Marginal rate Chapter 20 Illustration 1

The objective is to relieve losses at the highest possible rate, so the preference would be: - profits in the marginal band at 26.5% - profits taxed at the higher rate of 25% - profits taxed at the lower rate of 19% As a CY claim is all or nothing, with a loss of £120,000, the full £75,000 total profits would be wiped out, which would save tax in the current year as follows: £75,000 x 25% = £18,750, less marginal relief of 3/200 (250,000 – 75,000) = £2,625, so a total of £18,750 – 2,625) = £16,125, or to look at it another way: £(75,000 - 50,000) = £25,000 profits in the marginal band taxed at 26.5% = £6,625 and £50,000 profits taxed at 19% = £9,500, so a total of £(6,625 + 9,500) = £16,125. This would leave £45,000 of the loss to carry forward which would save tax at 26.5% = £11,925, so a total tax saving of £(16,125 + 11,925) = £28,050. (SEE CORRECTION BELOW, THE SAVING WOULD BE AT 25% NOT 26.5% AND SO 25% x £45,000 = £11,250 (NOT £11,925) So tax is being saved at 19% x £50,000 and 26.5% on £(25,000 + 45,000) = £70,000 over the two years. (SEE CORRECTION BELOW, THE SAVING WOULD BE 19% x £50,000, 26.5% x £25,000 AND 25% x £45,000, SO A TOTAL OF £27,375 OVER THE TWO YEARS. Carrying forward as per the illustration saves tax at £70,000 at 25% and £50,000 at 26.5% as follows: £(320,000 – 250,000) = £70,000 taxed at the higher rate of 25% = £17,500 and the balance of the loss (£(120,000 – 70,000) = £50,000 in the marginal band taxed at the marginal rate of 26.5% = £13,250, giving a total of £30,750 which is £2,700 less and is clearly preferable! (SEE CORRCTION BELOW, IT'S £3,375 LESS). Note, this difference can be calculated as follows: £50,000 x (26.5% - 19%) = £3,750 and £70,000 x (26.5% - 25%) = £(1,050) So a total of £(3,750 – 1,050) = £2,700 tax saved. SEE CORRECTION BELOW: £50,000 x (26.5% - 19%) = £3,750 and £25,000 x (26.5% - 25%) = £(3,75) and £45,000 x (25% - 25%) = 0 So a total of £(3,750 – 375) = £3,375 tax saved.

Can't thank you enough. You're such an amazing teacher. I've understood the calculations. About 45000 being carried forward, is that supposed to be multiplied by 25% since it'll be relieved against 320000? Then the tax would be saved by 25%*45000=11250 And that would make a total of 16,125+11,250=27,375?

Yes, you are right and I was wrong! Carrying forward £45,000 would reduce the profits from £320,000 to (£320,000 - 45,000) = £275,000 and would therefore save tax at 25% as you rightly said. Thank you for the correction! It really shows good understanding when you can spot my mistakes! So the difference would be £(30,750 - 27,375) = £3,375. £50,000 x (26.5% - 19%) = £3,750 and £25,000 x (26.5% - 25%) = £(375) and £45,000 x (25% - 25%) = 0

Just wanted to say that because of you I've reached this far in Tax. You're a great teacher. Otherwise things were too tricky in Tax subject. Thank you so much.

You're welcome (and keep up the good work)!