Income
tax is tax charged on income earned by individuals and it’s used by the
government to run and maintain the state.
tax is tax charged on income earned by individuals and it’s used by the
government to run and maintain the state.
The
government tax year starts on 6th April to 5th April the
following year.
government tax year starts on 6th April to 5th April the
following year.
|
Tax year
|
Tax period
|
|
2016/17
|
6
April 2016 to 5 April 2017 |
From
the total income earned by an individual, personal allowance is deducted to
arrive at the taxable income. The
personal allowance for 2016/17 is £11,000,
which could vary depending on the individual’s circumstances and income level.
the total income earned by an individual, personal allowance is deducted to
arrive at the taxable income. The
personal allowance for 2016/17 is £11,000,
which could vary depending on the individual’s circumstances and income level.
The
taxable income is subjected to different tax rates which range from 0% up to 45%
on different parts of the income. The tax rates and income brackets are shown
below for different types of income an individual could earn.
taxable income is subjected to different tax rates which range from 0% up to 45%
on different parts of the income. The tax rates and income brackets are shown
below for different types of income an individual could earn.
2016/17 Tax Year
|
|
Income
brackets |
Non-investment
income |
Savings
income |
Dividends
income |
Capital
Gains |
|
Starting
rate |
£0
– £5,000 |
–
|
10%
|
–
|
–
|
|
Basic
rate |
£0
– £32,000 |
20%
|
20%
|
7.5%
|
10%
|
|
Higher
rate |
£32,001
– £150,000 |
40%
|
40%
|
32.5%
|
20%
|
|
Additional
rate |
Over
£150,000 |
45%
|
45%
|
38.1%
|
20%
|
From
2016/17, there is a tax free savings interest of £1,000 for basic rate tax
payers and £500 for higher rate payers; an individual will then need to pay tax on any interest above this at
the applicable tax rate after adding savings income to non-investment income.
2016/17, there is a tax free savings interest of £1,000 for basic rate tax
payers and £500 for higher rate payers; an individual will then need to pay tax on any interest above this at
the applicable tax rate after adding savings income to non-investment income.
From2016/17, there is a dividend allowance which implies that there will be no tax
to pay on the first £5,000 of dividend income for all tax payers, and any
dividends received above this, will be subject to tax at the applicable tax rate
after taxing savings and non-investment income.
We
will now use an illustration to demonstrate the computation of income tax for
an individual.
will now use an illustration to demonstrate the computation of income tax for
an individual.
Illustration:
Thomas Bamqual, is 42 years old and he
has employment income of £43,000; interest received from a building society
savings account of £1,900; dividends received of £1,683; taxable gains from the
sale of a garage property of £20,100 (after deducting the annual exemption);
interest received from an ISA account of £800 and he made gift-aid contributions
of £960 through the year. What will be the tax liability?
has employment income of £43,000; interest received from a building society
savings account of £1,900; dividends received of £1,683; taxable gains from the
sale of a garage property of £20,100 (after deducting the annual exemption);
interest received from an ISA account of £800 and he made gift-aid contributions
of £960 through the year. What will be the tax liability?
