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Where Taxpayers and Advisers Meet

Confusion over adjusted allowances

tomdhu
Posts:54
Joined:Wed Aug 06, 2008 3:59 pm
Confusion over adjusted allowances

Postby tomdhu » Fri Jan 07, 2022 7:40 pm

I would appreciate guidance over the effect that extra pension contributions have with regard to tax thresholds for both dividend income and CGT.

I have a salary of around £40K and, in this year , expect to receive dividend income from shares and expect to face a CGT liability also. I have read various on-line articles on the relevant tax treatment but much of this is contradictory. What I would like to know is that if I make significant contributions to my SIPP, will it increase my basic personal tax allowance (up beyond £12,500) so that I can less tax on divis and CGT by virtue of a raised allowance.

Some people say the increased allowance threshold only effects earned income with no reduction in tax on divis or CGT.
Other sources suggest I can use the increased allowance against everything.

I have spent hours trying to get my head round this issue and so would appreciate a clearing of the fog.

robbob
Posts:3208
Joined:Wed Aug 06, 2008 4:01 pm

Re: Confusion over adjusted allowances

Postby robbob » Fri Jan 07, 2022 8:16 pm

I have a salary of around £40K and, in this year , expect to receive dividend income from shares and expect to face a CGT liability also. I have read various on-line articles on the relevant tax treatment but much of this is contradictory. What I would like to know is that if I make significant contributions to my SIPP, will it increase my basic personal tax allowance (up beyond £12,500) so that I can less tax on divis and CGT by virtue of a raised allowance.
No - but the grossed up value of your payment extends your basic rate band therefore providing higher rate relief if due - the basic rate relief will be provided by the extra 25% of the cash sum you add to your pot also being added in to your sipp by hmrc - 20% of grossed up value.
Some people say the increased allowance threshold only effects earned income with no reduction in tax on divis or CGT.
There is no increased allowance - there is increased basic rate band so this statement is kinda gibberish - but not fully as its possible there could be some reduction in tax due - how the tax due is compcicated by the fact the calculations are done in the most efficient way and full details are needed before we can be cerftain how everything will be allocated (allowances) and taxed - practicably speaking though you are likely to get higher rate relief if you have paid higher rate tax !!
Other sources suggest I can use the increased allowance against everything.
hopefully above poiint has answered this one

I have spent hours trying to get my head round this issue and so would appreciate a clearing of the fog.
if you post some example numbers someone will probably run a calc for you - they need tol be full and complete - eg salary cgt and type of cgt and dividend income and net/grossed up value of sipp payment made

tomdhu
Posts:54
Joined:Wed Aug 06, 2008 3:59 pm

Re: Confusion over adjusted allowances

Postby tomdhu » Sat Jan 08, 2022 11:17 am

OK, here are the actual figures expected before the end of this tax year.

Earned income (gross before tax) =£40,000
Dividend income =£20,000
CGT (from share disposals) =£30,000
Contribution into SIPP =£30,000

Hope this helps

robbob
Posts:3208
Joined:Wed Aug 06, 2008 4:01 pm

Re: Confusion over adjusted allowances

Postby robbob » Sat Jan 08, 2022 11:59 am

ok on year end 5/4/2021 tax calc and presuming total capital gain is 30k (before exemption) and presuming sipp contribution is grossed up amount (not what you have added cash)
I am presuming capital gains is at 10/20% rate - calcs will be different if your get what was previously entrepeanours relief


ignoring sipp contribution


salary used up pa and 27.5k of basic rate band
2k dividends at 0%
8k at basic rate band (7.5%)
and 10k at higher rate tax 32.5%
Capital gain all taxed at 20% -- ye 5/4/2021 that would be 17,700 presuming you have 12.3k exemption
note salary MUST if taxed be taxed before dividends which in turn is taxed before capital gains bit.
Note the complication arises when its advantageous to use dividend income against personal allowance ahead of salary - this does happen from time to time but not here - the only way to find out which is best is run full calcs for both use a computer or be like the card counting dude out of rain man.


ok your sipp contribution of 30k wipes out all higher rate tax by extending your basic rfate band so thats fairly simple

Your 17.7k capital gains is taxed at 10% not 20%
Your dividend income all taxed 7.5% not 32.5%

memo in above calc you have only had the benefit of 17.7k+10k = 27.7k of sipp payments - so your tax bill would come down by the same amount if your sipp contributions were 27.7k - as you have paid no higehr rate tax

Note as capital gains is the last added income source to the calculation if your sipp payments were lower you would get benefit against the dividend income first thats massively in your favour with the marginal extra tax charged being 25% extra at higher rate compared to only 10% extra for capital gains.

If you qualify for what was entrepeanours the capital gain would be ignored for sipp calcs as no higher rate tax is paid.

always remember you have always had 20% relief at source with yiur sipp pot having being bumped up by basic rate amount.

tomdhu
Posts:54
Joined:Wed Aug 06, 2008 3:59 pm

Re: Confusion over adjusted allowances

Postby tomdhu » Sat Jan 08, 2022 9:53 pm

That looks like really good news!
So in effect, my basic tax band ceiling is raised by the pension contributions from earned income. So if there is any of this raised basic rate allowance remains after the earned income has been taxed, then this "remainder" can be used to offset against (a) Interest on savings, then (b) dividend income and finally (c) CGT in that order - provided any of that original "remainder" still exists after each stage of (a), (b) and (c)

robbob
Posts:3208
Joined:Wed Aug 06, 2008 4:01 pm

Re: Confusion over adjusted allowances

Postby robbob » Sun Jan 09, 2022 11:25 am

So in effect, my basic tax band ceiling is raised by the pension contributions from earned income.
Yes with te folowing caveat
It's only the pension contributions you make directly or deducted from net salary - note deductions form net salary are called "relief at source."
Any employers contributions / salary sacrafice contributions or payments via deduction from gross pay (strangely called net pay arrangements !!) are ignored as your taxable pay is reduced at source and your taxable p60 is lower or you arent entitled to relief as its not you contribution if its deemded to be made directly via employer.

So if there is any of this raised basic rate allowance remains after the earned income has been taxed, then this "remainder" can be used to offset against (a) Interest on savings, then (b) dividend income and finally (c) CGT in that order - provided any of that original "remainder" still exists after each stage of (a), (b) and (c)
Your question is not 100% clear - .With regard to basic rate band zone after employment you simply pay tax at the rate charged for non higher rate taxpayers - the allocation order used as as you have described a - b - c in that regard. Practicably speaking everything in your example is simply taxed at basic rates as sipp contributions mean there is no higher rate liability due to the large exstenion to the baisc rate band.

you cannot though claim any tax back where you are not paying higher rate tax - so pension contributions that do not have any matching higher rate "tax" due liability will garner no extra relief as you havent paid higher rate tax tax. They certanly don't reduce any tax on dividends charged at the normal 7.5% - all you are doing is having the ability to avoid being charged higher rate tax nothing more - i think you do understand though i simply added this bit as your question isnt 100% clear here when i read it.


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