Gift Aid Donations and Pension Contributions

Hey everybody,

I need your help. I think I understand the above when it comes to working out income tax, but I know in the exam under time pressure I will get confused and doubt what I think is right, so I have tried to put together a system of steps that I can memorise to help deal with these kinds of questions.

It really helps me to be able to try and put things into a process so I have tried to do that here. I want you all to cast your critical eyes over it to spot any errors so I can amend it.

So, as a bit of background this is what I have done. I have used the NET INCOME from the income tax computation as my starting point, so we are right at the place where we are going to be looking at tax free allowances.

Step 1

This step is to work out the adjusted net income to see what we are going to do with the tax free allowances. There are two columns, one for individuals who are under 65 and have income over £100,000, and another for those over 65 (but less than 77, as you can’t contribute to a pension over that age) earning over £22,900. We take that net income and subtract gross Gift Aid donations and gross pension contributions (whether they are occupational schemes or personal schemes). This gives us the ADJUSTED NET INCOME.

Step 2

Here we look at the tax free allowance restrictions. There are three columns, for the personal, age and higher age allowances. We then look at the relevant income thresholds to compare with the ADJUSTED NET INCOME and the calculations that restrict the allowances in each case. The result of these is the tax free allowance we can take back to the individuals income tax computation in Step 3.

Step 3

There are two options in this step, depending on whether the individual’s pension contributions were made through a personal scheme (on the left) or through an occupational scheme (on the right).

If it was a personal scheme you take the individual’s net income and deduct the tax free allowance from Step 2 to give TAXABLE INCOME. From here you then work out the tax at the appropriate rates, but remember to extend each band by the gross pension contributions AND the gross gift aid donations.

If it was an occupational scheme you still increase the tax bands by the gross amount of Gift Aid donations, but DO NOT increase the bands by the gross pension contributions, as this amount will already have been deducted by the employer before operating PAYE. In respect of the income tax computation, you should have already deducted it from employment income to calculate NET INCOME.

Please see the attached files as you read the above. Apologies for the hand writing! When considering tax bands, to keep things simple I have assumed there is no savings or dividend income, therefore rates of 20%, 40% and 50%.

This is how I understand it, and I think (hope!) I am correct. Please let me know if there are any errors so I can get it straight in my head before the exam.

Thanks

CM