Income tax may sound daunting and just the thought of it is a sure headache, but knowing a couple basics will give you a better understanding. So what is income tax? Citizens Advice defines it as a tax on income, which includes: earnings from employment, self-employment, some social security benefits, interest on most savings, income from shares or trusts, rental income, and most pensions income, including state, occupational and personal pensions. The amount of your taxable income determines whether or not tax is payable, especially if it is beneath a specific level.
How income tax is calculated is very complex and there are a lot rules to this calculation. It is all determined by what qualifies as taxable income, what is tax deductible, and tax reliefs or allowance you qualify for. It is difficult to calculate the exact answer for every case, but there are a couple steps to have a general idea:
- Gather all your taxable income, before tax. This excludes all non-taxable income (i.e. housing benefit, pension credit, maternity allowance, lottery winnings, ect.). This will give you your total income to determine how much tax you’ll be paying.
- Determine if you can claim tax relief. Tax relief is income spent on professional subscriptions or certain costs for your job, which can lower your taxable income. This means you could pay less tax!
- See if you are entitled to tax free allowances. If you live in the UK, your are more than likely to be entitled to a basic Personal Allowance. Other allowances are Blind Person’s Allowance, Married Couples Allowance, or Pay As You Earn (PAYE). These allowances are deducted from your total taxable income.
- Once you have your total taxable income, it is time to calculate the tax payable. For a detailed layout, Citizens Advice gives a detailed calculation process. After this calculation, you’ll be able to determine the total tax due for the year. Be sure all your allowances are deducted and you have taken off taxes already paid (i.e. PAYE).
Keep in mind all of your taxable income, and the tax reliefs and allowances you are entitled to. Income tax doesn’t have to be as complicated as you might think it. The intricate details, guidelines, and calculations of this process seem disconcerting at first, but the simple steps above can help you understand.