Thursday, 16 June 2016

PERSONAL TAX PART 1


Income tax is tax charged on income earned by individuals and it’s used by the government to run and maintain the state.

The government tax year starts on 6th April to 5th April the following year, so we have just come to the end of 2015/16 tax year and started 2016/17 tax year.

Tax year
Tax period
2015/16
6 April 2015 to 5 April 2016
2016/17
6 April 2016 to 5 April 2017

Since we have recently come to the end of 2015/16, we want to use this article to illustrate the income tax calculation for an individual in 2015/16 and we will aim at writing another article in the next edition of this magazine showing the difference in tax calculation for 2016/17, so please look out for the next edition.

From the total income earned by an individual, personal allowance is deducted to arrive at the taxable income. The personal allowance for 2015/16 is £10,600, which could vary depending on the individual’s circumstances and income level.

The taxable income is subjected to different tax rates which range from 0% up to 45% on different parts of the income. The tax rates and income brackets are shown below for different types of income an individual could earn.

2015/16 Tax Year


Income brackets
Non-investment income
Savings income
Dividends income
Capital Gains
Starting rate
£0 - £5,000
-
0%
-
-
Basic rate
£0 - £31,785
20%
20%
10%
18%
Higher rate
£31,786 - £150,000
40%
40%
32.5%
28%
Additional rate
Over £150,000
45%
45%
37.5%
28%

The above means that for non-investment income such as employment income, you pay 20% tax on any taxable income (amount after deducting personal allowance) up to £31,785 and if the persons taxable income is more than that, then the difference up to £150,000 will then be subject to 40% and then any amount over £150,000 will be subject to 45%.

We will now use an illustration to demonstrate the computation of income tax for an individual.


Illustration:
Thomas Bamqual, is 42 years old and he has employment income of £43,000; interest received from a building society savings account of £1,900; dividends received of £1,683; taxable gains from the sale of a garage property of £20,100 (after deducting the annual exemption); interest received from an ISA account of £800 and he made gift-aid contributions of £960 through the year. What will be the tax liability?


Solution:
**You will need to bear in mind that:

       Employment incomeThe employment income is subjected to tax first, then

Savings incomeThe savings income is subjected to tax next, then

Dividends incomeThe dividends are subjected to tax next, then

Income from sale of assetsThe taxable income from capital assets will be taxed



Yours Sincerely,
The Friendly Team

The Training Place of Excellence Limited
ed

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