How to calculate your income tax? Step-by-step guide for income tax calculation

You can use Our Tax Calculator UK

How to calculate your income tax?

1. Figure out what part of your income is taxable

Not all your income requires you to pay tax. To determine which income is taxable, add all taxable income and then deduct specific items from this total, such as trading losses, personal allowance, etc. This helps you understand how much tax will I pay UK.

2. Calculate your total income by adding the ‘components’

For the tax year, identify the income (also called components of overall revenue) on which income tax calculation will be assessed. The sum of these figures is referred to as “total income.”

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Some of the components that can be added to your total income are:

● Employment income
● Self-employment income
● Property income
● Pension income
● Savings income
● Capital gains
● Dividend income
● Foreign income

3. Figure out which tax deductions you can use to lower your tax liability

There are many tax allowances to benefit from. Some of the tax allowances you can use to potentially lower your tax bill are the capital gains tax, personal Property Residence Relief (PPR), personal allowance, rent-a-room relief, and more.

Every person is entitled to a personal allowance. The personal allowance for most persons for the tax year beginning April 6, 2024, and ending April 5, 2025, is £12,570. This is essential when learning how to calculate tax on salary.

You can take the help of a tax calculator in the UK to understand which allowances you qualify for. It’s also helpful to use a UK income tax estimator for this purpose.

4. Calculate the tax rate that applies to your income

Some of your savings income may also have a 0% tax rate. Thus, you must verify the tax rate applicable to you.

Then there’s the base rate band, which levies a 20% tax on most forms of income. The majority of people do not pay taxes beyond the baseline rate. However, 40 per cent and 45 per cent tax rates may apply to high earners.

If you are a basic rate taxpayer, you may have to pay no tax on your dividend or savings income (that is, you may also be eligible for a dividend allowance of up to £500 and a personal savings allowance of up to £1,000).

5. Finally, check whether there are any other claims that you may have missed or additional tax charges you may have missed

Suppose you and your spouse or civil partner claim the marriage allowance (transferable tax allowance), and your spouse or civil partner has given up part of their allowance. In that case, you will be eligible for a tax reduction.

However, some deductions, such as the notional tax paid on profits on UK life assurance policies or investment bonds, cannot result in a refund.

The next step is to determine if you are subject to any tax penalties, such as the Gift Aid tax, the high-income child benefit fee, or the tax on some state pension lump amounts. This is essential when figuring out how do I figure out tax and how do taxes work.

What is the tax law?

The tax law helps us figure out how much tax and NI will I pay and how to work out income tax.

In other words, you sum up the various components of your income and subtract any reliefs and allowances.

The tax owed on each element is then calculated and totalled.

That will be enough in simple instances, but in more complicated cases, you will need to subtract any tax reducers and add in any additional tax owed.

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The entire amount of tax you owe for the year after all possible deductions plus any income tax charges is your income tax liability for that year.

The difference between your tax due and your already paid is your balancing payment for the year. You will be refunded if the amount you have already paid exceeds your tax burden.

Do make sure that you pay your tax on time. HMRC tax calculation is critical to avoid penalties. HM Revenue and Customs (HMRC) can take enforcement action to reclaim any tax you owe if you do not pay your tax bill on time and cannot negotiate an alternative payment arrangement.

If you notify HMRC as soon as you realise, they may agree to let you pay in instalments or extend your payment period.

Experlu Editorial Team
The editorial team at Experlu is comprised of seasoned financial professionals dedicated to providing high-quality content on accounting and finance. With a wealth of experience and diverse expertise, the team produces insightful articles that have established the Experlu blog as the UK's leading financial and accounting resource. The team includes accountants, auditors, and business advisors who stay updated with the latest industry developments. Their commitment to excellence ensures that Experlu remains a trusted source of information, helping readers stay informed about audit, business, finance, and tax matters.