How do I work out my tax?

Updated on 26 July 2021

Tax basics

Do you know how to work out your tax? We explain in four short steps.

Illustration of a calculator

How do I work out my tax?

You can work out your tax by following these four stages:

1. Work out whether your income is taxable or not

Some income is taxable and some is tax free. You start by adding up all amounts of income on which you are charged to income tax for the tax year.

You can then take certain deductions from this figure, such as trade losses.

2. Work out the allowances you can deduct from your taxable income

There are several different tax allowances to which you might be entitled. However, at this stage of the tax calculation there are only two which are relevant: the personal allowance and the blind person’s allowance.

Every man, woman and child resident in the UK has a personal allowance. For most people, the personal allowance for the tax year starting on 6 April 2021 and finishing on 5 April 2022 is £12,570.

Despite its name, you do not have to be completely without sight to claim the blind person’s allowance. So if you have very poor eyesight, check if you are entitled.

You can find out more information on these allowances on What tax allowances am I entitled to?. Note, however, that some so-called ‘allowances’ are in fact nil rates of tax that are applied at step 3 below, and some are given as a tax credit or tax reduction at step 4 below.

3. Work out at what rate your income is taxed

If you qualify, some of your savings income might be taxed at 0% – that is, no tax will be due on it.

Next, there is the basic rate band, where most types of income are taxed at 20%.

Most people do not pay tax higher than the basic rate.

But for some people with higher levels of income, 40% and 45% tax rates can also apply.

In addition, you are entitled to a personal savings allowance (£1,000 for basic-rate taxpayers for 2021/22) and a dividend allowance (£2,000 for all taxpayers for 2021/22). These are not tax allowances as such; they are 0% rate bands of tax for savings income and dividend income respectively. We explain more about how these work in our page on savings income.

See What tax rates apply to me? for more details.

If you live in Scotland and are a Scottish taxpayer, there are Scottish rates and bands of income tax set by the Scottish Parliament that apply to your non-savings and non-dividend income. The UK rates and bands apply to your savings and dividend income.

Similarly, if you live in Wales and are a Welsh taxpayer, there are Welsh rates of income tax set by the Welsh Assembly that apply to your non-savings and non-dividend income. The UK rates apply to your savings and dividend income.

4. Finally, consider whether you can deduct anything from your tax billandif you need to add any income tax charges

For example, if 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 personal allowance, then you will be entitled to a tax reduction.

You may also be able to deduct foreign taxes paid on income which is also taxable in the UK, as part of a foreign tax credit claim. See What if I am liable to tax in two countries on the same income? for more information.

But take care: some deductions cannot create a refund, such as the notional tax paid on gains on UK life assurance policies or investment bonds.

You then need to consider whether you are liable to any tax charges, such as tax on Gift Aid donations, the high income child benefit charge, or tax on certain state pension lump sums.

Your income tax liability for a year is the total amount of tax you owe for that year after all available deductions plus any income tax charges.

You then compare this to the amount of UK tax you have already paid (such as tax you have paid through PAYE) – if your tax liability exceeds amounts already paid, the difference is called your balancing payment for the year.

If amounts already paid exceed your tax liability, you will be due a refund.

Example calculation

For most individuals with simple tax affairs the way the tax calculation works is as set out below. The tax year runs from 6 April one year to 5 April the next. Negative or minus numbers are shown in brackets.

The calculations for Scottish taxpayers and Welsh taxpayers also follow this same basic format.

Total taxable income – most income is taxable although some may be tax free

xxxx

Take off certain tax allowances

(xxxx)

You are left with the amount of your taxable income on which you actually have to pay tax

xxxx

Calculate your tax liability using the tax rates that apply to you

xxxx

Take off the amounts you get due to any special allowances

(xxxx)

Take off any tax already deducted from the income you receive before you get it

(xxxx)

Tax now due or (repayable)

xxxx or

 

(xxxx)


So, if you live in England, Wales or Northern Ireland, have a job earning £350 a week and you are single your 2021/22 tax calculation would probably work out like this, using the table above:

Total taxable income – wages: £350 a week x 52 weeks

£18,200

Take off your personal allowance

£(12,570)

You are left with the amount of your taxable income on which you actually have to pay tax:
£18,200 – £12,500

£5,630

Calculate your tax liability:
£5,630 x 20%

£1,126

Take off the amounts you get due to any special allowances

(None)

Take off any tax already deducted from the income you receive before you get it:
This depends on the PAYE code used for your wages but here we assume you
were on the correct code for the whole tax year

£(1,126)

Tax now due or (repayable)

£0


If you are a Scottish taxpayer, there is an example in our section on Scottish income tax.

Where can I find more information?

If you need more information on how to work out your tax, you may find our other sections helpful:

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