How to Calculate your Income Tax? Step-by-Step guide for Income Tax calculation

What is the tax law?

The tax law helps us figure out how much income tax we owe.

To put it another way, you sum up the various components of your income, then subtract any reliefs and allowances.

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

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

How can you calculate the amount of tax you have to pay?

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, you can tally up all of the amounts of income for which you will be charged income tax throughout the tax year.You can then subtract specific items from this total, such as trading losses.

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 will be assessed. The sum of these figures is referred to as “total income.”

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), the 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, 2021, and ending April 5, 2022, is £12,570.

You can take the help of a tax calculator in the UK to understand which allowances you qualify for.

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. 

Check our guide on : What is Income Tax and How Does Income Tax Work?

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 some people with greater income levels.

If you are a basic rate taxpayer, then 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 £2,000 and a personal savings allowance of up to £1,000).

Check our : self employed income tax calculator to calculate your income tax liability.

5. Finally, check whether there are any other claims that you may havemissed or additional tax charges you may have missed
Suppose you and your spouse or civil partner both 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.

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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 what you’ve already paid is your balancing payment for the year. You will be owed a refund if the amount you have already paid exceeds your tax burden.

Do make sure that you pay your tax on time. 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.