Tax rates, allowances and amounts How to calculate your tax bill
Calculating your tax bill does not necessarily have to be too complicated.
Here we provide a step-by-step guide to working out how much tax you have to pay.
The first step is to work out the portion of your income you need to pay tax on.
Add together your non-savings income from various sources, including employment, self-employment, freelance work, pensions, rental income and taxable state benefits. Ignore any tax-free income such as interest from cash Isas.
Don't include income from savings and investments at this stage, as they are taken into account later.
Deduct tax reliefs
Now deduct any tax reliefs that you are entitled to such as:
- Pension contributions made through your employer's pension scheme (but not any contributions made to personal or stakeholder schemes, as relief for these contributions is given later in the income tax calculation)
- Qualifying loan interest payments, or
- Gifts to charities paid through a payroll giving scheme (but not through Gift Aid).
Following this, deduct any full-rate allowances you are entitled to, for example, personal allowance and blind person's allowance.
The figure you are left with is the non-savings part of the taxable income on which you will pay tax. For 2015-16 the first £31,785 will be taxed at 20%. Anything left above this amount will be taxed at 40%, unless it exceeds £150,000, in which case it will be taxed at 45%.
Savings and dividend income
Until April 2015, if you have very little or no other income apart from interest on your savings, some or all of your savings income may be taxed at only 10%, rather than the normal 20% basic rate. You can claim back any excess tax that's been deducted at source by using form R40.
Tax on your savings income is only payable at the lower 10% rate, if your savings income plus all other income falls into the starting rate tax band. This is £2,880 for the 2014-2015 tax year.
To work out how the band is applied, deduct your income from all other sources (non-savings income) from your tax-free personal allowance (typically £10,600 or £10,660 for 2014-15).
From April 2015, the 10% 'savings rate' band is abolished and replaced with a £5,000 tax-free (0%) savings income band on top of the personal allowance.
This is applied in the same way as the 10% band above, with non-savings income being set against your personal allowance and the savings income band first and savings income taken into account after this.
So first set your tax-free personal allowance against any non-savings income. If there is any tax-free allowance left, deduct this from your savings income. Any remaining savings income figure should then be set against the £5,000 band. If it all falls within this, the whole sum is eligible for a 20% tax refund or you could use form R85 to register to receive the interest without any tax deducted. If the savings income exceeds the band, any further interest is taxed at 20%.
If your non-savings income exceeds your personal allowance, deduct the excess from the £5,000 figure to see how much of the 0% band you have left. Set your savings income against whatever is left of the £5,000 band. If it all falls within the residue, the whole sum is eligible for a 20% tax refund or you could use form R85 to register to receive the interest gross. If the savings income exceeds what's left, only the amount within the reduced band is tax-free, with any further interest being taxed at 20%.
UK dividend income less than £31,785 in 2015-16
Any UK dividend income that comes to £31,785 (£31,865 in 2014-15) or less when added to non-savings income and savings income will be taxed at 10% (offset by a tax credit of 10% when you receive the dividend, meaning no further tax will be payable).
UK dividend income above £31,785 in 2015-16. (2014-15 limit is £31,865).
Any UK dividend income that comes to more than £31,785 (£31,865 in 2014-15) when added to non-savings income and savings income will be taxed at 32.5% (taking into account the 10% tax credit, the effective tax you pay on the dividend you receive will be 25%). If it comes to more than £150,000, it will be taxed at 37.5%.
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