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Income Tax

Income tax is a tax charged on income of an individual (Salaried personnel’s) or a self-employed person. Before knowing how to calculate income tax, you must know how to calculate non-savings income and savings income.

How to calculate your tax bill in the UK

Non-Savings Income

Non-savings income and earnings include earnings from employment, self-employment, social security schemes, pension scheme, rentals excluding any savings interest or dividend whereas savings income includes income from savings (interest) and the dividend income.

  • In the first step, you have to calculate your non-savings income (excluding any saving interest or dividend)
  • In the second step, you have to work out your taxable income from savings and dividend income in order to find out savings income.
  • In the third step, you have to add both non-savings income and savings income to find out your total taxable income.

Calculation Of Total Taxable Income

In order to calculate your total taxable income, the formulae is –

TOTAL TAXABLE INCOME = Non-savings income + savings income + dividend income – personal allowances – savings allowance – dividend allowance

NOTE - Personal allowances include blind person’s allowance, marriage allowance & tax reliefs.

Income Tax Rates And Bands (2018-19)

Band Taxable income Tax rate
Personal allowance Up to £11850 0%
Basic rate £11850 to £46350 20%
Higher rate £46351 to £150000 40%
Additional rate Over £150000 45%
You don’t have to pay tax on all your incomes. Peoples having a taxable income of more than £100000 have a reduced personal allowance. As per above income tax table –
  1. If your taxable income is less than £11850, you don’t have to pay any tax.
  2. As per UK basic tax rate, first £34500 above your personal allowance of £11850 will be taxed at 20% up to total earnings of £46350.
  3. As per UK higher rate, any income above the amount of £46350 (Basic rate) will be taxed at 40% up to total earnings of £150000.
  4. If your income exceeds the amount of £150000, it will lie into the additional rate category and the amount above £150000 will be taxed at 45%.

Dividends are also taxed based on same thresholds but at different rates.

Firstly, you have to pay tax on non-savings income followed by your savings income and then followed by dividend income.

As per 2019-20 tax slab, the personal allowance will increase from £11850 to £12500 and any amount above your personal allowance will be taxed at 20% up to total earnings of £50000 (previously £46350). These two changes will be implemented in tax slab of 2019-20.

Steps To Calculate Non-Savings Income

To calculate your non-savings income, follow the steps mentioned below –

  • Step – 1 – In the first step, add all your non-savings income on which you need to pay tax.

    Non-savings income from various sources includes earnings from employment, self-employment, freelancer work, social security schemes, pension scheme, rentals and taxable state benefits. In order to find out your total non-savings income, kindly add all of these incomes together.

    Kindly don’t include any tax free income such as interest from cash. Don’t include income from savings & investments too as it will be considered later in calculation.

  • Step – 2 – In the second step, Check whether you can claim tax relief on any amount you spent this year. Tax reliefs are claimed to reduce overall bill. In this step, you will deduct all your tax reliefs from the total income before tax. Some of the examples of tax reliefs are –

    1. Pension contributions made under employer’s pension scheme but it will not include any contribution made to personal or stakeholder schemes as relief for these contributions will be included later in the income tax calculation.
    2. Qualifying gifts to charities.
    3. Qualifying loan interest payments.
  • Step – 3 – In step -3, you have to deduct all your allowances. Tax free allowances are the allowances which you can earn before paying tax. As per 2018-19 tax policies, you don’t have to pay tax on the first £11850 you will earn. It comes under tax free personal allowances. There are two more allowances you can claim –

    1. Blind person’s allowance, which is £2390 for 2018-19
    2. Marriage allowance, which is up to £238 for 2018-19.

    You can claim marriage allowance when all of the following applies –

    • You are married or in a civil partnership
    • You don’t pay income tax or your income is below your personal allowance (generally £11850)
    • Your partner income is between £11851 and £46350 and he or she is paying income tax at the basic rate.
  • Step – 4 – The remaining amount is the non-savings part of your income on which you will pay tax.

Also Read: Tax on Affiliate Income

Tax On Savings Income

To do tax calculation of your savings income, you must know that interest you will earn on your savings will be treated as income & it is liable for tax.

It includes –

  1. Interest earned from Bank
  2. Building society Accounts
  3. Unit trusts
  4. Investment trusts and open ended investment companies
  5. Savings & credit union accounts
  6. Peer to peer lending

Steps To Calculate Tax Savings Income

  • In the first step, calculate how much interest you earned from your savings in a particular year. Bank statement provided by the bank or building society will give you the full information.
  • In the second step, you have to work out whether the savings starter rate applies or not. The savings starter rate will be £5000 of your tax free savings income plus your personal allowance. Those who are earning below £11850 personal allowance can use the full savings starter rate of £5000. The same amount is taken off from the savings starter rate for each pound you earn over the personal allowance. For example – If you are earning £12850, your saving starter rate will be £4000 but if you are earning more than £16850, there will be no savings starter rate at all.
  • In the third step, you have to deduct your personal savings allowance from the total savings income. Limits for the same is given below –
    Tax payers Personal savings allowance
    Basic rate tax payers Earn up to £1000 from tax free savings
    Higher rate tax payers Earn up to £500
    Additional tax payers Not receive any savings allowance
  • In the fourth step, we have to pay tax on the remaining interest. After deducting personal savings allowance from your total savings interest, you will find the total taxable savings income. The same will be added to your total income and you will pay the income tax according to your band.

Tax On Your Dividend Income

In dividend allowance, the first £2000 you received as dividend from investment is tax free as per tax year 2018-19. This has been reduced from £5000 to £2000 as per changes in the dividend allowance policy in 2017-18.

Any earnings from dividend above this threshold will be charged as per the following table –

Tax payers Rate charged
Basic rate tax payers 7.5% tax on dividends
Higher rate tax payers 32.5% tax on dividends
Additional tax payers 38.1% tax on dividends

Conclusion

Income tax is the tax charged on income of individuals (salaried personnel’s) and self-employed persons. Any individual residing in UK and earning income has to pay tax, if it is coming under the tax bracket as per the tax structure defined by the UK government. There are some changes which have been done in the tax structure for the year 2019-20 and every individual or a self-employed person has to pay tax as per the new tax structure in the coming future.

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