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Calculating the UK Income Tax

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Employers deduct a particular percentage every month from your salary or every week from your wages based on your taxcode. However, they do not pay the HMRC (the body responsible for taxes in the UK) till the end of the tax year. At times taxes could be overpaid or underpaid. When taxes are underpaid you will be required to pay the money  back and when taxes are overpaid you will get your overpaid amount back at least two months after the end of the tax year but it could be more. It feels good to get money you did not expect, however, it could be spent lavishly if you had no plans for the money. You can plan how you will spend the money if you know what you will be expecting.

For your income tax to be calculated you need to deduct your personal allowance from it before applying any rate. The personal allowance in the UK is £10,600 and it increases every year. This is the part of your income that is not taxable. For example, if you earn £30,000 in a year the only amount that will be taxed is £30,000 -£10,600 which is £19,400. However, if you earn above £100,000 your personal allowance goes down by £1 for every £2 your income is over by £100000. Thus, you do not get any personal allowance if your income is £121,200 or above. The tax system in the UK is a progressive one as such the higher your income the higher the tax rate you get. There are three tax rates which are the basic rate (20%), the higher rate (40%) and the additional rate (45%).  20% is charged on £0 to £31,785 (Basic Band). That is any amount that falls within the basic band after deducting the personal allowance if you are entitled to any is taxed at 20%. Thus if you earn £25000 in this tax year (6 April 2015 - 5 April 2016),  £10,600 will first be deducted which will leave £14400 which will then be taxed at 20%, thus, your tax for that year will be £2880. 

40% is charged on £31,785 to £150,000 (Higher band). As such if you earn £50000 in a year, the personal allowance (£10,600) will first be deducted which will leave £39,400 to be taxed. Since £39,400 exceeds the basic rate band. Both the basic rate (20%) and the higher rate (40%) will be applied. £31,785 will be taxed at 20%, then (£39,400 - £31,785) which is £7,615  will be taxed at 40%. 

A.Basic rate               (£31,785 × 20%) = £6,357
B.Higher rat(£39400-£31785) ×40%  = £3,046
C. (A + B)                                                 = £9403 
The addition of £6,357 and £3,046 will give you £9,403 which is going to be your income tax paid for that year. 45% is charged on any amount above £150,000 (Additional Band). That is if you earn £160,000. Remember, that £160,000 is above £121,200 so you will not be entitled to any personal allowance. All three rates will be applied on this amount since the income is above £150,000

A.Basic rate                (£31785 × 20%) = £6,357
B. Higher rate(£150,000- £31785) ×40% =
C.Additional rate(£160,000 - £150,000) × 45% =                                                                   £4,500
D. A+B+C=                                               £58,143.

Thus, your tax for the year will be £58,143. Now you are fully equipped to calculate your income tax if your only source of income is from your employer as such your income will include your salary  or wages and taxable benefits if you are entitled to any benefit. Other sources of income and how you calculate their tax will be discussed in another article. Keep checking my blog regulary.


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