Extending bands for Gift Aid & Pension

Lindi

Hi,
I'd like to know, do you extend each band (basic, higher and additional) if a client has made Gift Aid or Pension contributions? I thought it was only the basic band. Or can you choose which band you extend? Thank you

JayB2606

Only the basic rate band is extended by the gross value of donations made during the year, thereby increasing the amount of income taxable at the basic rate, resulting in relief at the donor’s marginal rate.

Lindi

Thank you, I thought as much though it looked like some of the BPP Question Bank questions worked differently which made me doubt myself. I'll see if I can find them, look through properly and probably post them if I still don't understand. Thank you!

Lindi

Hi JayB2606, I've found the issue I have with it, it's the additional rate "threshold". See this picture, Task 7.5 in BPP AQ2016 Question Bank.

JayB2606

the key word in 7.5 (c) is threshold - so you pay 45% after £155k

(a) and (b) say band - max tax you pay in the band

Lindi

Thank you, the bit I don't get is the given table on Tax rates says basic rate is up to £32,000 then higher is up to £150,000 and additional is anything over £150,000.

The book above seems to be adding the £5,000 gross gift aid amount to both higher and additional.
If her basic has been increased by £5,000 to £37,000 then her higher rate threshold should be £113,000 but in the answer above it's £118,000 so they've added the £5,000 there too. Same with the additional one, they are working on the additional band being £155,000 and over.... Can you help explain this part pretty please??

JayB2606

if the higher rate band was to be £113k the tax saving would be 20% (40% - 20%), however as she is AR tax payer the saving is 25% (45% - 20%)

assume a salary of 160k and assume no gift aid

32k @ 20% (1)

(150k - 32k) = 118k @ 40%

(160k - 150k) = 10k @ 45% (2)

assume a salary of 160k and assume gift aid £5k

(32k + 5k) = 37k @ 20% (1)

(155k - 37k) = 118k @ 40% ( the band is 118k which remains the same)

(160k - 155k) 5k @ 45% (2)

Tax saving is calculated

(1) 5k @ 20%

less

(2) 5k @45%

Lindi

Thank you, the more I look at it the more I can kind of see where you're coming from. I understand the concept of 25% saving as she's an additional rate payer. It is difficult to get anywhere when they don't give you her salary details. Hopefully I will not be thrown if I see a similar question in my exam.

Thank you ever so much for taking the time to explain this.

JayB2606

in your exam it might be an idea to work through an assume salary, which may help the thought process

Lindi

Thank you for the advice. So I am safe to assume that if she was a higher rate payer the tax saving would be 20%. I think I'll do a calculation with numbers as above without gift aid and then with gift aid. Thank you!

AlisonSwanson

Lindi. The gross amount of a gift aid payment or a personal pension payment is added onto BOTH BANDS. For example if a gross personal pension payment is made during the tax year of £5000 this would be added to both the £32,000 band AND the £150,000 rate band (for 2016-17). The gap between the bands remains at £118,000 both before and after adding on the gross personal pension payment.

Lindi

Thanks to everyone for helping and explaining this one. I don't recall learning that as such but will now be a little more prepared for my exam.