Summary
'Other' income type allows for manual input of gross income.
No National Insurance taxes are applied to 'Other' income.
Income tax is calculated based on the most recent tax rates and bands.
Option to adjust for inflation based on CPI, with custom cap and collar.
Description
Timeline Planning offers various predefined income types, but what if you have an income source that doesn't fit neatly into any of these categories? That's where the 'Other' income type comes in. This article will guide you through how National Insurance and Income Taxes are calculated for the 'Other' income type.
Income Type - Other Explained
In Timeline Planning, all income is treated in gross terms. When an advisor is uncertain about which predefined income type best suits a client's cash inflow, they can use the 'Other' income type. This allows the advisor to input the income in gross terms and then calculate the net value.
Like other income types, 'Other' income can be adjusted for inflation based on the Consumer Price Index (CPI) and custom collar and cap can be selected for each 'Other' income source as shown below:
Inflation cap
The inflation cap acts as the maximum inflation adjustment that will be allowed for a given year. If for example the inflation cap is selected to be 6%, then for all the years within a particular scenario that the annual CPI has been more than 6%, the income source will be increased by 6% and no more than that. Of course this means that for this particular year the real value of the income source will diminish because the inflation was more than 6%, and the income source was only adjusted up to 6%.
Inflation collar
The inflation collar acts as the minimum inflation adjustment that will be allowed for a given year. If for example the inflation collar is selected to be 3%, then for all the years within a particular scenario that the annual CPI has been less than 3%, the income source will be increased by 3% and no less than that. Of course this means that for this particular year the real value of the income source will increase because the inflation was less than 3%, and the income source was adjusted for 3%. On the other hand, if the CPI is more than 3%, then the income source will be adjusted based on the CPI.
Default limits for cap and collar
When setting up an 'Other' income source, by default there are no inflation cap and collar. Which means that the income source will be fully adjusted (increased or decreased) based on the CPI and hence in real terms will stay constant.
The inflation cap and collar are discretionary. You can select only an inflation cap or only an inflation collar or combinations of both to model accurately real financial inflation linked products.
Step #1: National Insurance Tax
For income classified as 'Other,' no National Insurance taxes are applied.
Step #2: Income Tax
Income tax for the 'Other' type is computed based on the most recent tax rates and bands. The total tax is then subtracted from the gross income to arrive at the net income value.
Example
Let's consider Kieran, who receives an annual income of £300,000 from an 'Other' income source. Timeline Planning calculates his income tax as follows:
£12,570 * 0% = £0
£37,700 * 20% = £7,540
£87,440 * 40% = £34,976
(£300,000 - £87,440 - £37,700) * 45% = £76,687
The total income tax Kieran has to pay is £121,203, leaving him with a net annual income of £178,797. The personal allowance is £0 in this scenario.
Conclusion
The 'Other' income type in Timeline Planning offers a flexible way to handle income sources that don't fit into standard categories. Understanding how National Insurance and Income Taxes are calculated for this income type can help advisors make more accurate financial plans for their clients.