Solution:
**You
will need to bear in mind that:
Employment income- The employment income is subjected to tax first, then
Savings income- The savings income is subjected to tax next, then
Dividends income- The dividends are subjected to tax next, then
Income from sale of assets- The taxable income from capital assets will be taxed
will need to bear in mind that:
Employment income- The employment income is subjected to tax first, then
Savings income- The savings income is subjected to tax next, then
Dividends income- The dividends are subjected to tax next, then
Income from sale of assets- The taxable income from capital assets will be taxed
Basic Rate bracket will now be extended to: £32,000
+ (£960/ 0.8) = £33,200
+ (£960/ 0.8) = £33,200
Interest from ISA’s are not taxed
Interest received will need to be grossed up, but dividends will
no longer be
no longer be
grossed up
Thomas will be entitled to the full personal allowance of £11,000,
since his taxable income is less than £100,000
since his taxable income is less than £100,000
|
|
Totals
|
Non-Investment
|
Savings
|
Dividends
|
Capital Gains
|
|
|
£
|
£
|
£
|
£
|
£
|
|
Employment
income |
43,000
|
43,000
|
|
|
|
|
Interest
(£1900/0.8) |
2,375
|
|
2,375
|
|
|
|
Dividends
|
1,683
|
|
|
1,683
|
|
|
Capital
gains |
20,100
|
|
|
|
20,100
|
|
Total
income |
67,158
|
43,000
|
2,375
|
1,683
|
20,100
|
|
Personal
Allowance |
(11,000)
|
(11,000)
|
|
|
|
|
Taxable income
|
56,158
|
32,000
|
2,375
|
1,683
|
20,100
|
This
means that the first item to be taxed will be £32,000 and then the next £1,200
from savings income will be taxed to make up the extended basic rate bracket
(remember the basic rate has been extended from £32,000 to £33,200 due to the
gift aid donations). The rest of the taxable income will be taxed at the
applicable higher rate based on the type of income.
means that the first item to be taxed will be £32,000 and then the next £1,200
from savings income will be taxed to make up the extended basic rate bracket
(remember the basic rate has been extended from £32,000 to £33,200 due to the
gift aid donations). The rest of the taxable income will be taxed at the
applicable higher rate based on the type of income.
Tax liability
computation:
computation:
|
|
£
|
|
£
|
|
Taxable employment
income |
32,000
|
£32,000 @ 20%
|
6,400.00
|
|
Interest
|
1,200 |
£500 @ 0%
|
NIL |
|
£700 @ 20%
|
140.00
|
||
|
Sub-total
|
33,200
|
|
|
|
Interest (£2,375-£1,200)
|
1,175
|
£1,175 @ 40%
|
470.00
|
|
Dividends
|
1,683 |
£1,683 < £5,000
|
NIL
|
|
Capital gains tax
|
20,100
|
£20,100 @ 20%
|
4,020.00
|
|
Taxable income (same
as above) |
56,158
|
|
|
|
Total tax liability
|
|
|
You
will notice the interest is split into three lines in the table above. This is
because the
will notice the interest is split into three lines in the table above. This is
because the
savings income is the next type of income to be taxed and we need
to use up the extended 20% tax bracket of £33,200, which the taxable employment
income doesn’t cover this bracket in full; so the balance is covered in the
savings income. The tax free savings interest of £500 for higher rate tax
payers has been accounted for; hence the savings income has been split as £500
which is exempt and then £700 which is then taxed at 20%, while the remaining
savings income of £1,175 is taxed at 40%.
to use up the extended 20% tax bracket of £33,200, which the taxable employment
income doesn’t cover this bracket in full; so the balance is covered in the
savings income. The tax free savings interest of £500 for higher rate tax
payers has been accounted for; hence the savings income has been split as £500
which is exempt and then £700 which is then taxed at 20%, while the remaining
savings income of £1,175 is taxed at 40%.
The
dividends received from 2016/17 will no longer be grossed up and the first
£5,000 dividends received will not be taxed, so there is no tax on the
dividends received by Thomas because it is less than £5,000.
dividends received from 2016/17 will no longer be grossed up and the first
£5,000 dividends received will not be taxed, so there is no tax on the
dividends received by Thomas because it is less than £5,000.
The
table above shows that Thomas will be due to pay tax of £11,030 for 2016/17; remember this tax year has just started
and the tax return will be due by 31/01/2018.
table above shows that Thomas will be due to pay tax of £11,030 for 2016/17; remember this tax year has just started
and the tax return will be due by 31/01/2018.
We have an article in the last edition of this magazine
which shows that this person would be due to have paid £13,548.75 in 2015/16 if he earned the same income. Please
feel free to compare the two tax years and identify the differences in the
thresholds and tax computations.
which shows that this person would be due to have paid £13,548.75 in 2015/16 if he earned the same income. Please
feel free to compare the two tax years and identify the differences in the
thresholds and tax computations.
Yours Sincerely,
The Friendly Team
The Training Place of Excellence Limited