#Tax Myth 13 - Your Income Is The Same For All #HMRC Purposes

Posted on in Administration

#Tax law is set up by different politicians at different times to achieve different aims, so we often end up with a strange mix of outcomes.

You may know what your Income is for income tax & national insurance purposes, but what about pension purposes? Child benefit high income charge? Childcare vouchers?

Here's a list of the main sources of income and when they're applicable when dealing with #HMRC:

Salary, Bonuses & Benefits

  • Income tax
  • National insurance - Class 1
  • Employee pension contributions
  • Childcare vouchers
  • High income child benefit charge
  • Working tax credits

Sole Trader/Self Employed Profits

  • Income tax
  • National insurance - Class 2
  • National insurance - Class 4
  • High income child benefit charge
  • Pension contributions
  • Working tax credits

Dividends - Gross

  • Income tax
  • High income child benefit charge
  • Working tax credits (over £300)

Interest Income - Gross

  • Income tax
  • High income child benefit charge
  • Working tax credits (over £300)

Property Profits

  • Income tax
  • High income child benefit charge
  • Working tax credits (over £300)

Pensions Received, Including State Pensions

  • Income tax
  • High income child benefit charge
  • Working tax credits

Points To Note

  1. The gross dividend is the amount you received plus the tax credit of 1/9. So for a £100 dividend, you use the higher non-cash figure of £111.11.
  2. The £300 is deducted only once from this income added together.
  3. The tax free personal allowance is not deducted when considering thresholds such as the £50k-£60k adjusted net income for the high income child benefit charge.

Strange Mix Of Outcomes

  1. When calculating your/your partner's adjusted net income for the high income child benefit charge, or your working tax credit income, remember to deduct self employed losses, gross gift aid and gross pension contributions (a net £100 gift or contribution becomes £125 gross), but not most property losses! And not in the same way as for income tax purposes!
  2. The childcare voucher thresholds ignore dividends, so you may be able to pay more tax free childcare vouchers from your own company than you thought.
  3. Pension contributions paid by employees are restricted according to salary, bonuses and benefits, but employer contributions don't have the same limitations (there are others). Your own company may therefore prefer to pay employer pension contributions (after seeing an IFA).
  4. With the new simplified cash accounting for unrepresented self employed sole traders effective from April 2013, these cash based profits are presumably the ones to use for working tax credits and other #HMRC purposes? They will probably be the same for the new universal credit system as we already know that requires monthly reporting of cash based profits.
#taxisfun