A tax year runs from 6 April to 5 April of the subsequent year and the taxable income includes:

  • Salary / take-home pay received from employer, including benefits in kind like company vehicle
  • Self-employment income
  • Income for personal, state and occupational pensions
  • Benefits from social security
  • Interest received on savings
  • Income from dividends received / shares
  • Income from rental
  • Income received from a trust
HMRC Income Tax Calculator

There are certain exemptions or income from certain source that fall under the non-taxable bracket. Also, income tax liability does not have any age criteria. The only thing that matters is the income earned and if the income is below or above the taxable limit. For a taxable individual it is imperative, by law, to keep all the records of income and expenses that are claimed against tax. These records will be required if HMRC instructs to complete a tax return.

HMRC PAYING INCOME TAX

The following steps will give an overview of how the taxable income and income tax payable is computed. Since, the rules for income tax are complex DNS Accountants can help taxpayers with any tax issues they come across.

Step 1: Taxable income from all the sources, before tax, is added. For a fiscal year or financial year, this may include salary or take-home pay received or profit from self-employment, taxable social security benefits, rental income, interest on savings, and pensions. The non-taxable income is not included. This may comprise of pension credit, child tax credit, lottery winning, housing benefits, maternity allowance, working tax credit etc. This step will give a clear understanding of what is the total income for computing the payable tax.

Taxable income – Band

Particulars

2016-17
(% of income/£ per year)

Essential rate

20%

Upper rate

40%

Additional rate

45%

Initial rate for savings income

0%

Dividend ordinary rate – for dividends otherwise taxable at the basic rate

7.50%

Dividend upper rate – for dividends otherwise taxable at the higher rate

32.50%

Dividend additional rate – for dividends otherwise taxable at the additional rate

38.10%

Starting rate limit

£5,000

Basic rate band

£0 - £32,000

Higher rate band

£32,001 - £150,000

Additional rate band

Over £150,000


National insurance contributions

While checking if the correct amount of tax has been deducted from the pay, it is also important to check if correct national insurance (NI) contributions have been deducted, so that the take-home pay amount is correct. NI contributions are computed on gross pay and it may vary for employees depending on the pension arrangements and income level.

For self-employed individuals, NI contributions have different rates, depending on the profits.

National Insurance contribution thresholds

Particulars

2016 - 2017
(£ per week)

Weekly Lower Earnings Limit

112

Weekly Primary Threshold

155

Weekly Secondary Threshold

156

Upper Earnings Limit

827

Upper Profits Limit

43,000 per year

Upper Secondary Threshold

827

Small Profits Threshold

5,965 per year

Lower Profits Limit

8,060 per year

Employment Allowance

3,000 (per year, per employer)

Apprentice Upper Secondary Threshold (AUST) for under 25s

827

Step 2: Compute if there is any tax relief for the money spent during a financial year. The money spent can be towards pension scheme or paying employment expenses. Such expenses are taking out from the total income. For self employed individuals, business expenses are reduced to arrive at taxable profit

Step 3: HMRC Income Tax Personal Allowance – Verify the entitled tax free allowances. People living in the United Kingdom are permitted a basic personal allowance on a daily basis. Personal allowance is less for income greater than £100,000 and people born before 6 April 1948*, are entitled to a high personal allowance, while it might be limited depending on the income. People who are differently abled – blind individuals can get a Blind Person’s allowance. Deducting the allowances, tax is payable on the remaining income referred to as taxable income.

Particulars

2016-17
(% of income/£ per year)

Personal allowance

 

Personal Allowance

£11,000

Personal allowance – Income limit

£100,000

Married couples’ allowance – Income limit

£27,700

 

Marriage allowance

£1,100

Married couples’ allowance – Born before 6 April 1935

 

Married couples’ allowance –  maximum amount

£8,355

Married couples’ allowance – minimum amount

£3,220

 

Blind person’s allowance

£2,290

 

Dividend allowance

£5,000

Personal savings allowance

 

Personal savings allowance – basic rate taxpayers

£1,000

Personal savings allowance – higher rate taxpayers

£500

Step 4: Payable tax for 2016 – 2017 can be computed based on an Example: If the taxable income is £11,000 after subtracting the personal allowance from total income, an individual does not have any taxable income above the basic rate limit of £32,000. Hence, the tax payable is £11,000 * 20% = £2,200

Step 5: To claim married couple’s allowance, an individual should be in a civil partnership or married, and either of the two should be born before 6 April 1935*. If this statement is valid, 10% of the married couple’s allowance is deducted from the payable tax

The above mentioned steps may not hold good if:

  • an individual is self-employed and incurred a loss for the year
  • an individual was born before 6 April 1948, and made charitable payments under Gift Aid and because of the level of income, age-related personal allowances are reduced
  • an individual has an overseas income which is tax abroad

* In April 2013, the United Kingdom government cancelled all age-related personal allowance. During tax year 2015 – 2016 this was restricted to people born before 6 April 1948. However, this is same for everyone now due to increases in the basic Personal Allowance.

HMRC INCOME TAX ALLOWANCES

The amount of income tax paid each year depends upon:

  • the amount of income above the personal allowance
  • how much amounts falls in each tax band

Some income is tax-free and individuals don’t pay tax on:

  • interest on savings from savings allowance
  • income from Individual savings accounts (ISA), National savings certificates (tax-exempt accounts)
  • the initial dividend amount of £5,000 from company shares, and others

Income Tax rates and bands

Band

Taxable income

Tax rate

Personal Allowance

Up-to £11,000

0%

Basic rate

£11,001 to £43,000

20%

Higher rate

£43,001 to £150,000

40%

Additional rate

over £150,000

45%

YOUR ACCOUNTING PARTNER – DNS ACCOUNTANTS

DNS Accountants is a skillful team of accounting and taxation professionals that helps clients with services ranging from tax planning to self assessment to business set-up. The firm helps owner managed small business and private individuals across the United Kingdom. DNS is an acknowledged firm of ACA’s or Chartered Accountants (CA) and the firm takes pride in saying that we are very helpful to our clients & deliver unmatched customer service and constantly help clients to manage their wealth. The firm’s learned team focuses on helping sole traders with business registration, tax filings and other services such as self-assessment, payroll management and bookkeeping. At DNS, we are constantly in touch with our clients and offer

  • FIXED price service
  • Consistent and transparent service
  • Certainty on tax base and taxation advisory

Other services
DNS Accountants offers taxation & accounting services to owner managed businesses and freelancers / contractors. For business owners and freelancers / contractors, it is difficult to keep pace with the ever changing government regulations and rules. Our expert team of chartered accountants and taxation professionals help clients in services ranging from bookkeeping to payroll to tax planning, and filing tax returns. DNS Accountants help clients focus on maximizing their wealth.



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