return but replicated the data in SA2000. I found that by nominating just £100 of Gift Aid from the current tax year as applying to the previous tax year - the subject of the return, the request to pay by installments went away. That is a purely nominal change, one of the few adjustments the tax return allows (section 4 - charitable giving).

Similarly you can play with the figures in SA2000 to see the impact of different investing scenarios. For example comparing the same dividend income from foreign sources vs UK dividends or dividend vs bond income.

[tjh290633]

You have got it wrong about charitable donations, Lorna. You don't deduct them from your taxable income, but add them to your personal allowance.

That way you get relief from the higher rates of tax, but not from basic rate tax.

TJH

[Bouleversee]

You have got it wrong about charitable donations, Lorna. You don't deduct them from your taxable income, but add them to your personal allowance.

That way you get relief from the higher rates of tax, but not from basic rate tax.

TJH

Quite right, tjh. I see that last year they were added to my basic rate band but since my total income was below the latter, they didn't benefit me at all. Till I can see an example of how they work the tax out, I don't know whether they will this year either.

Thanks to others for software suggestions. No time to go down that route at the moment. Some decisions must be made tomorrow that I need to work on.

[pochisoldi]

You have got it wrong about charitable donations, Lorna. You don't deduct them from your taxable income, but add them to your personal allowance.

That way you get relief from the higher rates of tax, but not from basic rate tax.

TJH

Charitable donations increase your basic rate band, not your personal allowance.

[tjh290633]

Charitable donations increase your basic rate band, not your personal allowance.

Yes, you are correct. Sorry about that.

TJH

[XFool]

Probably best just to ignore this post!

Groan! I wish I could offer help here, but I can't. When it comes to understanding income tax under the present system, I've pretty well given up. I used to deal with my yearly income tax affairs in about 2 - 3 mins using one standard small sized sheet of a Post-It Note.

The key to understanding this is that the "dividend allowance" is not a "tax free allowance", in reality it is a "taxed at 0% band"
Same goes for the "personal savings allowance" - not tax free, just taxed at 0% rate.

It may well be the key, but I still fret over the first year of the introduction of this system, where AFAICS, the "personal savings allowance" - but not the dividend allowance - WAS added to my "tax free allowance".

Some might claim this was my misunderstanding - I'm not saying it isn't - but:

1. In the following year my "tax free allowance" DECREASED by £500 (there was no change in my circumstances) despite the budget increasing the tax free allowance by £500 that year. How? Well my calculation: Tax Free Allowance increased by £500, my personal allowances decreased by £1000 (personal saving allowance NOT now added to tax allowance?) net result = Tax Free Allowance decreased by (£500 - £1000) = -£500 (check!)

2. Note in my online Personal Tax Account: "From this year HMRC has altered the way Personal Savings Allowance is calculated(?)" or words to that effect.

I didn't see how else to figure this... Nobody else seems to agree, it knocked my confidence in understanding what was going on. Then, when following year led to HR Tax, I struggled a while to make sense of the numbers, then gave up. As I noted at the time, the Age UK Tax Calculator closed the following tax year.

[Urbandreamer]

Groan! I wish I could offer help here, but I can't. When it comes to understanding income tax under the present system, I've pretty well given up. I used to deal with my yearly income tax affairs in about 2 - 3 mins using one standard small sized sheet of a Post-It Note.

You have my deepest sympathy. Someone created a office of tax simplification, then proceeded to make it more and more complicated. They introduced odd additional rates and bands. They decided to claw back chidrens allowance. To introduce a 0 tax band on investmenent income and dividends, then change it the next year.

They introdced that many changes so fast that even HMRC couldn't keep up and their calculator was producing the wrong results.

The media and talking heads don't make things any better. If you contribute to a pension, as I understand it, most people pay no tax on contributions. Hence a standard rate tax payer gets a uplift of the 20% tax they paid while the higher rate tax payer gets 40%. This is described as regresive! The bloody talking heads claim that the government is giving that contribution rather than not taking the tax at that point.

Sorry, I could go on (and on). However returning to the point. The paper fileng date has been missed. The higher rate rax will probably have to initially be paid. If events prove that it has been over paid, because of charitable gifts or EIS/VCT investments then it can be reclaimed after the event next year.

Ps I'm firmly commited to being and remaining a standard rate tax payer if I have to pay tax at all.

[Bouleversee]

Although they didn't answer my questions, I am grateful for those responses as they reassured me that it isn't just me losing my marbles. I'd like to think, however, that once I get my tax calculation for this year I will understand how it has been arrived at and if I don't there will be hell to pay. (I spend a lot of time writing to my MP about various injustices, with some results.) I find Xfool's comments alarming. The fact that nobody has come forward to explain how it works (thought admittedly most people have better things to do over a weekend so there is still time) suggests that nobody can understand it which is appalling. Or it could mean that they understand it so well that they have managed to avoid higher rate tax so haven't had any calculation on that basis. I don't mind paying a reasonable amount of tax (how can the country be run without our paying our whack?) but I do object to being taxed twice or even three times, it could be argued, on the same income or capital. How can one plan one's affairs to avoid paying tax unnecessarily if the tax laws are unintelligible to intelligent people?

Incidentally, I have already given quite generously to various charities with which I am associated but if I preferred to give more rather than pay higher rate tax I would need to understand how the calculations are done and make additional gift aid payments before I submit my tax return if I want them to be set back into last year.