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  • Tax

    Clause 24 2017-8 tax calculation

    All, I wanted to pick the tax brains on here about the way income tax is calculated during the current tax year. I understand for 2017-8, you are still allowed to deduct 75% of finance/mortgage costs, so here are some theoretical numbers:

    total rental income (net of agent fees, repair etc but before mortgage)= 60,000

    mortgage cost = 15,000

    total taxable income = 60,000 - 15,000 X 75% = 48,750

    assuming personal allowance of 11,500, and a higher tax threshold at 45,000, and no other income sources:

    total tax payable: (45,000 - 11,500) X 20% + (48,750 - 45,000) X 40% - 15,000 X 25% X 20% * = 7450

    * this is deducting from total tax liability the capped 20% tax relief for the remaining 25% of mortgage cost

    does this look correct?

    many thanks

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    Here is a Calculator from TMW ( The Mortgage Works ) showing you a breakdown year by year as Section 24 kicks in.

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    Thanks for the link, unfortunately no access to excel for the time being so can't really play with it. If anyone else can take a look at my original calcs, I'd be grateful.

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    Hi,

    This is quite a good example, as previously your rental profit would have been:

    Rental income less allowable expenses: £60,000
    Less mortgage interest: £15,000
    Equals rental profit: £45,000

    The rental profit above under the old rules, would have normally been within the basic rate tax band to the pound.

    However, 2017/18 is the first of the 4 year phase in of Section 24, and your calculations appear correct.

    Essentially, your rental profit in 20178/18 would be:

    Rental income less allowable expenses: £60,000
    Less 75% of your mortgage interest: £11,250
    Equals rental profit: £48,750

    This would then be taxed thus:

    £11,500 @ 0% = £Zero
    £33,500 @ 20% = £6,700
    £3,750 @ 40% = £1,500
    Subtotal tax = £8,200

    Then……

    Subtotal tax above: £8,200
    Less reducer: (£750) (£15,000 x 25% (allowable element) x 20% (tax))
    Equals total tax owed: £7,450

    (Note, that the above could result in payments on account falling due towards the following tax year)

    Of course, there are multiple factors that could affect the above.  One such example may be if you make AVC pension contributions, which could extend the basic rate 20% band, exposing less of your income to the 40% rate.

    Hope that helps and best wishes,

    RITA4Rent

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk


    I get everything apart from the  " REDUCER " ?

    Can you explain please.

    Chris

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