Tax Law

Question 1

Calculating income tax

Answer 1

• Step1: Identify TOTAL INCOME
• Step 2: Deduct available tax reliefs (interst on qualifying loans and pension contributions) for NET INCOME
• Step 3: Deduct the PERSONAL ALLOWANCE (£12,570) to get the TAXABLE INCOME.
• If net income is +£125,140 there is no personal allowance
• If net income is between 100k-£125,140 the formula for personal allowance is
  12,570-(Net Income-100k)/2
• Step 4: Identify if the individual has different type of income
• calculate non-saving first: taxable i. - saving i. - dividend i. = NSI
• Step 5: Calculate NON-SAVINGS income to TAX PAYABLE
• 0-37,700 -> basic -> 20%
• 37,700-125,140 -> higher -> 40%
• +£125,140 -> Additional -> 45%
• Step 6: Calculate SAVINGS INCOME
• savings are taxed 0% for the first £1,000 (taxable income basic), £500 (higher). This 1000 and 500 known as “personal savings allowance”
• Step 7: Calculate dividend income