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Hi All,
I keep tripping up for not grossing up my figures.
Is the following correct?
For any number quoted as personal pension contribution gross up by 100/80 (WHY?)
For any number quoted as gift aid *unless explicitly ‘gross’*, gross up by 100/80 (WHY?)
For any dividends gross up by 100/90 (WHY?)Are there any more times when we need to gross up?
Thanks!
When you prepare a tax calculation, you start by entering all the figures gross, and then calculate the tax on these figures to get a tax liability. Then by subtracting tax already paid, you reach the tax payable figure.
In terms of the pension, if you make a contribution, the government automatically pay in 20% of your gross contribution. Therefore, if you pay in £80, the government will pay £20 which is 20% of £100 (the gross figure).
From memory, gift aid donations extend the bands (basic rate etc) by the gross amount. Again, the government pays 20% of the gross amount.
Dividends are a similar rule, but come with a 10% credit. Sometime else can give more details because I’m a bit hazy now!
Edit: I just had a quick research. I think the dividend rules may have changed a bit. But what learnt, and I could be wrong) was that companies deducted 10% tax at source. So if you were due a dividend of £100, you would receive £90. You would gross it up to £100, and pay tax at whatever rate you pay tax at. Then subtract £10 at the end to reach tax payable. As you see, if you are a basic rate tax payer, you’ll have no further tax to pay.By the way, if you’re wondering why the government contributes 20%, I can try to explain.
What they are effectively doing is refunding tax on the amount you are contributing/gifting. It is presumed that you already paid tax on this figure at some point, at at least 20%. As the various bands are extended by this gross amount, higher and additional tax payers effectively receive tax relief at their tax rate.
In the case of pensions, governments want to encourage people to pay into a pension scheme, so by refunding tax provides an incentive. Likewise, they want to encourage charitable donations (in this case the charity receives the gross figure, and the person’s bands are extended by the gross amount, so no benefit to the person if you’re a basic rate tax payer, but benefit to the charity).
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