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Tax rates and allowances

How to calculate your tax bill

By Ian Robinson

Article 6 of 10

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How to calculate your tax bill

Easily work out how much tax you'll pay using our tax calculator.

Calculating your tax bill doesn't have to be too complicated. Here, we provide a step-by-step guide to working out how much tax you have to pay.

  • Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

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're 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 
  • Qualifying gifts to charities.

Deduct allowances

Following this, deduct any full-rate allowances you're entitled to, for example, personal allowance and blind person's allowance. Make sure you claim every allowance you're entitled to. The video below highlights five allowances that are commonly forgotten.

Taxable income

The figure you're left with is the non-savings part of the taxable income on which you'll pay tax. For 2017-18, the first £33,500 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. This applies to 2017-18.

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

In 2017-18, you get a £5,000 tax-free (0%) savings income band in addition to your £11,500 personal allowance. 

To calculate if tax is due on your savings income, set any non-savings income against your personal allowance. 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

The £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%.  

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.

  • Last updated: April 2017
  • Updated by: Gareth Shaw
 
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