PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

A worked example based on 2015-16

Income Tax

This example looks at income for 2015-16 as this is what will be entered on tax returns issued in April 2016, for submission by 31 January 2017.

We are going to work out Julie’s tax. Julie has a salary from her job at a supermarket, and some self-employed income from designing greeting cards. Julie also has a little savings income. She wants to work out her tax bill for 2015-16. Julie is single and has a daughter, aged seven.

Julie has the following income for 2015-16:

  • Gross salary £12,000; tax deducted under PAYE £280 (National Insurance of £472.80 would also been deducted, but is not relevant for this calculation). Her employer gives her a form P60 with these figures in May 2016
  • Self-employed profits £2,432 (after expenses have been deducted)
  • Net dividends £270 (i.e. amount actually received); dividend tax credits of £30 (this is 10% of the gross dividend (£270+£30) or 1/9th of the net dividend (£270))
  • Bank interest received £800; tax already deducted £200 tax (20% on Gross interest £1,000)

The relevant rates of tax for 2015/16 are these:

Starting rate band for savings income:

The first £5,000 of savings income is taxed at 0%; but only if non-savings income is less than £15, 600 (the  personal allowance – £10,600 – plus the savings starting rate band of £5,000).

Julie’s has non-savings income is £14,432, (employment of £12,000 plus self-employment of £2,432) this is under £15,600, so she will be entitled to the starting rate of 0% for up to £1,168 of savings income (15,600 – £14,432).

Basic rate band: the first £31,785 of income

  • Usually taxed at 20%, but special rules may apply to savings income (as above)
  • Dividend income is taxed at 10%

Note: Savings income is treated as the ‘top slice’ of income – that is, all your other income is taxed first, then savings income is added on top and the tax worked out.  Dividend income is taxed as the highest part of savings income.

Calculating Julie’s income tax

Gross Income

£

Tax already paid

Gross Salary 12,000 280.00
Self employment 2,432
Dividends, plus dividend tax credits (270 + 30) 300 30.00
Gross interest and tax deducted (800 + 200) 1,000 200.00
Totals 15,732 630.00
Less: Personal allowance (10,600)
Total income after PA
£5,132

 

630.00
Income tax due As Julie’s total income is less than £31,785 the tax rate is 20% except for savings and dividends.  Her savings are taxed at 0% and dividends at the 0% ‘dividend ordinary rate’
Basic rate 20% on £3,832 (all income except savings and dividends) 766.40
Dividends £300 at 10% 30.00
Total tax due on income 796.40
Tax already paid (as above) ( 630.00)
Income tax payable now (tax due, less tax paid)  £166.40

Notes:

1)     Julie is able to access the 0% starting rate for savings income as her non-savings income at £14,432 is less than £15,600. The £1,000 of savings income is taxed at 0%. If Julie had registered to receive interest free of tax at source, she would have additional tax to pay on her self-assessment bill.

2)      Julie could ask HMRC to collect the tax of £166.40 (due on her self-employment income) under PAYE from her main employment. She would  need to ask by 30 December 2016 at the latest. Alternatively, the tax would be due by 31 January 2017 under self assessment

3)      Julie would need to submit a tax return by 31 October 2016 (if she sends in a paper return) or 31 January 2017 (if she submits the return on-line). If she missed these filing dates she will have to pay a £100 fine.  Further fines of up to £1,600 over the first 12 months will be due if the return remains outstanding.  These fines are not limited to the amount of tax due and would be payable even if no tax were owing.