Hopefully Quick Tax Question!
Pross Posts: 36,413
edited November 2018 in The cake stop
Does your taxable income allow for your personal allowance e.g. if you had a gross salary of £50k and a tax code of 1000L would your taxable income be £50k or £40k? I appreciate this is simplistic and you'd need to include any BIK and can deduct pension payments etc. but just looking at the headline figure. I assume it is the former but hoping for the latter.
A 1000L code means you have £10k of tax free allowance so your taxable income in your example above will be £40k.
I suppose I'd better track down 5 years of P60s and P11Ds now just to make sure though. Surely there should be a more efficient and proactive way of dealing with these things!
See section on 'What counts as income'.
If you're close to the limit, suggest you use the child benefit calculator which is linked in the above.
The whole system is a mess though, and Is unnecessarily complicated since hmrc already know your paye record or tax return, and there should be a mechanism to match two parents with the child.
If it's any consolation, your assumption above is a very easy one to make if you're not a tax professional. Some of this stuff makes my head hurt and tax is my main line of work.
If you want to get something back tax-wise without doing anything that might be seen as risky, making additional pension contributions gets you a tax deduction at your top marginal tax rate - so if you are a 40% taxpayer it's a very efficient form of investment. PM me if you want.
I think part of Pross' problem is historical though, in which case he will still get whacked for the past if he is over the threshold.
Anyway, that leads onto another question - if you arrange a payment plan with HMRC do the payments get made before or after tax? Just thinking if you pay after tax then you are effectively being double taxed!
In my experience (limited as it is) trying to organise a "payment plan" for underpaid tax with HMRC ain't gonna work . . . even when it was due to their coding error.
Here's how I see it:
- Child benefit is not itself taxable, but you can be taxed on it if you are over the income threshold.
However it's unlikely you paid any extra tax if they did not realise your situation until now, so if that's the case you won't get any tax back.
- If they are just assessing you for the extra tax due to the benefit, there's no chance of any tax deduction there, obviously.
Unless you have an enormous number of kids you could be a lot less than £5k as I believe it is phased in up to about £60k.
They are cracking down hard but if you are very good at negotiating you can get a payment plan.
I think I went over in all bar the first year when adding on company car, healthcare and possibly some bonuses.
Bloke at work had something similar and he managed to get them to drop penalties, interest and accept a payment plan. It took him weeks of hour long phone calls going up through the chain of command but in the end they adjusted his tax code and took it that way. He did of course max out his pension contributions to get it lower.
I now fall well below the threshold and don't earn enough through PAYE that it can be claimed through my tax code (something HMRC have just told me after they should have been collecting last year's small amount of unpaid tax).
If anyone else is in a similar situation I would suggest contacting HMRC as soon as possible as I suspect when they write to you it means they know you should have paid but appreciate that is was a poorly implemented system and are giving you a chance to contact them and reduce you penalty charges. They were actually very helpful though I still don't know how supportive they will be if you cannot pay the money back, they do offer a payment plan but I don't think they generally allow it to extend beyond 12 months so you could forking out around £500 per month.
But it is poorly designed. Effectively your earnings between £50K and £60K are taxed at just over 50% with one child and just under 60% with two children. If you've got lots of children it just keeps increasing.
Essentially, you need to be earning noticeably more than £60K to make taking home your full pay worthwhile, if earning between the 2 figures, the best return is to self cap your salary at £50K and put the rest into your pension. Easiest scenario is if your pension is a salary sacrifice.
A lefty should have joined them in the pub to witness the Laffer Curve in effect as they figured out the pension contribution they needed to make.
With an annual allowance of £40k that idiot idea of Brown’s must reduce total tax take. They should drop the top tax rate to £100k