Income Tax Calculation Steps

The total amount of money you earn in a tax year, including income like wages, pensions, and interest, but excluding exempt income like benefits.

Income that has already had tax deducted, usually in the form of a net salary, which is paid after tax deductions.

The original amount of income before any tax is taken off.

The process of adjusting a net income figure to calculate the gross amount before any deductions.

Non-cash benefits received by an employee based on their employment, for example, company cars, private medical insurance, or cheap loans.

The cost to the employer of providing a benefit in kind to an employee.

Benefits provided by an employer that are exempt from tax, such as certain healthcare benefits.

The system used by employers to deduct income tax directly from employees’ wages.

Income from renting out property or running a business, below £1,000, is tax-free and does not require a tax return.

This allowance lets you deduct £1,000 from your gross property or trading income instead of calculating actual expenses, reducing your taxable income.

This allowance lets you earn a certain amount of savings interest tax-free, depending on your tax bracket.

Basic rate taxpayers are entitled to £1,000 of tax-free savings interest, while higher rate taxpayers get £500.

Additional rate taxpayers (earning over £125,140) do not have a PSA.

This allowance lets you receive up to £500 of dividends tax-free, regardless of your tax bracket.

Income within the PSA and DA is still considered towards the basic rate or higher rate limits when calculating other income.

Income that is not from savings or dividends, such as wages or pensions.

Interest received on bank or building society deposits.

Income from dividends received from companies.

A tax system where the rate of tax increases as your income rises, ensuring those with higher incomes pay a proportionally higher share of tax.

Income tax payable is calculated separately for each type of income (non-savings, savings, and dividends) and then added together.

The starting rate of 0% for savings income applies only if you have no or very low non-savings income (less than £5,000), otherwise, the basic rate of 20% applies.

The amount of tax you are liable to pay based on your total income.

Tax can be collected either by directly deducting it from your income (like PAYE) or by you calculating and paying it yourself (self-assessment).

A set of rules within ITEPA 2003 Part 3 chapters 2 – 11 that dictates which benefits given to employees by their employers are taxable.

Benefits provided to employees that are subject to income tax.

A loan that is either interest-free or provided at a lower rate of interest than the official rate.

The difference between the interest calculated at the official rate and the interest actually paid by the employee on a beneficial loan.

A lump sum payment made to an employee upon termination of employment, often used as a farewell or redundancy payment.

The formula used to calculate the taxable amount of a termination payment, considering the employee's potential earnings during their notice period.

Payments made to an employee upon termination that are not part of the contractual agreement, such as ex gratia payments or damages for wrongful dismissal. These payments are subject to a £30,000 exemption from tax.

The amount of income subject to income tax. This is calculated by subtracting reliefs and allowances from net income.

A deduction from income that reduces the taxable income amount. This includes the personal allowance, blind person's allowance, and married couple's allowance.

A tax-free allowance available to all individuals. It can be set off against income of any kind.

The deadline by which you must submit your tax return online, usually on 31st January after the end of the tax year.

The deadline by which you must submit your tax return as a paper copy, usually on 31st October in the same year as the end of the tax year.

The final date to pay the income tax due, regardless of how the return was submitted, typically on 31st January after the end of the tax year.

Payments made in advance towards your income tax liability, typically split into two payments.

The first payment on account, due on 31st January during the tax year.

The second payment on account, due on 31st July after the end of the tax year.

A final payment to cover any remaining tax liability for the year, due on the next 31st January.

Payments on account are not required if your self-assessed tax from the previous year was less than £1,000.

A system where businesses and individuals manage their taxes digitally through online accounts.

A government initiative aimed at streamlining the tax system with digital tools and online accounts.