Hopefully Quick Tax Question!

Pross

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.

Stevo_666

Pross wrote:

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.

Here's a quick plain English guide:
https://www.lovemoney.com/guides/15060/how-to-check-youre-on-the-right-tax-code-2018

A 1000L code means you have £10k of tax free allowance so your taxable income in your example above will be £40k.

Pross

Thanks for that, hopefully that's good news for me as I got a letter from our friends at HMRC about High Income Child Benefit Charge and, as a PAYE tax payer with no need to file a self-assessment since that came in and having not received any previous communication from them on it I thought I was potentially owing thousands for some of those years but if the tax allowance is deducted I should be OK I think. Ironically I'm no longer anywhere near the threshold!

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!

Stevo_666

Pross wrote:

Thanks for that, hopefully that's good news for me as I got a letter from our friends at HMRC about High Income Child Benefit Charge and, as a PAYE tax payer with no need to file a self-assessment since that came in and having not received any previous communication from them on it I thought I was potentially owing thousands for some of those years but if the tax allowance is deducted I should be OK I think. Ironically I'm no longer anywhere near the threshold!

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!

Sorry to put a damper on this for you mate, but the child benefit threshold refers to your adjusted net income, which is taxable income before any personal allowances are taken into account:
https://www.gov.uk/child-benefit-tax-charge
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.

Pross

Bollox. They like to make these things confusing don't they, the letter I got is almost an admission that a lot of people don't understand it. At this rate I'm going to be paying to go to work.

Mad_Malx

Pension contributions come off though. So if you are in the 40-50 k zone it is often worth making additional pension contributions (and can reduce higher rate tax liability too), although I recognise not everyone can spare income in the short term
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.

Stevo_666

Pross wrote:

Bollox. They like to make these things confusing don't they, the letter I got is almost an admission that a lot of people don't understand it. At this rate I'm going to be paying to go to work.

Yep, its complex and gets more complex every year - usual caveat applies that the devil is in the detail, although the HMRC and gov.uk websites do a decent job of explaining this sort of stuff if you know where to look.

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.

Stevo_666

Mad_Malx wrote:

Pension contributions come off though. So if you are in the 40-50 k zone it is often worth making additional pension contributions (and can reduce higher rate tax liability too), although I recognise not everyone can spare income in the short term
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.

Good point about the pension contributions and the child benefit.

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.

Pross

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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!

laurentian

Pross wrote:

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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.

Stevo_666

Pross wrote:

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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!

Unlikely.

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.

TheBigBean

Pross wrote:

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!

After tax.

surrey_commuter

Pross wrote:

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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!

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.

Pross

Surrey Commuter wrote:

Pross wrote:

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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!

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.

surrey_commuter

Pross wrote:

Surrey Commuter wrote:

Pross wrote:

It looks like I'll be clobbered for a payment of around £5k. My fault obviously but it's frustrating that they don't put a reminder in when they send your annual tax coding to remind you of the requirement as those who were below the threshold when it was introduced are likely to overlook it as I did. Also, the fact you have to include for any BIK etc. can tip people over the threshold when they might think they didn't need to notify as it doesn't feel like being part of your earnings (which again was an issue for me).

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!

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.

Pross

They actually wrote to me asking me to check and haven't said I owe anything. The letter says that if I am over and let them know then they'll remove any charges for 2016/17 and reduce for other years. I think it's their way of trying to get people to let them know and get them in the system quicker and in writing it will take away any chance of pleading ignorance once they do catch up with people so quite a clever letter really but should have been sent 4 years ago!

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).

Pross

Just as an update to this. Thanks Stevo for the initial information, I contacted HMRC with all the information needed to calculate the amount owed (which is eye watering amount despite not being liable in the first year only, just creeping over due to BIK in the second year and only having one child in receipt for the last year). As I self-referred they dropped charges for 2016/17 and reduced the charges for other years to 10%. I'd been stressing about contacting them knowing the numbers that were involved and toyed with waiting for them to chase me but I'm glad I got it sorted out. Fortunately, I decided to have another crack at a PPI reclaim that had previously been turned down and they admitted liability this time with the amount coming back to me almost exactly matching what I need to pay but it has been a horrible couple of months thinking about it.

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.

Stevo_666

Glad you got it sorted Pross. It's usually better to go to them in these cases. Problem is that this sort of thing is so complex that its very easy to fall foul of the rules. Makes my head hurt sometimes !

Pross

It was poorly thought out. Too easy for people on PAYE to slip over the threshold and despite what some people say after the initial fuss of it being introduced there is nothing to inform them. It should be easy for HMRC to include a note on your annual tax statement when you have exceeded the threshold and / or something off your employer with a P60. I read of one tribunal hearing where it was ruled that HMRC cannot use discovery assessments as that would require undeclared income and it isn't income and, from what I could tell, they would therefore have no legitimate way to reclaim from previous years. Then there is the obvious inherent unfairness in the way it is applied to only the higher earner so a household with one wage earner on £60k loses everything whilst one with two earning £50k keep the whole lot. The joys of crappy rushed legislation to satisfy your coalition partners!

thistle_

Pross wrote:

. It should be easy for HMRC to include a note on your annual tax statement when you have exceeded the threshold and / or something off your employer with a P60.

Or send out a mailshot mid year to anyone who is at risk of going over, might be more likely that someone will read it. It could also ask things like "is this allowance you are claiming still correct?"

morstar

thistle (MBNW) wrote:

Pross wrote:

. It should be easy for HMRC to include a note on your annual tax statement when you have exceeded the threshold and / or something off your employer with a P60.

Or send out a mailshot mid year to anyone who is at risk of going over, might be more likely that someone will read it. It could also ask things like "is this allowance you are claiming still correct?"

They are now reminding me 2 months after I did my return. Unfortunately, I didn't know for the first 10 months I went over the threshold and only found out through this forum.
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.

tailwindhome

Well ain't this a can of worms.

Stevo_666

It's messy if you're earning somewhere around the threshold.

surrey_commuter

People at work on PAYE had the same issue when they unexpectedly earnt over £100k as the marginal tax rate goes to 62%. They had all reasonably assumed it was being taken at source.

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

Stevo_666

Surrey Commuter wrote:

People at work on PAYE had the same issue when they unexpectedly earnt over £100k as the marginal tax rate goes to 62%. They had all reasonably assumed it was being taken at source.

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

Talking of beer and taxing success...
https://www.moorestephens.co.uk/msuk/moore-stephens-south/news/april-2016/the-tax-system-explained-using-a-beer-analogy