Believe us when we say that totting up your tax bill isn’t nearly as complex as you might initially think. Having a little bit of basic knowledge really can go a long way. So we’ve put together a short guide to help you crunch the numbers and get your tax bill right first time.
To make life even easier for you, we’ve also included a few links to our favourite online tools.
What is income tax?
Quite simply, income tax is the tax you pay based on your income. You pay it on things like money earned from employment, profits from self-employment, certain state benefits, and most pensions (including state, company and personal pensions).
You don’t pay tax on all kinds of income, though, and some resources are exempt. For example, interest on savings under your savings allowance, the first £5,000 of dividends from company shares and National Lottery wins.
Your non-savings income
The first thing to do is work out exactly how much of your income is taxable. Here’s how you do it:
- Add up your non-savings income from all sources
This includes employment (full-time or part-time), self-employment, pensions, freelance work, rental income and any taxable state benefits. Leave out any resources that are not taxed, such as cash ISAs or interest on savings.
- Take away your tax relief
The second step is to take into account any tax relief you’re entitled to – whether it’s pension contributions that are paid through an employer’s pension scheme, qualifying loan interest payments or charitable gifts (like donations or gift aid).
- Deduct your allowances
Next, you need to take away the full-rate allowances you qualify for. At the top of the list is the personal allowance (which currently stands at £11,500), as well as marriage allowance, blind person’s allowance, or something else. However many of these you have, remember to include them all as it will impact your tax bill.
Following this, deduct any full-rate allowances you’re entitled to, for example, personal allowance and blind person’s allowance. Make sure you don’t forget to claim each allowance you’re entitled to. If you’re unsure, it might be best to seek professional advice from an accountant.
- Taxable income
So, when you arrive at this stage, the figure you have will be the non-savings portion of your taxable income – meaning this is the amount you’ll pay tax on.
For 2017-18, the first £33,500 is subject to 20% rate of tax (that’s the first £33,500 after your personal allowance of £11,500 and other allowances). Anything over this threshold is taxed at a higher rate of 40%. And if your taxable income is above £150,000, it will be taxed at a rate of 45%.
What about dividend income?
Well, as it stands for 2017/18, you’re entitled to £5,000 tax-free dividends. This could be from your business or other investments. Remember, this is in addition to your personal allowance of £11,500.
Anything above this figure of £5,000, basic-rate taxpayers will have to pay £7.5% tax on dividends, while higher rate taxpayers will have to pay 32.5%. As for additional rate taxpayers, it goes up to 38.1%.
Are there any tools that can help?
You’ll find lots of different tools online to help you calculate your income tax. But if your tax bill is complex, it could be best to seek advice from an accountant. Here are a few of our favourites:
- HMRC income tax calculator – click start now and answer the questions that follow
- Money Saving Expert income tax calculator – a really simple calculator to get you started
- Self-employed ready reckoner – a tool that helps you budget for your self-assessment tax
- Call HMRC – speak to an advisor who can go through all your tax related queries