# Personal tax interactive worksheet Income tax computations

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Olivia Crolla AAT Student

Personal tax interactive worksheet
Income tax computations
Based on the provisions of the Finance Act 2012
It will come as no surprise that the ability to calculate an individual’s income tax liability for a tax year is a key skill of any tax professional.
In this module we’ll look at the key points in computing an individual’s income and tax liability for a tax year, and then we’ll work through a detailed example. Finally we’ll give you the opportunity to attempt a practice question.
Remember that you are provided with tax tables in the Personal tax assessment. These tables will give you data to help you put your answer together.
Here’s an extract from the 2012/13 Tax Tables showing the income tax thresholds, bands and personal allowances.

Tax rates and bands %

Basic rate

20

Higher rate

40

50

£ first 34,370 to 150,000 over 150,000

Savings income is taxed at 10%, 20% and 50%. (10% applies to a maximum of £2,710 of savings income only where non-savings income is below this limit.) Dividends are taxed at 10%, 32.5% and 42.5%.

Personal allowances £

Personal allowance

8,105

Age allowance – ages 65 to 74

10,500

Age allowance – over 75

10,660

Income limit for age allowance

25,400

Key points
1. It is very important you become familiar with the taxable income pro-forma. Once you have become used to the pro-forma, you will be a lot more confident in answering income tax computation questions.
2. Set out below is an example pro-forma:

Pro-forma computation of taxable income

£

Earned income

Employed income - receipts basis

X

Self-employed income – current year basis

X

Investment income

Savings income - receipts basis

X

X

Property rental income – receivable basis

X

___

Total income

X

Less reliefs (For example, self-employed losses)

(X)

___

Net income

X

Less Personal Allowance (PA)

(X)

___

Taxable income

X

===

Worked example
Sue had the following income in the 2012/13 tax year:

£39,000 (PAYE tax deducted £6,200) £800
£1,800

Calculate Sue’s taxable income and income tax payable for the 2012/13 tax year.

Let’s see how to answer this question in simple steps.

Step 1 – Build the taxable income computation

Hint: Remember that taxable income should always be shown gross in the computation. Bank and building society interest is usually received after deduction of tax at 20% whilst dividends are received net of a notional 10% tax credit.

Using the pro-forma shown earlier, we have the following computation:

Sue: Taxable income for 2012/13
Earned income Employed income
Investment income Savings income (£800*100/80) Dividends received (£1,800*100/90)
Total income Less Personal Allowance (PA)
Taxable income

£
39,000
1,000 2,000 ___ 42,000 (8,105) ___ 33,895 ===

Step 2 – Calculate the income tax liability

We first need to deal with the non-savings income, followed by the savings income (excluding dividend income) and finally the dividend income.

Hint: The personal allowance is first deducted from the non-savings income then savings income (excluding dividend income) and lastly from the dividend income.

Non-savings income: (£39,000 - £8,105) x 20% Savings income: £1,000 x 20% Dividend income: £2,000 x 10% Income tax liability

£6,179 £200 £100 £6,479

Hint: Remember that dividend income is taxed at 10% in the basic rate tax band.

Step 3 – Calculate the income tax payable

Once you have calculated the income tax liability, to reach the income tax payable all you need to do is deduct the tax credit on dividends and then the tax deducted at source.

Income tax liability

£6,479

Less: Tax credit on dividends

£(100)

Less: Income tax deducted at source (£6,200 + £200)

£(6,400)

Income tax repayable

£21

Practice question

Kumar had the following income in the 2012/13 tax year:

Gross salary

£30,000 (tax deducted £4,450)

£19,200

£270

Calculate Kumar’s taxable income and income tax payable for the 2012/13 tax year. We’ve set out the calculation in steps to help you.

When you’ve attempted each step, you can check your calculation by clicking on the button to reveal the solution before moving onto the next step.

Step 1 – Build the taxable income computation Click to display/hide the solution. Solution
Kumar: Taxable income for 2012/13 Earned income Employed income Investment income
x SDaivvidinegnsdisncreocmeeive(£d1(9£,227000**110000//9800))
Total income Less Personal Allowance (PA) Taxable income
Step 2 – Calculate the income tax liability Click to display/hide the solution. Solution
Non-savings income (£30,000 - £8,105) = £21,895 x 20% Savings income Firstly, the balance of the 20% band is used: (£34,370– £21,895) = £12,475 x 20%
x
Then, the balance is taxed at 40%: (£24,000 - £12,475) x 40% Dividend income £300 x 32.5% Income tax liability

£ 30,000 24,000
300 ___ 54,300 (8,105) _____ 46,195 =====
£4,379
£2,495
£4,610
£98 £11,582

Step 3 – Calculate the income tax payable Click to display/hide the solution. Solution

Income tax liability Less: Tax credit on dividends Less: Income tax deducted at source (£4,450 + £24,000 x 20/100) Income tax payable

£11,582 £(30)
£(9,250) £2,302