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Scottish Taxpayer tax calculation problem

Issue with the interaction of pension contributions and separate basic rate bands

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Hoping someone may have come across this and knows the explanation.

We've run a calculation for a client that seems wrong, but after checking with our software provider they've given us the HMRC calculation confirming their figures. We still think it's wrong though.

 

These are example figures but give the same issue as the actual ones:

Employment income £54,000

Interest £6000

Dividends £15,000

Net pension contributions £19,200

 

The salary is taxed under the Scottish bands, £2000 @ 19%, £34,150 @ 20%, £6000 @ 21%.

The interest and dividends are taxed under the UK regime, interest is £500 @ 0% and £5,700 @ 20%

Dividends are taxed £2,000 @ 0%, £2,150 @ 7.5% and £10,850 @ 32.5%

 

Can anyone explain why the figure for dividends being taxed at 32.5% is £10,850? We're all sure it should be £4,850, the difference is the same as the amount taxed at 21% under employment income. This holds true with our real world example as well where the figure is something more precise, so I'm sure it's no coincidence.

Basic rate bands are extended by 5/4 x £19,200, £24,000, so are £34,150 for Scotland and £58,500 for England. The amount of income being taxed at basic rate is £52,500.

 

Posting as anonymous as I don't particularly want anyone in my office knowing my account name and this puzzle has been all round the office. I am a regular poster on here though.

 

Edit: to respond to the point below, we are not in dispute about the use of the personal allowance, HMRC and our calculation allocate it in full to the salary. The issue is that HMRC's calculation appears to deduct the amount taxed in the Scottish Intermediate band from the available basic rate band twice.

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By ajkidd
10th Jul 2019 15:07

Personal Allowances are set against employment income which is potentially taxed at 41% rather than dividends taxable at 32.5%.

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By halblackburn
12th Jul 2019 02:33

(1) In your question did you mean interest of £5,500 @ 20% rather than the £5,700 @ 20% as stated ?

(2) Using your numbers with CCH software gives: Scottish IT £11,707.50 and non-Scot. IT £11,667.50, so £40 extra tax in Scotland. In both calculations the dividends are taxed: £2,000 @ 0%, £8,350 @ 7.5% and £4,650 at 32.5%

(3) As ajkidd indicates the personal allowance is set against the employment income in both calculations.

(4) Does your software allow you to switch easily between Scottish IT and non-Scottish IT ? If so, then the taxation of interest and dividends should be the same in both calculations. Only the taxation of the employment income changes.

(5) Can you get a correct Scottish calculation by using smaller values for the two variables: employment and pension premium? If so, then start there and systematically increase one variable at a time until the calculation goes wrong. It's time consuming but this enables the edge of the error region to be determined.

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Replying to halblackburn:
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By anonanonanon
12th Jul 2019 08:58

Registered a new account to respond.

1) Actually the typo was in the first part, I used £6200 for interest, not £6000. I've changed it to £6000 to compare like for like though.

2) This is what we expected and reflects our understanding of how the rules ought to be applied. Our software does not do this though, the Scottish taxpayer owes £13,207.50 in tax, the difference being 25% of £6000 as £6000 more in dividends are being taxed at higher rate.

3) The personal allowance isn't an issue, we're happy it's correctly applied.

4) Yes, our software matches yours for the English version.

5) The error occurs when the savings & dividend income is large enough to fully use the difference in basic rate band between Scotland and England, and salary income is large enough that with the pension extension, there is still salary being taxed at the intermediate rate.

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Replying to anonanonanon:
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By anonanonanon
12th Jul 2019 08:58

We have gone through HMRC's worksheet on how to calculate your tax liability and have found what looks to be the issue.
There is a box labelled A167c which determines the extension to the basic rate band applied to the savings & dividend income. This box is defined as the smaller the gross pension contributions, less the amount of income taxed at the Scottish intermediate rate.

We have no idea why the amount taxed at intermediate rate is deducted from the pension contributions in working out the basic rate band extension. Your software is (correctly, in my opinion) not doing that. HMRC's calculation, and by extension our software's, is.

Obviously as far as our software provider is concerned, so long as their calculation matches HMRC's they're doing it right. It's HMRC who are doing it wrong.

We're sending the return in by post with a covering letter because we have no idea how else you can contest an HMRC calculation that is per their tax return instructions, but appears wrong.

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