How do I work out my tax?
Do you know how to work out your tax? We explain in four short steps.
How do I work out my tax?
You can work out your tax by following these four stages:
- Work out whether your income is taxable or not
Some income is taxable and some is tax free.
- Work out the allowances you can deduct from your taxable income or your final tax bill
There are several different tax allowances to which you might be entitled.
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 2020 and finishing on 5 April 2021 is £12,500. If you are part of a married couple or civil partnership, the marriage allowance might be available (though if one of you was born before 6 April 1935, the married couple’s allowance is likely to be more beneficial – it is not possible to claim both).
There is also a blind person’s allowance for those who qualify. Despite its name, you do not have to be completely without sight to claim it, so if you have very poor eyesight, check if you could be 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.
- 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 are within 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 2020/21) and a dividend allowance (£2,000 for all taxpayers for 2020/21). 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.
- Finally, consider whether you can deduct anything from your tax bill
The most common deduction is UK tax you have already paid.
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 might not be allowed and some tax is not refundable, for example, the notional tax paid on gains on UK life assurance policies or investment bonds.
To work out your tax, you have to do the following calculation:
- First, take your allowances from your total income to work out your taxable income.
- Second, work out the charge tax on your taxable income using the rates of tax that apply to you. You only apply the tax rate to income falling within the associated tax band. As such you may need to apply different tax rates to your income to work out your overall liability. The tax rates are set each year.
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.
|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|
So, if you live in England, Wales or Northern Ireland, have a job earning £350 a week and you are single your 2020/21 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||£(12,500)|
|You are left with the amount of your taxable income on which you actually have to pay tax:
£18,200 – £12,500
|Calculate your tax liability:
£5,700 x 20%
|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
|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: