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.
Total Income Tax is calculated on the basis of Tax Bands. Below is the segregation of how you pay tax for each band-
* This calculator is only for reference purposes. For accurate and detailed report, please consult with an accountant. *
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.
|INCOME TAX RATES|
|Individuals - UK|
|Starting rate||£1 - £5,000||20%||£1 - £5,000||20%|
|Basic rate||£5,001 - £34,500||20%||£5,001 - £33,500||20%|
|Higher rate||£34,501 - £150,000||40%||£33,501 - £150,000||40%|
|Additional rate||Over £150,000||45%||Over £150,000||45%|
Individuals - Scottish income tax
|Starter rate||£1 - £2,000||19%||N/A|
|Basic rate||£2,001 - £12,150||20%||£1 - £31,500||20%|
|Intermediate rate||£12,151 - £31,580||21%||N/A|
|Higher rate||£31,581 - £150,000||41%||£31,501 - £150,000||40%|
|Top/Additional rate||Over £150,000||46%||Over £150,000||45%|
|Standard rate||£1 - 1,000||20%||£1 - 1,000||20%|
|Trust rate||Over £1,000||45%||Over £1,000||45%|
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
|NATIONAL INSURANCE CONTRIBUTIONS|
|Earnings per week||Rate payable||Earnings per week||Rate payable|
|£0.01 - £162.00||Nil||£0.01 - £162.00||Nil|
|£162.01 - £892.00||13.8%||£162.01 - £892.00||12%|
|Over £892.00||13.8%||Over £892.00||2%|
|Class 1A and 1B (employers only)||13.8%|
|Class 2 (self employed)||£2.95 per week (small profits threshold £6,205)|
|Class 3 (voluntary)||£14.65 per week|
|Class 4 (self-employed)||Profits up to £8,424||0%|
|Profits from £8,424 to £46,350||9%|
|Profits above £46,350 per annum||2%|
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.
|Income Tax Allowances|
|Basic personal allowance||£11,850||£11,500|
|Married/civil partners allowance||£8,695||£8,445|
|Minimum married/civil partners allowance||£3,360||£3,260|
|Married/civil partners transferable allowance||£1,185||£1,150|
|Blind persons allowance||£2,390||£2,320|
|Rent a room limit||£7,500||£7,500|
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:
* 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.
The amount of income tax paid each year depends upon:
Some income is tax-free and individuals don’t pay tax on:
Income Tax rates and bands
|Band||Taxable Income||Tax Rate|
|Personal Allowance||Up to £11,850||0%|
|Basic Rate||£11,851 to £46,350||20%|
|Higher Rate||£46,351 to £150,000||40%|
|Additional Rate||over £150,000||45%|