TAXATION OF INDIVIDUALS
INCOME TAX
STEP 1 What is Income? What is capital?
Only “income” is subject to income tax.
Money raised from the one-off sale of an asset will typically be a capital
gain, whereas income includes such things as salaries, pension earnings,
interest from saving accounts, dividends and money received from renting a
property.
An “Income” is is the product of how the taxpayer generates money on a
regular basis.
STEP 2 Work Out Total, Net and Taxable income.
Total Income = Add together all sources of income
Total Income is a taxpayer’s total gross income from all sources - Add
together all sources of income, including savings and dividend income.
Net Income = Deduct available tax reliefs (interest on qualifying loans and
pension scheme contributions)
Calculate the Net Income by making appropriate deductions from total
Income
a) Deduct any money put into a pension for the person in question.
b) Deduct “Qualifying Interests” which is interest paid on any loan that
a person took out in order to buy an interest in a partnership,
contribute capital to a partnership, buy shares in a ‘close’ company,
employee controlled company or invest in a cooperative, or that a PR
took out to pay Inheritance Tax.
,Taxable Income = Deduct the personal allowance (£12,500) from the net
income
Calculate the Taxable income by deducting the personal allowance from the
Net income.
• The personal allowance for 2019/20 tax year is £12,500.
If the person in question has a net income of less than £100,000, the
calculation is as follows: Net Income - Personal Allowance = Taxable
Income.
The personal allowance decreases by £1 for every £2 of Net Income above
£100,000.
This changes the calculation - If a person in question has a net income of
more than £100,000 (but less than £125,000), the calculation would therefore
be in two stages:
STAGE 1: (Net Income - £100,000) - £12,500 = New Personal Allowance
2
STAGE 2: Net Income - New Personal Allowance = Taxable Income
NOTE that this is only true up to a net income of £125,000 - over that there
is no personal allowance left, so if net income is greater than £125,000:
Net income = Taxable Income
STEP 3 Split up the Taxable Income into non-savings, savings and
dividend income.
a) First, add up all interests received to get the “savings income”
b) Next, add up all the dividend to calculate the figure for “dividend
income”
c) Finally, the remaining figure (net income less interests income, less
divided income is termed “non-savings income”
, STEP 4 Apply the tax bands to the split up figures.
The tax rates and bands for the current year are set out below:
2019/20
Band of taxable income Tax rate
£0 - £37,500 Basic 20%
£37,501 - £150,000 Higher 40%
over £150,000 Additional 45%
a) First, tax the non-savings income:
• The first £37,500 is taxed at 20%
• Anything over £37,500 up to £150,000 is taxed at 40%
• Anything over £150,000 is taxed at 45%
Tax Income in each Band where applicable - For example if Non-savings
income is £170,000 -
The first £37,500 of that £170,000 is taxed at 20%
Then £112,500 (£150,000 (Band 2) - 37,500) is taxed at 40% - Higher Band
Then £20,000 (£170,000 (Tax Income) - £150,000 (Band 3)) is taxed at 45% -
Additional Band
£37,500 + £112,500 + £20,000 = £170,000 (Total Taxable Income)
INCOME TAX
STEP 1 What is Income? What is capital?
Only “income” is subject to income tax.
Money raised from the one-off sale of an asset will typically be a capital
gain, whereas income includes such things as salaries, pension earnings,
interest from saving accounts, dividends and money received from renting a
property.
An “Income” is is the product of how the taxpayer generates money on a
regular basis.
STEP 2 Work Out Total, Net and Taxable income.
Total Income = Add together all sources of income
Total Income is a taxpayer’s total gross income from all sources - Add
together all sources of income, including savings and dividend income.
Net Income = Deduct available tax reliefs (interest on qualifying loans and
pension scheme contributions)
Calculate the Net Income by making appropriate deductions from total
Income
a) Deduct any money put into a pension for the person in question.
b) Deduct “Qualifying Interests” which is interest paid on any loan that
a person took out in order to buy an interest in a partnership,
contribute capital to a partnership, buy shares in a ‘close’ company,
employee controlled company or invest in a cooperative, or that a PR
took out to pay Inheritance Tax.
,Taxable Income = Deduct the personal allowance (£12,500) from the net
income
Calculate the Taxable income by deducting the personal allowance from the
Net income.
• The personal allowance for 2019/20 tax year is £12,500.
If the person in question has a net income of less than £100,000, the
calculation is as follows: Net Income - Personal Allowance = Taxable
Income.
The personal allowance decreases by £1 for every £2 of Net Income above
£100,000.
This changes the calculation - If a person in question has a net income of
more than £100,000 (but less than £125,000), the calculation would therefore
be in two stages:
STAGE 1: (Net Income - £100,000) - £12,500 = New Personal Allowance
2
STAGE 2: Net Income - New Personal Allowance = Taxable Income
NOTE that this is only true up to a net income of £125,000 - over that there
is no personal allowance left, so if net income is greater than £125,000:
Net income = Taxable Income
STEP 3 Split up the Taxable Income into non-savings, savings and
dividend income.
a) First, add up all interests received to get the “savings income”
b) Next, add up all the dividend to calculate the figure for “dividend
income”
c) Finally, the remaining figure (net income less interests income, less
divided income is termed “non-savings income”
, STEP 4 Apply the tax bands to the split up figures.
The tax rates and bands for the current year are set out below:
2019/20
Band of taxable income Tax rate
£0 - £37,500 Basic 20%
£37,501 - £150,000 Higher 40%
over £150,000 Additional 45%
a) First, tax the non-savings income:
• The first £37,500 is taxed at 20%
• Anything over £37,500 up to £150,000 is taxed at 40%
• Anything over £150,000 is taxed at 45%
Tax Income in each Band where applicable - For example if Non-savings
income is £170,000 -
The first £37,500 of that £170,000 is taxed at 20%
Then £112,500 (£150,000 (Band 2) - 37,500) is taxed at 40% - Higher Band
Then £20,000 (£170,000 (Tax Income) - £150,000 (Band 3)) is taxed at 45% -
Additional Band
£37,500 + £112,500 + £20,000 = £170,000 (Total Taxable Income)
