R06 revision

esthomizzy

Hi All

I’m revising for next weeks r06 (hopefully this pic works) and with this q for the HRT element of month one I thought it would be

150000-34500-11850 not as they have without the personal allowance.

Can anyone illuminate where my logic is going wrong?

Thanks
E

arongunningham

If you include the 11,850 as you have, you will be including a tax-free element into your calculation whereas you're trying to calculate the taxable elements.

I think if you follow the solution shown you'll identify the correct answers if you have question like this.

good luck!

esthomizzy

I see that their answer is correct and I’m wrong but I still don’t see why 1/12 of each band (excuse the new year allowances below) doesn’t apply here. If we’ve accounted for 1/12 of the PA and BR band then surely the next slice is between HR and AR having subtracted both of those.

What is my income tax rate for 2019/20?
EARNINGS (IF YOU LIVE IN ENGLAND, WALES OR NORTHERN IRELAND) RATE
Under your personal allowance (PA)
For most, £12,500 No income tax payable
Between PA and PA + £37,500 (basic rate)
For most, over £12,500 to £50,000 20%
Between PA + £37,500 and £150,000 (higher rate)
For most, over £50,000 to £150,000 40% (1)
Over £150,000 (additional rate) 45%

And thanks for the reply it’s helpful to talk out exactly why I’m wrong.

arongunningham

On the Month 1 basis rule you need to divide all the elements by 12. The payment is happening on one single occasion so PAYE should be calculated into a monthly segment.

(the reality is that if this person had no other income, it would mean there'd be some repayment of overpaid tax).

My calculation method would be slightly different:

11850 / 12 = 987.50 minus 0% = 987.50
34500 / 12 = 2875 minus 20% = 2300
115,500 / 12 = 9625 minus 40% = 5775
remainder = 9012.50 minus 45% = 4956.88

net taxable element is £14,019.38, with £8,480.62 tax paid

Kate_W

esthomizzy - it looks like you are double counting the personal allowance (a mistake that I made when studying R03).

If you look at a basic income tax calculation (if you have access to the R03 text book read chapter 1 section I2) you want to follow the following steps:

1) Calculate all pre-tax income
2) Deduct certain reliefs
3) Deduct the personal allowance
4) Adjust your tax bands to account for pension contributions and gift aid
5) Apply the tax bands

For the purposes of the question you are doing you can ignore step 2 and 4.

You first deduct 1/12 of the personal allowance.

THEN on what you have left AFTER deducting the personal allowance:

you calculate the BR tax on 1/12 of £0 to £34500 (34500/12 = 2875)
you calculate the HR tax on 1/12 of £34500 to £150000 (115500/12 = 9625)
You calculate AR tax on the remainder

Also, when using past papers make sure you are using the tax table for the correct tax year (the example you are using is for a payment in the 2018/19 tax year not the current year).

Does that help?

esthomizzy

Thanks both. I understand now, for some reason I had trouble getting my head round this. Yes this last R06 will be examined on 2018/19 allowances which is unnecessarily confusing between April and Sept