Income Tax calculation

Nabla

Hi, I've been reading about how income tax is actually calculated in the PAYE system in the UK based on gross income, but I can't quite understand the calculation. So considering gross income from a single job, and not taking into account pension/other deductions, or any capital gains etc (just the most basic scenario), and ignoring national insurance contributions I understand it as the following:

1. If gross income is less than personal allowance, £11,850, then no tax is paid at all.
2. If it is within the basic rate band (£11,851-£46350), then basic rate of 20% is paid (ONLY on anything above the personal allowance). e.g. on £31,851 salary then 20% x £20,000 = £4000 annual tax. NOT 20% of total gross salary e.g. £31,851 x 0.2 = £6370.
3. If it is within the higher rate band (£46,351-£150,000), then as above the higher rate of tax (40%) is only paid on anything above £46,351, then added to the basic rate applied to the basic band, which is (£46,350-£11,851) x 20% = £6899.8. So 40% is NOT applied to the entire gross salary e.g. £60000 x 40% = £24,000 !
4. If it is in the additional rate band (above £150,000) then then as above, 20% is paid on the entire basic band, plus (£150,000-£46351) * 40% = $41,459, then anything above £150,000 is taxed at the additional rate of 45%. Also Personal allowance decreases by £1 for every £2 increase in income above £100,000 personal allowance threshold until personal allowance = £0, so the Basic band (on which you get charged 20%) gets 'larger' until gross income becomes larger than £123,702. So you do NOT get charged 45% on the entire gross income?

Is this correct?

So basically if your income is within a particular band, then you don't get charged the associated rate on your ENTIRE gross income, but each rate is applied only to the amount of income within the associated band?


If the rates are applied to the ENTIRE gross income then your GROSS income can increase over a threshold, but your NET income will actually be lower than before you passed the threshold. Or equivalently someone can earn around £10,000 more Gross income than someone else and have the same or lower actual NET income - surely this is not the case?


I'm just trying to put some finacial spreadsheets together, so want make to sure I have my calculations right.


Thanks

Dazed_and_confused

In very simple terms, for salary or pension income upto £100,001 and a taxpayer who isn't Scottish resident for tax purposes,

First £11,850 - no tax due as a result of the Personal Allowance
Next £34,500 - 20% tax
Next £53,651 - 40% tax

As soon as you have different income types such as interest or dividends or adjusted net income go over £100,001 it gets way more complicated.

00ec25

tax is applied at the rate applicable to the income within that band

the reduction of personal allowance above gross income of 100k is as you say

that is how an annual figure is worked out. If you want to understand how it works in PAYE you need to do more reading, or use the forum search function as it has been explained many times already .

agrinnall

I think you have understood it correctly, although your explanation is quite complicated, and your paragraph that includes the "£10,000 more gross" part seems to ignore everything that you have previously written.



However, although your income tax calculations are correct you really do need to include national insurance in your calculations as that is, in effect, another tax, albeit one where thresholds are more complex and rates are not progressive in the way that tax rates are. If you hope to work out your net pay then you must account for NI too.