Monday, 20 June 2016

PERSONAL TAX PART 3



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.

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

From the total income earned by an individual, personal allowance is deducted to arrive at the taxable income. The personal allowance for 2016/17 is £11,000, 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.

2016/17 Tax Year

Income brackets
Non-investment income
Savings income
Dividends income
Capital Gains
Starting rate
£0 - £5,000
-
10%
-
-
Basic rate
£0 - £32,000
20%
20%
7.5%
10%
Higher rate
£32,001 - £150,000
40%
40%
32.5%
20%
Additional rate
Over £150,000
45%
45%
38.1%
20%

From 2016/17, there is a tax free savings interest of £1,000 for basic rate tax payers and £500 for higher rate payers; an individual will then need to pay tax on any interest above this at the applicable tax rate after adding savings income to non-investment income.
From 2016/17, there is a dividend allowance which implies that there will be no tax to pay on the first £5,000 of dividend income for all tax payers, and any dividends received above this, will be subject to tax at the applicable tax rate after taxing savings and non-investment income.
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 income- The employment income is subjected to tax first, then 

Savings income- The savings income is subjected to tax next, then 

Dividends income- The dividends are subjected to tax next, then 

Income from sale of assets- The taxable income from capital assets will be taxed



               
Basic Rate bracket will now be extended to: £32,000 + (£960/ 0.8) = £33,200

Interest from ISA’s are not taxed

Interest received will need to be grossed up, but dividends will no longer be 
grossed up

Thomas will be entitled to the full personal allowance of £11,000, since his taxable income is less than £100,000




Totals
Non-Investment
Savings
Dividends
Capital Gains

£
£
£
£
£
Employment income
43,000
43,000



Interest (£1900/0.8)
  2,375

2,375


Dividends
  1,683


1,683

Capital gains
20,100



20,100
Total income
67,158
43,000
2,375
1,683
20,100
Personal Allowance
(11,000)
(11,000)



Taxable income
56,158
32,000
2,375
1,683
20,100


This means that the first item to be taxed will be £32,000 and then the next £1,200 from savings income will be taxed to make up the extended basic rate bracket (remember the basic rate has been extended from £32,000 to £33,200 due to the gift aid donations). The rest of the taxable income will be taxed at the applicable higher rate based on the type of income.

Tax liability computation:


£

£
Taxable employment income
32,000
£32,000 @ 20%
6,400.00

Interest

  1,200
£500 @ 0%
   NIL
£700 @ 20%
140.00
Sub-total
33,200


Interest (£2,375-£1,200)
  1,175
£1,175 @ 40%
   470.00
Dividends
  1,683
£1,683 < £5,000
   NIL
Capital gains tax
20,100
£20,100 @ 20%
4,020.00
Taxable income (same as above)
56,158


Total tax liability


11,030.00












You will notice the interest is split into three lines in the table above. This is because the 
savings income is the next type of income to be taxed and we need to use up the extended 20% tax bracket of £33,200, which the taxable employment income doesn’t cover this bracket in full; so the balance is covered in the savings income. The tax free savings interest of £500 for higher rate tax payers has been accounted for; hence the savings income has been split as £500 which is exempt and then £700 which is then taxed at 20%, while the remaining savings income of £1,175 is taxed at 40%.

The dividends received from 2016/17 will no longer be grossed up and the first £5,000 dividends received will not be taxed, so there is no tax on the dividends received by Thomas because it is less than £5,000.

The table above shows that Thomas will be due to pay tax of £11,030 for 2016/17; remember this tax year has just started and the tax return will be due by 31/01/2018.


We have an article in the last edition of this magazine which shows that this person would be due to have paid £13,548.75 in 2015/16 if he earned the same income. Please feel free to compare the two tax years and identify the differences in the thresholds and tax computations.


Yours Sincerely,
The Friendly Team

The Training Place of Excellence Limited

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