Income Tax Calculation: How to Calculate Income Tax
Introduction to Income Tax
Income tax is a tax charged on the income of an individual from the following fields:
1) Earnings from employment
2) Earnings from Self-employment.
3) Earnings from social security schemes
4) Earnings from Pension schemes
5) Interest on most savings
6) Income from trusts
7) Income from dividends
8) Income from rentals
Depending on your total income, you are given an allowance that means a certain amount is void from tax, each year. As per tax rules of UK, there is no minimum age at which you are liable to pay tax. If your income comes under the defined tax structure, you are liable to pay tax. The only way you will not be liable to paying tax is if it falls below the £11850 allowance.
Income Tax Rates and Bands
|Band||Taxable income||Tax rate|
|Personal allowance||Up to £11850||0%|
|Basic rate||£11850 to £46350||Three working days|
|Higher rate||£46351 to £150000||40%|
|Additional rate||Over £150000||45%|
Steps to Calculate Income Tax
If you are an employee then your income tax will be deducted automatically through PAYE. If you have other streams of income then you will need to write HMRC a cheque at the end of the tax year to ensure you are complaint with the law.
1) Add all your taxable income before tax from all sources listed at the beginning of the post. Do not include any non-taxable incomes such as pension credit, housing benefit, child benefit, child tax credit, maternity allowance, working tax credit, premium bond prizes, personal independence payment & lottery winnings.
You will generate a figure that is your total amount of income.
2) Check whether you can claim any tax relief on what you have spent this year. Some of the examples of tax reliefs are:
- Pension contributions made under employer’s pension scheme but it will not include any contribution made to personal or stakeholder schemes as it will be included later in the step-4 of income tax calculation.
- Qualifying gifts to charities.
- Qualifying loan interest payments.
In this step, you will deduct your all tax reliefs from the total income before tax.
If you are self-employed, you must deduct the business expenses from the total income before tax.
3) Next, you must deduct tax free allowances. As per 2018-19 tax policies, you don’t have to pay tax on the first £11850 you earned. There are also two more allowances you can claim:
- Blind person’s allowance, which is £2390 for 2018-19
- Marriage allowance, which is £238 for 2018-19.
4) Interest earned on your savings will be treated as income & it is liable for tax.
- Interest earned from Banks
- Building society Accounts
- Unit trusts
- Investment trusts
- Savings & credit union accounts
- Peer to peer lending
How to Calculate Tax on Your Savings
1) First you must calculate the amount of interest you earned from your savings in the given year. A statement provided by the bank will give you the full information.
2) You must then 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.
3) Now you must deduct your personal allowances. Limits for the same is given below –
|Tax payers||Personal savings allowance|
|Basic rate tax payers||Earn up to £1000 from savings tax free|
|Higher rate tax payers||Earn up to £500|
|Additional tax payers||Not receiving any savings allowance|
4) You must now 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 tax according to your band.
Calculating Income Tax on Your Dividend Income
The first £2000 you received as income from dividends 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.
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|
You have all the steps to calculating the total amount of income tax you will pay from all your earned income. This post should be used as a guide and we recommend enlisting the services of an accountant to ensure your data is correct and you don’t incur any fees from HMRC.
Why Choose Nomisma Income Tax Computation Software?
Nomisma software for income tax computation updates across the board, so receipts, uploaded from any device, update continually in the books throughout the financial year. Expenses, dividends, pension contributions, benefits, and allowances are calculated for individuals. Nomisma Solution has a unique cash-accounting facility for retail businesses; and another techno-facility especially designed for CIS contractors. For businesses: departmental expenses, corporation tax, and wages feed into accounts to generate trial balances, build reports, and monitor overheads.