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How are tax bands calculated?


Housten

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Good morning, Gentlemen,

I am hoping – although this may be entirely the incorrect place to ask – that someone can answer the slight, and probably silly, problem that I have at the moment.

As I have mentioned before I am a pensioner, and I like to get my tax affairs sorted as early as possible so that I know where my wife and I are in relation to our finances. To that I end I have been trying to write – or whatever one should call it – a small Excel programme to calculate, or at least try to, what our taxes are so we can, if necessary, set some cash aside to meet the demands when they arrive. I have worked on a particular assumption, but over the last few days I have been assailed by doubts. This is concerning the bands. I have, I am fairly certain, always worked on the premise that there is a tax-free element, then the 20% and then the 40% band. Now I am, fairly, certain that that has not changed but it is the way that it is implemented that has changed! Or has it???? For instance for this tax year the personal allowance is £9,440, the 20% band is £0 to £32,010, and the 40% band – I only wish I were anywhere near it – is £32,011 to £150,000.

What I have always worked on is that the 20% band starts, in effect, at £9,441 and goes on to £(9,440 plus 32,010) = £41,450, with the 40% above that. So only if your salary is in excess of £41,450 do you have to pay 40%. But now I am wondering if the first £9,440 is excluded so that the 20% band in reality, actually stretches from £9,440 to £32,010!!! As I see it this would make a difference of over £1,800 in the tax, and could push some people into the 40% band!!

If someone cold just confirm that my original premise is correct I would be very grateful.

Many thanks in advance.

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lotvic

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You can check it on http://www.tax-calculators.co.uk/incometaxbands.html and at the bottom it explains how it is calculated.

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lotvic

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Posted in haste, I should have checked on http://www.hmrc.gov.uk/incometax/basics.htm to see what that says :) I believe the personal allowance is taken off and then the rest is called 'taxable income' For the 20% band £0 to £32,010. (income actually £41,450).

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Housten

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lotvic,

Many thanks, just what I wanted. When you start thinking sometimes your head will not let something go, and you go round, and round and round. It seems a never ending stream, and just drives you demented. So, many thanks, you have returned my sanity to me. ( Not sure if the wife approves! She has less excuses then!! )

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lotvic

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Income Tax workings on a Sunday morning.... I must start to get out more :P

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wee eddie

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I think that someone may have got the wrong end of the stick.

I have no idea how many Tax Bands there are, however tax is calculated this way:

  1. Income between Zero and Tax Free Allowance is taxed at Zero

  2. Income in excess of the Tax Free Allowance and up to the next Band Figure is currently taxed at 20%.

  3. Income over the top of the 20% Band and up to the next Band is Taxed at whatever the appropriate rate is, and so on, ad-infinitum!

Just because your Income exceeds a particular Band Limit does not mean that all your Income is Taxed at the new rate.

There are Sources of Income that are taxed at different Rates, just to confuse the issue. Read the Link provided.

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Housten

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Gentlemen,

Many thanks to both of you. At least I have it sorted in my head now!!!

Many, many thanks.

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spuds

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Perhaps another route if you get stuck at any time. If you have AgeUK in your area, then ask them if they have an advisor in their staff. My local AgeUK as a retired Bank Manager/Finance Advisor who offers free advice on these topics, on certain days of the week by appointment.

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lotvic

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Well I thought I had it sorted, but wee eddie's post has now got me confused. Using a simple example (ignoring the Sources of Income that are taxed at different Rates) - what is the maximum a person's gross income can be to stay within the 20% tax band?

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Abel

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Hello Housten,

In addition to your personal allowance, there maybe other items to be taken into consideration also. So, let's start with your tax code, this sets you definitive allowable income before tax. Whatever code the tax man has issued you simply add a 9 to the end of it; this then becomes the amount of income you're allowed before you pay tax. For example, if your tax code were 944, take no notice of the suffix letter, add 9 to the end of it so that it then becomes 9449, this is then the amount of income, in £, you're allowed before paying tax.

Abel

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lotvic

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Further to my last post, I found an example on http://monevator.com/tax-brackets-and-allowances/

*"For example, if you will earn £40,000 in 2013/14 from all sources and you’re under 65, then your taxable income is £40,000 minus your basic allowance of £9,440, so £30,560.

That will put all your income within the 20% tax bracket, as it’s less than £32,010; you’ll pay no tax on the first £9,440 you earn, and 20% on the remaining £30,560.

If you earn £50,000, then by the same method your taxable income is £40,560. The first £32,010 will be taxed at 20%, and the rest at 40%."*

Basic rate: 20% £0- £32,010

Higher rate: 40% £32,011-£150,000

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