A dumb question about income tax bands

[northernladuk]

Why do many accountants recommend taking a salary of personal allowance - £500 or so, rather than exactly the personal allowance?

From what I see it is personal choice. Some advise under, some advise over. There doesn't seem to be a black and white answer hence the ambiguity.

[Pondlife]

Why do many accountants recommend taking a salary of personal allowance - £500 or so, rather than exactly the personal allowance?

It's related to NI rather than personal allowance.

i.e. you get your NI contribution stamp but don't owe any tax.

That's how I understand it anyway.

[psychocandy]

Why do many accountants recommend taking a salary of personal allowance - £500 or so, rather than exactly the personal allowance?

I could be wrong but isn't £7488 the optimum figure for paying no tax and no NI but still being over the threshold where NI is credited (even though you don't pay any). Basically, you want to be paying yourself as much as you can tax-free but not going into the band where you have to pay employers and/or employees NI.

Like NLUK said, it varies between accountants what is recommended. I pay £7488.

[d000hg]

It's related to NI rather than personal allowance.

i.e. you get your NI contribution stamp but don't owe any tax.

That's how I understand it anyway.

Yes, but the point is I'm also on a salary of £7488. Yet my personal tax allowance is £8105. So why aren't we all on a salary of £8105?

[Pondlife]

Yes, but the point is I'm also on a salary of £7488. Yet my personal tax allowance is £8105. So why aren't we all on a salary of £8105?

£144 p/w (£7488) is the threshold at which it counts as a contributing year for future benefits.

NICs are due on anything above £146 p/w therefore you'd have to pay NI on the difference between £146 x 52 (£7592) and £8105.

HM Revenue & Customs: Rates and thresholds for employers

[Nixon Williams]

£144 p/w (£7488) is the threshold at which it counts as a contributing year for future benefits.

NICs are due on anything above £146 p/w therefore you'd have to pay NI on the difference between £146 x 52 (£7592) and £8105.

The 2013/14 salary that can be paid without any deductions for PAYE (assuming a standard code) and NIC, or any employer NIC will be £7,696 which amounts to £641 per month.

The tax free threshold will rise to £9,440 - the starting point for tax and NIC used to be the same but the Government's aim to raising the tax threshold appears to ignore the NIC that is payable on lower starting salaries.

[psychocandy]

£144 p/w (£7488) is the threshold at which it counts as a contributing year for future benefits.

NICs are due on anything above £146 p/w therefore you'd have to pay NI on the difference between £146 x 52 (£7592) and £8105.

HM Revenue & Customs: Rates and thresholds for employers

Not quite right. I think the threshold is a bit lower than £7488 but, as you say, NI is due on anything above £7488 which is why its better to not use all of your tax free allowance.

[Pondlife]

Not quite right. I think the threshold is a bit lower than £7488 but, as you say, NI is due on anything above £7488 which is why its better to not use all of your tax free allowance.

I took the figures from the linky unless I missread them.

[Nixon Williams]

I took the figures from the linky unless I missread them.

Sadly, it is more complicated than it used to be.

For 2012/13:

Income tax is payable on income over £8,105

Employee's NIC is payable on income over £7,605

Employer's NIC is payable on income over £7,488

For 2013/14 the figures are:

Income tax is payable on income over £9,440

Employee's NIC is payable on income over £7,748

Employer's NIC is payable on income over £7,696

[d000hg]

I was looking at this again, and was struck that if you give a fixed % of your profits to charity, you end up having to perform a geometric series summation to figure out to the penny what you can actually take.

e.g say your divi pre-tax limit is 30k and you set to give 10% to charity...

You take a £30,000 divi and give £3000 away. That is £3750 gross.
You take a £3750 divi and give £375 away. That is £468.75 gross.
You take a £468.75 divi and give £46.88 away. That is £58.60 gross.
...

So we are performing with a = £30,000 and r = 0.125:

We end up with total divi = £30000 / 0.875 = £34285.71, charitable giving = £3428.57.

Who knew real maths could be useful in accounting!