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Natalia’s only income in the tax year 2024/25 is trading income of £80,000.
She also has an annual allowance charge of £10,000 as a result of making gross personal pension contributions of £50,000 in the tax year 2024/25.
What is Natalia’s income tax liability for the tax year 2024/25?
annual allowance charge 10000 as added with 80000 than subtracted with personal allowance and income tax liability was 15486
my doubt is why is annual allowance charge added?in the beginning along with trading income shldnt it be after the deduction of personal allowance
£(80,000 – 12,570) = taxable income of £67,430.
The basic rate band is extended by the gross personal pension contribution, so £(37,700 + 50,000) = £87,700, which means that all of her income is taxed at basic rate, so £67,430 x 20% = £13,486.
The annual allowance charge means that the excess of total pension contributions over the annual allowance results in additional tax being levied on the individual, so if the AA charge is £10,000, as this falls within the extended basic rate band (£87,700 – £67,430 = £20,270) an additional amount of £10,000 x 20% = £2,000 is added to the tax liability of £13,486, giving a total Income Tax liability of £15,486.
Incidentally, the annual allowance in 2024/25 was £60,000. It hasn’t been £40,000 since 2022/23, so with gross personal pension contributions of £50,000 as in your example (and there will be no employer’s contributions to increase this amount as she’s self employed), the example is wrong in this respect as £50,000 < £60,000 and therefore there would be no AA charge.
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