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Hello Tutor,
Please find below the question and answer for a problem given in the act
EXAMPLE 4
May was born on 19 December 1959. For the tax year 2014–15 she has a trading profit of £159,000. During the year May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is as follows:Trading profit 159,000
Personal allowance (6,500)
______
Taxable income 152,500
______
Income tax:
83,865 at 20% 16,773
68,635 at 40% 27,454______
Tax liability 44,227
______• The gross personal pension contributions are £40,000 (32,000 x 100/80) and the gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £10,000 is reduced to £6,500 (10,000 – 3,500 (107,000 – 100,000 = 7,000/2)).
• The basic and higher rate tax bands are extended to £83,865 (31,865 + 40,000 + 12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively.My query is when the higher rate band is extended to 202000, After 68635 @ 40%why dont we consider 49500(152500-202000) for 45% also for tax liability ?
The taxpayer does NOT have 202,000 of taxable income!!
The taxpayer has taxable income of 152,500 which has been correctly charged to tax through the revised basic rate band and the remainder within the higher rate band. Tax at 45% would only have been charged if May had taxable income in excess of 202,000 which she does NOT.
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