INCOME TAX

CONUNDRUM

THE Inland Revenue wants us to take more responsibility for our tax affairs - as anyone who's been grappling with a self-assessment form knows only too well. But how can we approach the task with any confidence if even the most basic tax rules are obscure and difficult to understand.

Unless you realise the complicated way some allowances work - and are a dab hand with the calculator - it's well nigh impossible to work out whether they are correct or are saving you the right amount of tax.

Take the married couple's allowance. This normally goes to the husband to set against his taxable income, but can be claimed by a wife instead. The basic figure is #1830, but goes up to #3185 where either the husband or wife is 65 or over and #3225 if one of them is 75 or more.

But because the allowance is ''restricted'' and worth only 15% of the full amount you can't just add it to the ordinary personal allowance to find out how much tax-free income you're allowed. What you have to do is work out how much, in theory, the allowance would save you in tax - and then calculate how much income you would need in order to pay that amount of tax. It's crazy.

This is how it works. The married couple's allowance for those aged 65-74 can only save up to 15% tax this year - that's just over #477 (15% of the quoted allowance of #3185).

If the husband is claiming this allowance then his tax threshold is the point at which his income above his personal allowance would be enough to generate #477 of tax.

The first #4100 of taxable income is taxed at 20%. So, to pay tax of #477 he would need to have #2388 of income - 20% of #2388 is just over #477.

When #2388 is added to the full personal allowance of #5220 this year for 65 to 74-year-olds it gives a tax threshold of #7608 - the amount of income he can have before paying income tax. Different calculations need to be done if you or your wife are under 65 or over 74.

Some taxpayers receive details of their tax code - the amount of tax-free income they're allowed - from the Inland Revenue. But even this raises more questions than it answers.

Herald reader Jeremy Edwards was baffled when he received details of his tax code earlier this year. ''It showed my personal and married couple's allowance in full, but there was also a figure of #996 called Allowance Restriction which had been taken away from those allowances. Both my wife and I are over 65.

''On the Coding Notice it says that I must check that the details shown are correct, but how can I? I don't understand where this figure has come from and have no idea whether it is right or not.

''I telephoned my local tax office and they explained that it is virtually impossible for the layman to work out how the allowance restriction is calculated. They said that all my relevant information is fed into the computer which churns out the answer.

''The lady I spoke to there actually said 'Trust us' - and I suppose I'll have to.''

But is that good enough? Shouldn't ordinary taxpayers be able to work out these sorts of figures for themselves? We asked two tax experts to look at Mr Edwards' code to see if it was safe to trust the Inland Revenue.

''I could not reconcile the figures precisely because the Revenue do not explain their logic on the Coding Notice,'' says John Andrews, president of the Chartered Institute of Taxation.

''I had all the information an ordinary taxpayer would have and found the system very difficult to unravel because of the lack of good explanation.''

Over at accountants Grant Thornton, senior tax partner Mike Warburton agrees. ''It took me several minutes to work out that the figure is pretty much correct - and that's with knowledge that the average taxpayer simply won't have.''

n If you don't receive a Coding Notice you can ask the Inland Revenue for one at any time in order to check your allowances.

n Two free Inland Revenue leaflets - Understanding Your Tax Code (P3) and the factsheet on tax allowance restrictions (FS1) - may help to explain the figures.

n An excellent guide for older people to this very complicated subject is Check Your Tax published by Help the Aged. It's free if you send an s.a.e. to Tax Information Department, Help the Aged, St. James's Walk, Clerkenwell Green, London EC1R 0BE.