Summary - Steps of an Income Tax calculation
Step 1
Calculate the individual’s “total income” i.e. the income which is taxable under ITEPA 03 and
ITTOIA 05.
N.B. allowable expenditure, exempt income, capital allowances
Step 2
Calculate any reliefs (payments the taxpayer must make such as interest payments on
business loans). Then deduct any reliefs from total income to obtain “net income”.
Step 3
Deduct relevant personal allowances checking that there is no reduction.
Step 4
Calculate income tax at the relevant rate(s) on the taxpayer’s taxable income.
N.B. Do not forget that “non-savings” income is taxed before savings income and dividends,
or that there is only one basic rate band. Also check for the applicability of the Personal
Savings Allowance and/or Dividend Allowance when calculating at Step 4.
Step 5
Add together tax payable.
Income tax
Who pays is?
- UK resident taxpayers on their taxable income.
- Individuals(minors too)
- Partners on their own taxable profit
- PR = represent deceases estate, if there is an outstanding income tax bill on any
income such as rent, which has been generated by the estate during administration,
PR will be responsible to pay this.
- Trustees = will also be liable to pay income tax on income produced by the trust fund
they are trustees for.
- You pay income tax on income receipts. These are recurrent e.g. rent.
- There is two legations that govern what is an income receipt.
1. Income Tax (Earnings and Pensions) Act 2003 (ITEPA 03) states these are
income receipts;
- Employment (e.g. a wage or salary of an employee)- always use the pre tax figure,
can be found on P60 but will be given in exam.
, - Pensions
- Welfare benefits such as Jobseeker’s Allowance, Carer's Allowance, Employment
and Support Allowance and Bereavement Support Payment.
2. Income Tax (Trading and Other Income) Act 2005 (ITTOIA 05)
Self-employed trading/activities (which includes both sole traders and partners in
partnership)
- Rental from properties
- Dividends from shares
- returns from investments (including bank/building society interest)
RECEIPTS WHICH DO NOT QUALIFY AS INCOME
Interest and Prizes - Interest on National Savings Certificates, Individual Savings Accounts
(ISA), interest and bonuses on SAYE (save as you earn) contracts and premium bond prizes.
Specified Welfare Benefits - a number of state benefits.
Rent a Room Scheme - Taxpayers do not have to pay income tax on rent received for
renting out a room in their own home (e.g. to a lodger) until that income exceeds £7,500,
when they would pay tax on the excess only.
Tax Credits – Working Tax Credit and Child Tax Credit.
Miscellaneous - Termination payments in respect of loss of employment where the
payment is under £30,000 and is regarded as compensation and not fresh consideration,
interest on damages for personal injury or death, annual payments under certain insurance
policies e.g. for sickness, scholarships and other educational grants, voluntary payments
from relatives etc.
STEP 1
CALCULATE THE TOTAL INCOME (check if saving/non saving)
- This will be the income which is taxable under the previous statutes.
- Look and see if any of those incomes above are mentioned and add them together.
- Interest and dividends would be added to the other income receipt = total income.
Allowable pre-tax deductions = the aim is to reduce the total income, therefore
reducing the tax paid.
1. Deductions for trading/professional receipts of the self-employed (ITTOIA 05)
- Self-employed individuals such a partners/sole traders, can have income expenses
deducted.
- “wholly and exclusively for the purposes of the trade” from the turnover of their
business.
Step 1
Calculate the individual’s “total income” i.e. the income which is taxable under ITEPA 03 and
ITTOIA 05.
N.B. allowable expenditure, exempt income, capital allowances
Step 2
Calculate any reliefs (payments the taxpayer must make such as interest payments on
business loans). Then deduct any reliefs from total income to obtain “net income”.
Step 3
Deduct relevant personal allowances checking that there is no reduction.
Step 4
Calculate income tax at the relevant rate(s) on the taxpayer’s taxable income.
N.B. Do not forget that “non-savings” income is taxed before savings income and dividends,
or that there is only one basic rate band. Also check for the applicability of the Personal
Savings Allowance and/or Dividend Allowance when calculating at Step 4.
Step 5
Add together tax payable.
Income tax
Who pays is?
- UK resident taxpayers on their taxable income.
- Individuals(minors too)
- Partners on their own taxable profit
- PR = represent deceases estate, if there is an outstanding income tax bill on any
income such as rent, which has been generated by the estate during administration,
PR will be responsible to pay this.
- Trustees = will also be liable to pay income tax on income produced by the trust fund
they are trustees for.
- You pay income tax on income receipts. These are recurrent e.g. rent.
- There is two legations that govern what is an income receipt.
1. Income Tax (Earnings and Pensions) Act 2003 (ITEPA 03) states these are
income receipts;
- Employment (e.g. a wage or salary of an employee)- always use the pre tax figure,
can be found on P60 but will be given in exam.
, - Pensions
- Welfare benefits such as Jobseeker’s Allowance, Carer's Allowance, Employment
and Support Allowance and Bereavement Support Payment.
2. Income Tax (Trading and Other Income) Act 2005 (ITTOIA 05)
Self-employed trading/activities (which includes both sole traders and partners in
partnership)
- Rental from properties
- Dividends from shares
- returns from investments (including bank/building society interest)
RECEIPTS WHICH DO NOT QUALIFY AS INCOME
Interest and Prizes - Interest on National Savings Certificates, Individual Savings Accounts
(ISA), interest and bonuses on SAYE (save as you earn) contracts and premium bond prizes.
Specified Welfare Benefits - a number of state benefits.
Rent a Room Scheme - Taxpayers do not have to pay income tax on rent received for
renting out a room in their own home (e.g. to a lodger) until that income exceeds £7,500,
when they would pay tax on the excess only.
Tax Credits – Working Tax Credit and Child Tax Credit.
Miscellaneous - Termination payments in respect of loss of employment where the
payment is under £30,000 and is regarded as compensation and not fresh consideration,
interest on damages for personal injury or death, annual payments under certain insurance
policies e.g. for sickness, scholarships and other educational grants, voluntary payments
from relatives etc.
STEP 1
CALCULATE THE TOTAL INCOME (check if saving/non saving)
- This will be the income which is taxable under the previous statutes.
- Look and see if any of those incomes above are mentioned and add them together.
- Interest and dividends would be added to the other income receipt = total income.
Allowable pre-tax deductions = the aim is to reduce the total income, therefore
reducing the tax paid.
1. Deductions for trading/professional receipts of the self-employed (ITTOIA 05)
- Self-employed individuals such a partners/sole traders, can have income expenses
deducted.
- “wholly and exclusively for the purposes of the trade” from the turnover of their
business.
