Wednesday, 13 April 2016

Calculating the UK income tax: Part 3




Image courtesy of Stuart Miles at FreeDigitalPhotos.net


Hello readers, so today I will be showing how to calculate another aspect of the UK income tax. You should read Part 1 and Part 2 before reading this article.  The last tax year ended on the 5th of April, 2016. As such the rates I used in the previous articles are no longer applicable. A recent development has occurred with the dividend income. Dividends worth £5000 or lower are not taxable. The dividend tax rate for this present tax year are presented below. The new rates are
                            2016/2017            Over £5000
Basic rate           £0 - £32,000                7.5%
Higher rate        £32,001 -£150,000    32.5%
Additional rate Over £150,000           38.1%

An example will help you understand what I presented above better.

Scenario 1
Morufat had received an employment income of £7000 and a dividend income worth £10,000.  

From the previous articles you should remember that you are always entitled to a personal allowance except you receive £122,000 or above.  As such, the taxable income will be £7000 + £10000 - £11000 = £6000. Remember that the dividend income is always taxed after the employment income, as such the remaining £6000 is part of the dividend income. Remember that the first £5000 of the dividend income is not taxable as such we deduct £5000 from £6000 which gives us £1000 taxed @ 7.5%. Therefore, the tax that will be paid is £75.

Scenario 2
Taiwo had gotten an employment income of £45000 and a dividend income of £12000. As usual we will deduct the personal allowance.  So it will be £45000 + £12000 - £11000 = £46000. So we know the £12000 (dividend income) is inclusive because the dividend income is always taxed after the employment income.

The calculation of UK income tax is shown below. The employment income will be taxed first which is £46000 - £12000 which equals £34000
Basic rate  32000 × 0.2                      6400
 Higher rate 2000× 0.4                         800
Higher rate
(12000 - 5000)  × 0.325                       2275
                                                           _______
                                                               9475

Therefore, the tax that will be paid is £9475.
You should note that £5000 deducted is the non taxable dividend income.

Keep checking my blog regularly. Cheers!



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