I am doing a 2010/11 tax estimate and wonder how the basic rate band extension works.
Say someone has £200,000 of partnership profits and £20,000 gross pension contributions, obviously no personal allowance, and the basic rate tax band will be extended to £57,400 like in the past.
But, do we keep the 40% tax band at £112,600 or do we reduce it so that 50% still kicks in at £150,000?
eg. (if we keep 40% band at £112,600)
57,400 x 20% = £11,480
112,600 x 40% = £45,040
30,000 x 50% = £15,000
Total = £71,520
OR
eg. (if we reduce 40% band so that 50% still kicks in at £150,000)
57,400 x 20% = £11,480
92,600 x 40% = £37,040
50,000 x 50% = £25,000
Total = £73,520
If we do it the 2nd way, it would be possible for someone to have no 40% tax band at all, which surely cant be correct?
Many thanks for help in advance
Replies (2)
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Simples
The answer is that the 40% band stays at £112,600.
The legislation is FA 2009 Sch 2 para 11: "on the making of a claim the basic rate limit and the higher rate limit for the tax year in the individual’s case are increased by the amount of the contribution" - so the first threshold becomes £57,400 and the second threshold becomes £170,000 - the gap between the two remains at £112,600.
Andrew Meeson CTA ATT