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Where Taxpayers and Advisers Meet

The 1.4 million percent tax trap

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am
The 1.4 million percent tax trap

Postby someone » Wed Jan 03, 2018 3:27 pm

Our intrepid explorer into tax law is a skilled worker. She earns a very respectable 110K. In order to avoid the tapering of annual allowance she's paid 20K (gross) into her pension each year.

Unfortunately (or fortunately), last year she got made redundant - and got a 100K package, the first 30K of which was tax free. Due to her valuable skills, she was able to secure a new job at the same pay and started immediately her notice period expired so there was no break in employment.

Delighted at this turn of events, she decided to pay her 100K package into her pension, making use of the available carryback.

Come January and she has to do her tax return. She has managed to encode the vaguarities of tax law into a spreadsheet. She puts her numbers in and is delighted to see that she only needs to pay 21200 in tax and will get a healthy refund from the taxman.

However, nobody is infallible - and on looking at her bank statements she realises that she gets 10p per month in interest.

So she puts this one pound of additional income into her spreadsheet and is horrified to see her tax bill leap to 35200. Thats 14K of tax on one pound of income!

Never mind, she thinks, I'll just do a gift aid donation and carry it back. Unfortunately, that only reduces her tax bill by 20p per pound.

On further investigation, our explorer discovers that the problem is that her adjusted income for the year is 210001, reducing her pension annual allowance to 10K leading to an excess pension contribution of 30K that is taxed at 40%. When her income is £1 less her threshold income is 110000 where pension allowance tapering doesn't apply.



Many years ago I remember talking to a colleague from India. He said that the tax law then was so complicated and had so many weird cases that if you ever ended up paying more than 100% tax then you could give the money to the government and remove it from your tax calculation, effectively capping the maximum tax rate at 100%

Does our intrepid explorer have a similar get out?

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: The 1.4 million percent tax trap

Postby robbob » Wed Jan 03, 2018 8:35 pm

Its times like these when one is thankful that they can remember the day that they took a 5 mile detour on the way home from work in their private car to post something important for work- not worth claiming back from the employer at the time but the claim of £2.25 against employment income (45p mile) comes in pretty handy in this circumstance. I am presuming that would be sufficient to reduce the "threshold income" below the 110k- ??????

Being serious though this is ridiculously harsh - and thanks for the post someone hopefully someone may benefit from having this flagged up - presumably gift aid payments now made and carried back to the previous year don't reduce that prior years "threshold" income?

I guess hmrc will says the rules are simple in that the 110k limit is flagged up so that's it shouldn't be a surprise that this situation is reached and anyone putting 100k into a pension in one go probably really ought to pay a qualified professional to check things over if they aren't a tax god and don't want to end up in the s***. Its a pretty crappy situation though for those who don't know what they will earn during the year.
Does our intrepid explorer have a similar get out?
in future Yes pay a suitably insured professional to do the calcs and advise as appropriate so this situation is avoided -

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am

Re: The 1.4 million percent tax trap

Postby someone » Wed Jan 03, 2018 9:14 pm

Does our intrepid explorer have a similar get out?
in future Yes pay a suitably insured professional to do the calcs and advise as appropriate so this situation is avoided -
Thanks.

My situation isn't nearly as extreme but is severely hampered by a significant bonus in January (large enough that ALL of the tapering is as a result of the bonus) - the amount of my bonus isn't communicated to me until it's paid - which I think is fairly common in the industry.

Ironically, I can arrange to have some of it donated directly to charity - which WOULD reduce the threshold and adjusted incomes - but I don't know how much the bonus will be. I can just ask for a percentage or an actual amount (which would be capped at the bonus amount) to be paid to charity.

Payroll deduction to charity - allowed. Gift aid - not allowed.

The only major difference I can see is that gift aid can be carried back.

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am

Re: The 1.4 million percent tax trap

Postby someone » Wed Jan 10, 2018 7:14 pm

not worth claiming back from the employer at the time but the claim of £2.25 against employment income (45p mile) comes in pretty handy
On further investigating, I'm not sure this is a valid deduction. It will depend on whether it falls under s23 of ITA 2007.

But it gets worse!

https://www.gov.uk/hmrc-internal-manual ... l/eim16065

Despite what it says on this page about having no effect on the employees tax situation, I think this does now!

Employer sends employee to US for two weeks. AIUI, that is a "benefit in kind" which will increase the adjusted income but the deduction under s337 or s338 ITEPA 2003 isn't allowed for the purposes of reducing it again. I've just had a major panic but, fortunately, it was Feb 2016 so just before this new law would have caught me! I have absolutely no idea what I would have done as I didn't keep any records of the costs of the flights (or the hotels which I guess are also included) My miscellaneous expenses were 495.80 which, thankfully, I didn't delay claiming back so were paid into my account on 9th March 2016.

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am

Re: The 1.4 million percent tax trap

Postby someone » Wed Jan 10, 2018 7:45 pm

But the good news: payroll giving is an allowed deduction

http://www.legislation.gov.uk/ukpga/2003/1/section/713

It reduces the amount chargeable to income tax and hence the s23 amount.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: The 1.4 million percent tax trap

Postby bd6759 » Wed Jan 10, 2018 7:48 pm

Step 1: Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

An expense is a deduction from income. After deducting expenses you arrive at the amount on which tax is charged.

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am

Re: The 1.4 million percent tax trap

Postby someone » Thu Jan 11, 2018 8:22 am

Step 1: Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

An expense is a deduction from income. After deducting expenses you arrive at the amount on which tax is charged.
Sorry! You are quite correct. I got so bogged down in s24 that I stopped seeing the wood for the trees.


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