How should income tax be calculated?

[R.G. Bargy]

The weather is rubbish so I set about doing my self-assessment tax return online [so it is diy-related :-)] and came up with a puzzling query.

How should income tax due be calculated *precisely* ?

My income tax situation is very simple: basic tax rate only (20%), simple tax code (810L), single income source (company pension).

When I put the numbers from last year?s P60 into the HMRC self-assessment form, it automatically adjusts the earnings figure down to the nearest £ (discarding £0.40) and the tax paid figure up to the next £ (adding £0.80) and concludes that I?ve overpaid by £0.15.

When I do my own calculation using the P60 figures, the tax due differs from what is shown on my P60 and appears to show I?ve *underpaid* by £1.88.

When I do the same calculation using the HMRC-adjusted figures, it appears I?ve underpaid by £1.00.

The calculation formula I?ve used is this: tax_due = (gross_income ? personal_allowance) x 20% I?ve used (tax_code x 10) as my personal allowance, per HMRC?s guidance.

Whilst I realise the discrepancies aren?t significant, I would have thought there would/should be only one well-defined way of calculating income tax and, therefore, only one correct answer, whereas I?ve found four!

Can anyone shed light on these inconsistencies?

[Brian Gaff]

are you allowed to pay yourself for the time taken working out your tax?

Brian

[Andy Burns]

I thought it used to be (tax_code x 10) + 5

which would indeed be £1 different at 20%

[jgh]

I use personal_allowance as my personal allowance, because tax_code is INT (personal_allowance / 10). Last year's personal allowance is

8,105 so that 5 lost in the rounding to get the tax code is probably changing your figures.

JGH

[Martin Bonner]

This may be an extra-statutory concession - but it is the standard way.

Because you should be using whole pounds.

That sounds wrong.

That's right.

Ah! That's the mistake. You will have got a "Notice of Coding" at some point, and that will have shown your *actual* tax allowance - you need to use that. (And if your code really is 810L, then it is probably the just the personal allowance of £8105).

... That would bring your tax paid to exactly right (which is what I would expect - the pension will be PAYE which should get it right over the year.) So where is the 15p gone?

[Dennis Davis]

...

Can't really answer your question. I've always been lazy and used the figures obtained from:

when trying to work out my net income, using my gross income as the starting point.

[Jethro_uk]

Rounding errors ?

Back in 1997, when self-assessment was introduced, I was still listed as a director for my Dads company, even though I hadn't drawn a wage for 5 years. This meant I was sent a form, and *had* to fill it in. Which I did with the details of my single PAYE employment. To my surprise I had underpaid by about £10. When I queried this, they admitted that my employer had (quite correctly) been calculating tax using the IR supplied tables. However these tables are very slightly rounded *down*. As soon as my earnings were _precisely_ calculated - I had underpaid.

To be fair the agent I spoke to admitted it had the look of a scam about it ... send out 100,000 self assessment forms, and make a cool million.

After a second year with no income from the directorship reported I spoke to them again, and they said that as long as I wasn't going to be earning from the directorship, they wouldn't bother with self assessment ... and true enough, 12 years on they've been good to their word.

[Andy Wade]

PAYE is not a precise process. ISTR reading, a while ago, that HMRC don't worry about 'errors' of less than £5.

When doing a tax return you are *allowed* to round down the income from each source and round up tax paid, allowances, etc. to the nearest whole pound. AIUI the calculation should then proceed with 'full resolution' to the penny - but again, Hector isn't going to chase you for 15p. They've got much bigger fish to fry.

If you use the on-line SA100 then just accept the calculation to be correct, since it's come from 'them'.

[Peter Crosland]

If you are a pensioner with only a pension as income you are not subject to self assessment!

[Andrew Gabriel]

The online self-assessment rounds figues to the nearest pound in your favour. They aren't bothered by the amount they lose in those rounding errors.

I've no idea if they will bother repaying your 15p. One year, I wasn't required to make a tax return but filled the numbers in anyway, and they owed me £11, which I didn't bother to submit.

[Rick Hughes]

You should be able to charge an offset for the time you save an uncivil servant doing it.

I have a submission every year, and they issues PAYE code ... at end of every year I always owe a few hundred pounds .... they say it's because Government changed tax allowances during year ...

As they are computerized, why is that not automatically adjusted !

It is also galling that I have to do a Tax man's job and calculate what I owe them, and then get fined if I don't submit it on time !

Never mind income tax is only a temporary thing brought it was introduced in 1799, as a temporary measure to cover the cost of the Napoleonic Wars.

[R.G. Bargy]

It's a company pension, not the state pension. Why would that be tax free?

[jgh]

'cos you've already paid tax on it when you put them money in?

JGH

[R.G. Bargy]

Eh? I thought pension contributions were tax free.

[R.G. Bargy]

HMRC states the 'tax_code x 10' rule here: , incorrectly by the looks of it.

Using the actual allowance of £8105, I now have a formula that works-ish. Except for the ?£0.15 overpaid? bit.

The pension provider's payslips show 12 monthly instalments of equal gross pay amounts, but the tax amount varies between two values £0.20 apart. Five payments are of one amount, seven of t?other, scattered across the year ? bizarre.

The totals from the slips tally with the P60 values. But the tax paid is £0.80 under the revised calculated version anyway.

So, I'm still puzzled, but £0.95 up overall.

[Peter Crosland]

I did not say it was tax free and in any case the sate pension is taxable. HMR&C do not normally require a self asswessment to be completed where that is th income.

[Dave Liquorice]

Except pension contributions are subject to tax relief. You get the tax you paid on the money you put into a pension scheme back as a tax credit into your pension pot.

[R.G. Bargy]

Until 2010-11 I was self-employed so had to do so. But I'd forgotten that one shouldn't need to do so when everything can be covered by PAYE. I received a request to submit a tax form this year - maybe it's just 'one for luck'. I'll challenge it if one arrives next year.

[John Rumm]

He said, "not subject to self assessment", not "not subject to tax"... quite different.

[R.G. Bargy]

I've been submitting tax forms for too many years, forgot about PAYE.