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Notional tax on a life assurance gain

Should the notional tax on a life assurance gain reduce an actual tax liability?

For 2016/2017 a client had the following:

  • Employment income of £14,658.25, from which tax of £506.80 was deducted at source under PAYE.
  • Self employment profit of £5,648.00
  • Bank interest of £2.11
  • Life assurance gain of £7,957 (notional basic rate tax of £1,591.40).

Without the life assurance gain the SA liabilty would be £1,354.45, i.e.

(£14,658.25 + £5,648.00 - £11,000.00 PA) @ 20% = £1,861.25

£1,861.25 - £506.80 = £1,354.45

With the inclusion of the life assurance gain our tax software comes up with the same result by restricting the notional tax (because £997.89 of the gain falls within the savings allowance and is taxed @ 0% - the remaining gain of £6,959.11 is taxed at 20% and the deductible notional tax is restricted to the resulting liability of £1,391.82).

HMRC's SA Tax Calculation allows a deduction for the full notional tax of £1,591.40, resulting in a liability of only £1,155.60.

Which is correct, please?

Many thanks in anticipation of your assistance and guidance.

 

 

 

 

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By Mr_awol
13th Dec 2017 13:20

Have a look at ITTOIA 2005 Part 4 Chapter 9 s530. Subsection 2 states that " income tax treated as paid under subsection (1) is not repayable"

However, the savings allowance brought in via s12A ITA 2007 is not an exemption but an actual rate of tax, albeit at 0%. There is nothing in s530 ITTOIA 2005 which denies credit when part of the gain is charged at 0%, and indeed there was no such rate when the s530 rules were originally introduced and so this issue never arose before.

So, something of a grey area but I'm inclined to go with HMRC on this one - albeit perhaps with a caveat to the client explaining that IF it gets reviewed by HMRC in the future, they MAY decide that actually some of the credit should be restricted, so the client should probably bung the difference in a savings account in case they have to hand it back at a later point.

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13th Dec 2017 14:51

Had one of these recently and both HMRC and my software allowed the notional tax to be deducted from other tax liabilities but only down to zero. Capital gains tax wasn't affected i.e. no set off.

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