Top slicing query - Multiple CEGs

Top slicing query - Multiple CEGs

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Hello, this is just on the offchance that some sad person out there can spare the time to check my figures.  Not really expecting anyone to help with this but you never know :)

Or rather, check the figures of my software (Sage) which provides a figure for top slicing relief but no detailed calculation of how it is derived and I have problems manually reproducing it.  My bible for this stuff is IPTM3820 to IPTM3850.

The tax year is 2013-14.  Part of the problem may be that the unsliced CEGs result in complete abatement of personal allowances to £nil.  The taxpayer qualifies for 75+ age relief £10660 before abatement, abated to a standard £9440 if we include the sliced CEG.  Another part of the problem is that I believe that we are entitled to allocate personal allowances between income sources in such a manner as is most beneficial to the taxpayer, and I don't know how Sage manages this.

Anyway, onto the figures:

Pensions income £6339
Savings income £7336
Dividend income (gross) £6411
CEGs £127860 (BR tax at source on all)
No gift aid

There are 7 CEGs making up the £127860:
£26186 (26 years); £1007 per year
£17758 (26 years); £683 per year
£29567 (21 years); £1408 per year
£30690 (1 year); £30690 per year
£4663 (13 years); £359 per year
£6223 (7 years); £889 per year
£12773 (18 years); £710 per year

Total of yearly equivalents is £35746

Spare BR band if you allow £0 personal allowances is £11924

Sage calculates top slicing relief at £6145.66

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The "step 2" liability should not be contentious:
(£127860 - BR £11924) @ (40% - 20%) = £23187.25

Reverse engineering Sage's figure, this means that Sage determines that the Step 6 liability (IPTM3840) is
£23187.25 - £6145.66 = £17041.59
Divide this by 20% and we get to the "Step 5 total"
£17041.59 / 0.2 = £85207.95
And now divide this by the number of gains (7) to get the "Step 4 total" £12172 (losing the odd pennies)

Soooo, of the total of sliced gains £35746, Sage reckons that £12172 falls into the 40% band and the balance £23574 falls into the BR band.

But if we forget to abate any personal allowances at all, and give the full £10660, and allocate the whole PA to other income sources, I still get only £22584 available BR band to set against the sliced CEG.  The discrepancy is larger if we only allow £9440 personal allowance.

Any ideas where I have gone wrong?  Is Sage's figure actually correct?

With kind regards

Clint Westwood

Replies (2)

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James Reeves
By James Reeves
09th Dec 2014 14:19

Why are you using the number of gains?

I'm not sure why you are using by the number of gains (7) as a divisor. 

"N" in this case will be £127,860 / £35,746 (Total gain divided by AEA) = 3.5769.

The full calculation that I get is this:

CEG taxed as top slice, so all other income taxed first (including divs):

Pensions + savings + dividends = £6,339 + £7,336 + £6,411 = £20,086

Basic rate band remaining = £32,010 less £20,086 = £11,924

CEGs at 40% = £127860 - £11,924 = £115,936

Step 2 = £115,936 @ (40% - 20%) = £23,187.20

AEA = £35746

AEA in higher rate band = £35,746 - £11,924 = £23,822

£23,822 @ (40% - 20%) = 4,764.40

Step 5 = £4,764.40 x 3.5769 = 17,041.78

Step 2 - Step 5 = £23,187.20 - £17,041.78 = £6,145.42

Within a pound of the Sage figure you quoted.

 

Thanks (1)
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By nogammonsinanundoubledgame
09th Dec 2014 17:17

Thanks

I used the divisor 7 because IPTM3840 at step 6 requires that a total be multiplied by the number of gains, and as I was reversing the procedure to reproduce an earlier step figure I was dividing as the inverse function.

But that is a red herring.  Where I went wrong was to disregard the comment in IPTM3110.  I had assumed that as the total of the annual equivalents, together with non-gain income, amounted to less than £100K the individual would be entitled to £9440 personal allowances in calculating how much of the annual equivalent falls into the higher rate.  This it now appears is incorrect and in that regard the software (and you) have treated it correctly.

So thanks again

With kind regards

Clint Westwood

Thanks (0)