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Hi,
This question relates to gift aid donations and asks you to compute income tax payable for two individuals. It is only actually one of them who makes a donation, and she is a higher rate tax payer.
When I answered this question, I did two things. First, as she was earning over £100,000 but less than £112,950, I reduced her personal allowance accordingly. Then I extended the basic rate band by her gross gift aid donation and then worked out the tax at the appropriate rates. This is the way the BPP text instructed to do it.
However, when I checked the answer that BPP gave on pg. 384 they took a different approach. They didn’t extend her basic rate band and instead reduced her total income by the gift aid donation before working out her reduced personal allowance for earning over £100,000.
The net result of this was that both BPP and I got the same answer (only a rounding difference of £1), but through two different methods. I just wanted to check which is the correct one to do in the exam.
If Adjusted net income (ANI) is > £100,000 you need to restrict the personal allowance (PA) by
PA 6475
LESS 1/2 (ANI-100000) (x)
Revised PA
ANI=NET INCOME LESS GROSS GIFT AID AND GROSS PERSONAL PENSION CONTRIBUTIONS
When you work out the income tax you extend the basic and additional rate bands by gross gift aid and gross personal pensions
Hope this helps- Topics: 23
- Replies: 68
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Thanks for your reply superwoman. So you are saying that the BPP answer is also incorrect?
The way I answered the question I only did one of those things (increase band) and BPP also only did one thing (subtract gift aid from total income). Whereas we both needed to each do the second step too?
I think that is where I was confused – that I got the same final figure even though I did it differently to BPP’s answer method.
If the donation is under Gift Aid Scheme – this should extend the basic rate band.
If the individual donates under payroll scheme, this must be deducted from the total empl. income.If the donation is under Gift Aid Scheme – this should extend the basic rate band.
If the individual donates under payroll scheme, this must be deducted from the total empl. income.- Topics: 23
- Replies: 68
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The question states she made a Gift Aid donation. I answered the question by increasing the basic rate band.
The answer in the back of BPP deducted the gross donation from her net income, and did nothing with her basic rate band.
Through two different methods, both BPP and I came to the same answer.
From what I understand from superwoman, both the BPP text and I are wrong. The correct answer would be to deduct the gross contributions from her net income as she is earning over £100,000 AND increase her basic rate band.
If she was not earning over £100,000, but was a higher rate tax payer, I would just increase her basic rate band. And if she was a basic rate taxpayer, I would do nothing.
Am I getting there?
Can you be specific regarding the question, Is this from the BPP Practice and revision kit?
- Topics: 23
- Replies: 68
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No it is from the actual study text.
Hiya
I have looked at the question. The personal allowance is correct but the basic rate band should be extended by the gross gift aid donation.
Hope this helpsHiya
I have looked at the question. The personal allowance is correct but the basic rate band should be extended by the gross gift aid donation.
Hope this helps- Topics: 23
- Replies: 68
- ☆☆
Hi superwoman,
Thanks for the clarification. I feel better knowing that the answer in the back of the book was wrong as well!
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