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 2012-13 the first £34,370 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 50%. For 2013-14, the threshold for 40% tax falls to £32,010. The threshold for additional rate tax stays at £150,000, but the rate falls from 50% to 45%.
Savings and dividend income
Once you have split your non-savings income into bands, you can work out how much tax you need to pay on the amount you earn from savings and investments.
Savings income that comes to £2,710 or less (2012-13). In 2013-14 this rises to £2,790.
Any savings income that comes to £2,710 (£2,790 for 2013-14) or less when added to your non-savings income will be taxed at 10%.
Savings income between £2,710 and £34,370 (2012-13). In 2013-14 the limits are £2,790 and £32,010 respectively.
Any savings income that comes to between £2,710 and £34,370 (£2,790 and £32,010 in 2013-14) when added to your non-savings income will be taxed at 20%.
Savings income above £34,370 (2012-13). In 2013-14 this limit falls to £32,010.
Any savings income that comes to more than £34,370 when added to your non-savings income will be taxed at 40%, unless it exceeds £150,000, in which case it will be taxed at 50% .
UK dividend income less than £34,370
Any UK dividend income that comes to £34,370 (£32,010 in 2013-14) 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 £34,370 (2012-13). In 2013-14 this limit falls to £32,010
Any UK dividend income that comes to more than £34,370 (£32,010 in 2013-14) 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 42.5%.
For more information if you're self-employed, see our book Working for Yourself.