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Did you know most taxpayers overpay because they don’t account for all available deductions?
Figuring out how much income tax you owe doesn’t have to be complicated. Whether you’re a first-time filer or just want to double-check your calculations, breaking it down step by step makes the process much easier.
Let’s walk through exactly how to calculate your tax bill, so you can avoid mistakes and keep more of your hard-earned money!
9 Simple Steps to Calculate Your Income Tax in the UK
1. Determine Your Total Income
To start calculating your income tax, you need to work out your total income. So let's get into it!
This means adding up all your income sources, including your salary, freelance work, rental income, and dividends. Employment income is a primary source of taxable income and should be included along with any additional income from side gigs or investments, as these contribute to your gross income.
Getting an accurate figure is important, as any missed income could lead to underreporting and potential penalties from HM Revenue and Customs (HMRC).
Double-check all your earnings from the year, even if they seem small. Remember, it’s better to over-report and claim reliefs later than to risk underestimating your tax liability.
2. Subtract Tax-Free Allowances
Once you’ve calculated your total income, it’s time to take off any tax-free allowances.
The personal allowance is the most common one and allows you to earn up to £12,570 without paying any tax (2023-2024 tax year).
For UK-resident individuals, claiming the remittance basis of taxation may result in forfeiting the tax-free personal allowance along with other tax exemptions. It’s a simple way to reduce the amount of your income that gets taxed right off the bat.
You might also have tax-free income from sources like ISAs or certain state benefits. For example, interest earned in an ISA doesn’t count towards your taxable income.
Make sure you don’t miss any allowances or miscalculate their value. It’s easier than you think to overlook something, especially if you’ve got multiple income streams.
Using tools like the Pie Tax app can help you keep track of everything so you don’t leave any tax-free money on the table!
3. Identify Your Taxable Income
After subtracting all allowances, what’s left is your taxable income.
This is the part of your income that HMRC will base your tax bill on. Getting this number right is essential because it directly determines how much tax you’ll pay.
For example, if you earned £30,000 and deducted the £12,570 personal allowance, your taxable income would be £17,430. That’s the amount you’ll use to figure out which tax bands you fall into.
It’s simple math, but mistakes happen when allowances aren’t applied correctly or if you overlook tax-free income!
4. Understand Tax Brackets and Rates
The UK uses a progressive tax system with various income tax rates, meaning your income is taxed in portions based on specific bands.
The basic rate is 20% for taxable income up to £50,270, the higher rate is 40% for income over that up to £125,140, and the additional rate is 45% for anything above £125,140.
Here’s how it works: if your taxable income is £40,000, only the amount over £12,570 is taxed, and it’s all within the basic rate band.
If you earn £60,000, the first £50,270 is taxed at 20%, and the remaining amount (just £9,730) is taxed at 40%. Each portion of your income is taxed at the rate for its band, not your entire income at the highest rate.
We had a client who thought earning more meant all their income would jump into the higher rate. It doesn’t work like that, and understanding this saved them unnecessary stress!
5. Consider Deductions and Reliefs
Deductions and reliefs are your best friends when it comes to reducing your taxable income.
Expenses like business costs, charitable donations, or pension contributions can all lower the amount you pay tax on. It’s worth keeping track of these throughout the year to maximise your savings.
For example, if you’re self-employed, things like office supplies, travel expenses, or software subscriptions could all count as eligible deductions.
Even if you’re employed, contributions to your pension can provide tax relief, reducing the amount of income that’s taxed at different tax rates. Every little bit helps!
One of our clients discovered they could deduct home office expenses, which they hadn’t claimed for years. The Pie Tax app helps track and categorise deductions, so you don’t miss out on these opportunities to save!
6. Factor in National Insurance Contributions (NICs)
If you thought income tax was the end of it, don’t forget about National Insurance Contributions (NICs).
These are additional payments based on your earnings and employment status, and they help fund things like state pensions and healthcare.
Employees typically have Class 1 NICs deducted directly from their payslip, while the self-employed need to pay Class 2 and Class 4 NICs based on their profits.
For example, if you earn between £12,570 and £50,270, you’ll pay 12% NICs, and 2% on anything above that threshold.
7. Account for Tax Credits
Tax credits are a fantastic way to reduce your tax bill.
Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. Common credits include the marriage allowance, which lets you transfer some of your personal allowance to a spouse, or childcare credits.
For example, if you qualify for the marriage allowance, you could save up to £252 a year.
It might not seem like much, but it adds up, especially when combined with other credits. Always check what you’re eligible for, as many people overlook these opportunities.
8. Savings and Investments
Managing your savings and investments wisely can make a big difference when it comes to reducing your tax bill. Let's break it down!
Savings Income: Interest earned on savings accounts is subject to income tax, but you can earn some tax-free under the personal savings allowance:
£1,000 for basic-rate taxpayers
£500 for higher-rate taxpayers
Dividend Income: Dividends are taxed at lower rates, and you can earn a certain amount tax-free with the dividend allowance:
£2,000 tax-free for the 2024/25 tax year
Capital Gains: Profits from selling assets like property or shares are subject to capital gains tax, but you get a tax-free annual exemption:
£12,000 for the 2024/25 tax year
By keeping these allowances in mind, you can plan your savings and investments wisely to reduce your tax bill!
9. Double-Check and File Your Return
Finally, before submitting your self-assessment tax return, take a moment to review everything. Check your income figures, deductions, and credits to ensure accuracy. Even a small typo can cause delays or trigger a notice from HMRC.
The deadline for online filing in the UK is 31 January, so don’t leave it until the last minute. Filing late can result in penalties, and nobody wants that stress hanging over them.
One of our clients nearly missed the deadline but managed to file on time using the Pie Tax app. It’s a lifesaver for getting everything done quickly and correctly. Plus, it keeps all your documents in one place for easy reference next year.
Be sure to check out the Gov website for more tips as well!
Final Thoughts
Calculating how much income tax you owe might seem overwhelming at first, but following these nine steps makes it straightforward.
By understanding your income, allowances, and tax brackets, you can avoid overpaying and even maximise savings.
If you’re unsure or want to simplify the process further, consider using the Pie Tax App to make calculations easier and filing stress-free.
Start your tax journey with confidence today!
