Tax pool and help with tax pool calculations

Tax pools help trustees of discretionary trusts keep track of the amount of trust Income Tax paid. Trustees need to monitor this because income payments to beneficiaries are treated as taxed at the 'trust rate' - currently 40 per cent, but not all trust income is taxed at this rate. This can sometimes lead to a tax shortfall which the trustee must make up.

On this page:

Tax pools: the background
How tax shortfalls can arise
Using the HMRC tax pool calculator to help prevent a tax shortfall
When HMRC will work out your tax pool calculation
More useful links

Tax pools: the background

Tax pools apply only to discretionary trusts, in which trustees - who are responsible for paying all the trust’s taxes - have ‘discretion’ over what to do with the income and sometimes the capital of the trust.

When trustees of a discretionary trust make a discretionary payment of income it is treated in the hands of the beneficiary as if Income Tax has been already paid at the trust rate (currently 40 per cent). This means the beneficiary could claim some or all of the tax back if they are a basic rate taxpayer or a non-taxpayer.

Because of this, when trustees make a payment of income, they must ensure they have paid sufficient Income Tax (whether in the current year or in previous years) to cover the 40 per cent ‘tax credit’ (tax declared as deducted) that accompanies the income payment.

The tax pool keeps track of Income Tax the trustees pay. If the tax credit on subsequent income payments to beneficiaries can’t be covered by the amount of tax recorded in the tax pool, the trustees must pay the difference through the Trust and Estate Tax Return.

How the tax pool works

The tax pool is a record that the trustees need to keep in order to show, at the end of a given tax year, the difference between:

the total Income Tax entering the tax pool that year, plus the value of any amount carried over in the tax pool from earlier
the total value of the 40 per cent tax credits attached to income payments to beneficiaries that year

When the trustees pay tax the tax pool increases by the amount of tax paid (this can vary between 20 and 40 per cent).

When the trustees pay income to beneficiaries the amount in the tax pool is reduced by the value of the 40 per cent tax credit that is carried with each payment.

Check Income Tax rates on discretionary trust income

The ‘tax pool’ itself is what’s left at the end of the tax year of the tax paid by the trustees (excluding any non-refundable dividend tax credits) after the 40 per cent tax credits on any payments to beneficiaries have been deducted. Any balance is carried forward to the next tax year, and can be offset against payments then.

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How tax shortfalls can arise

A shortfall can arise where the value of tax credits on payments to beneficiaries exceeds the amount available in the tax pool.

This situation might occur for any of the following reasons:

some of the income received by the trustee is covered by the ‘standard rate band’ and taxed at the lower rates of 10 per cent for dividends and 20 per cent for other income
some of the income is used for trust management expenses and taxed only at the lower rates
some of the trust income is from dividends and is taxed at 32.5 per cent, of which 10 per cent is non-refundable, so only 22.5 per cent enters the tax pool

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Using the HMRC tax pool calculator to help prevent a tax shortfall

You can use the HM Revenue & Customs (HMRC) tax pool calculator to:

check for (and prevent) a potential tax pool shortfall when planning a given distribution
enter estimates in order to work out the maximum income you can distribute to beneficiaries over the tax year without incurring a tax shortfall
work out how to maximise use of the tax pool if a trust is being wound up mid year

Tax pool calculator

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When HMRC will work out your tax pool calculation

If you file your SA900 Trust and Estate Tax Return by 31 October you can ask HMRC to work out your tax. When doing so they will also work out your tax pool surplus or shortfall for the following year based on:

the information provided at question 14 (a list of payments made to beneficiaries during the tax year)
the amount of unused tax pool brought forward from the previous tax year

They include the tax pool surplus or shortfall amount for the next tax year in your tax calculation.

If you choose to work out your own tax HMRC will only check the tax pool if they are reviewing your tax return for accuracy - it’s therefore important to understand and get your tax pool figures right, so that you don’t accidentally overpay or underpay tax.