Knowing how to calculate taxable income and tax payable are necessary skills that everyone should master. Having knowledge when it comes to taxation not only saves you accounting fees attached to filing tax papers, but also gives you a better appreciation of taxes and its utilitarian purpose. In this article, learn how to calculate taxable income.
What compromises taxable income?
In studying taxation, the first question that is usually asked is "What compromises taxable income?" It should be noted that not all income, entities and institutions are taxable. Income As a general rule, all income from both full-time and part-time are included in the computation of taxable income. Income is the value one gets from service rendered, products delivered, interest on loans, bank deposits and other sources. Income that you earn from partnerships and dividends received from corporations also compromises of taxable income. Rental income and pension income are also part of a person's taxable income. Common non-taxable income in the United Kingdom On the other hand, there are certain forms of income that are exempted from taxable income. The most common non-taxable income in the United Kingdom include disability allowances, maternity allowances, pension credit, child benefit and Young Person's bridging allowance among others. Income from taxable sources should be added together to arrive at the gross taxable income.
Personal and other special tax allowances
After getting the gross taxable income, you should now deduct personal and other special allowances. Obviously, the main concept behind personal and special tax allowances is that a person works to provide for himself and his family. Personal allowance In the UK, the basic personal allowance of an employed person, aged 65 below, is set at £7,475 with an income limit of £100,000. On the contrary, people who are aged between 65 - 74 and 75 years above, are given basic personal allowances of £9,940 and £10,090 respectively, with limits of £24,000. Apart from the personal allowances, other special tax allowances such as married couple allowance, blind person's allowance and other tax reliefs are given by the UK government.
Different tax rates
After deducting allowances and exemptions from the gross taxable income, you now arrived at the taxable income that will be used as basis for your tax payable. In computing for tax payable, certain tax rates should be noted. Taxable income For taxable income less than £2,560, the tax rate is 10 percent, for more than £2,560 but less than £35,000, the tax rate is 20 percent while for taxable income more than £35,000 but less than £150,000, the tax rate is 40 percent. Lastly, for taxable income more than £150,000, a 50 percent income tax rate shall be applied.