Calculating income tax

Question 1

What does the tax liability proforma include?

Answer 1

The tax liability proforma breaks down tax rates for different types of income:

Non-savings income:

20%: Up to £37,700
40%: From £37,701 to £125,140
45%: £125,141 and over

Savings income:

0%: Up to £1,000 for basic rate; £500 for higher rate earners
20%: From £37,701 to £125,140
40%: From £37,701 to £125,140
45%: £125,141 and over

Dividend income:

0%: Up to £1,000
8.75%: Up to £37,700
33.75%: From £37,701 to £125,140
39.35%: £125,141 and over

Calculation of tax liability:
TAX LIABILITY - PAYE = TAX PAYABLE

This proforma aids in estimating tax obligations across different income types, ensuring accurate tax filings.

Question 2

How do you calculate the extension to the basic rate band for Gift Aid donations?

Answer 2

The extension to the basic rate band for Gift Aid donations is calculated as follows:

Gross charitable donation = Donation paid × 100/80

This formula accounts for the tax relief gained through charitable donations, effectively increasing the basic rate band.

Question 3

How is the extension to the basic rate band calculated for contributions to a personal pension?

Answer 3

To calculate the extension to the basic rate band for personal pension contributions:

Gross pension contribution = Pension contribution × 100/80

Question 4

What is the maximum pension contribution eligible for tax relief?

Answer 4

The maximum contribution to a personal pension plan eligible for tax relief is the greater of:

• £3,600
• 100% of earnings - this is subject to an overall cap of £40,000. Contributions exceeding this amount do not receive tax relief.

Understanding this limit is vital for optimizing tax relief benefits when planning pension contributions.