Tax rates, allowances and amounts How to calculate your tax bill

Tax basics

Work out the portion of your income you'll pay tax on

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.

Find out more: Use the Which? tax calculator to check your 2015-16 tax bill

Non-savings income

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).

Deduct allowances

Following this, deduct any full-rate allowances you are entitled to, for example, personal allowance and blind person's allowance.

Taxable income

The figure you are left with is the non-savings part of the taxable income on which you will pay tax. For 2016-17 the first £32,000 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 income

Until 6 April 2016, 20% tax was deducted from savings interest at source. If you were a higher-rate taxpayer, you had a further 20% tax to pay on this and additional rate taxpayers paid a further 25%.

From April 2016 a new system incorporating personal savings allowance applies. Interest on savings is tax free, to a threshold of £1,000 for 20% taxpayers, and £500 for those who pay higher rate tax. 

Tax will no longer be deducted by your bank or building society and all interest will be paid gross. 

If the interest your receive from all sources exceeds the £1,000 limit (£500 for 40% taxpayers), any tax due will be collected through a self-assessment tax return or via an adjustment in your PAYE tax code.   

The starting rate limit

From April 2015, a £5,000 tax-free (0%) savings income band applied in addition to the £10,600 personal allowance. This remains in place for 2016-17.  

To calculate if tax is due on your savings income, set any non-savings income against your personal allowance (for 2016-17 this is typically £11,000). If non-savings income exceeds your personal allowance, deduct the excess from the £5,000 savings income band to see how much of this you have left. 

Set your savings income against the remainder of the band and a further tax-free £1,000/£500 of personal savings allowance. If all your savings income falls within this, you have no tax to pay on it.  If your savings income exceeds what's left, only the amount within the band is tax-free, with any excess interest being taxable.

Dividend income

From 6 April 2016, the first £5,000 you receive in dividends from investments is tax free. Above this, basic rate taxpayers will pay 7.5% tax on dividends, higher rate taxpayers 32.5%, and additional rate taxpayers 38.1%.  

In 2015 dividend income carried a 10% tax credit, so, basic-rate taxpayers effectively paid no tax, higher-rate taxpayers paid tax at and effective rate of 25% and additional rate taxpayers paid tax at just over 36%.

Non-savings income is normally allocated against your tax bands before savings, dividends and capital gains, so to find out at what rate interest on your savings is taxed, you must add this to your other taxable income.

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Last updated:

April 2016

Updated by:

Ian Robinson

 

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.