How To Calculate How Much Tax You Owe

When it comes to tax, understanding is everything. Whether you’re self-employed or working elsewhere in a non-PAYE capacity, you absolutely must know how much Income Tax you’re meant to pay. Estimate your Income Tax before it can sting you.

Missed deadlines carry extensive fines or – even worse – can cause HMRC to launch an investigation.
GoSimpleTax is here to help. We’ve written a guide to help you figure out the tax you’ll owe, covering everything from self-employed expenses to National Insurance (NI) and income scales. Like our mobile tax tool, it’s designed to clear up anything you might be liable for.

DETERMINE YOUR EARNING STATUS

Tax percentages rise with income bands – once passed, they’ll take a larger portion of your earnings. There are three bands: basic, higher rate, and additional rate.
The percentages for each are:

You may notice that anything below £12,501 isn’t taxed at all. That’s because you are given a tax free Personal Allowance. The first £12,500 you earn per year does not carry a tax bill. It applies to every taxpayer in the UK, even additional rate earners. However, if you earn over £100,000 then your personal allowance is reduced on a sliding scale, if you earn over £125,000 then you do not get any tax free personal allowance.

Furthermore, you don’t pay the same amount of Income Tax on your total earnings. So, for instance, a sole trader earning £54,000 would pay 0% on the initial £12,500, 20% on anything between that and £50,000, and 40% on the rest.

In this case, the final bill would be £9,099.40, comprised of £7,499.80 (at the basic rate) and £1,599.60 (at the higher rate). Self Assessment tax return software like GoSimpleTax can automatically calculate your taxable income and estimated tax bill based on any income information you input.

USE AN NI SALARY TAX CALCULATOR

We pay National Insurance because it goes towards benefits such as Maternity Allowance and the State Pension. Regular PAYE employees have NI taken from their wages every month.

Sole traders, on the other hand, must pay it themselves through their Self Assessment tax bill. There are two basic rules to how much you pay.

For employees the first is that NI only kicks in once you’re earning more than £183 a week (as of 2020/21). It’ll be charged at 12% of net pay from £183 to £962. The minimum monthly figure, then, is £87.84, whilst the highest at this level is £461.76.

As a sole trader you pay 2 classes of National Insurance. Class 2 of £3.05 per week is paid if you have profits over £6,475 a year and class 4 national insurance of 9% on profits between ,£9,501 and £50,000 and 2% on profits over £50,000 You can include NI declarations in your Self Assessment tax return with GoSimpleTax, for an easier submission straight to HMRC.

CONSIDER ADDITIONAL BENEFITS

Whilst the Personal Allowance applies to most, you may be in line for a couple of further income advantages.

One of these is a dividend payment – something that can only be accessed when you form and lead a limited company. Dividends are a huge plus for tens of thousands of British businesspeople.

Like your direct income, they have an allowance: as of 2020/21, the initial £2,000 you earn is tax exempt.
From there, the tax is lower than typical income. Many business owners split their earnings to a dividend and a wage, so they keep both below a certain tax band. We have another table to demonstrate this:

The cash you ultimately make each month can be cut up anyway you like into wages and dividends. Estimate your Income Tax with dividend rates in mind – they’re a massive advantage for limited companies.

Other tax breaks apply for married couples, with a special allowance granting your spouse (should they earn less than their Personal Allowance limit) the ability to transfer any unused, tax-free portion over to your account – to the maximum tune of £1,250.

You can save up to £250 per year with this method. To qualify, the lower earner has to apply. You’ll then get a special tax code to be used on their Self Assessment.

Add it to your forecast for the current tax period, or backdate your Marriage Allowance up to three years prior to claim a refund on some of what you’ve paid thus far.

TAKE SELF-EMPLOYED EXPENSES INTO ACCOUNT

Don’t forget about expenses – they’re another core means of lowering your bill before a Self Assessment deadline.

Every profession has its own expense list. Some common fees crossover, of course (like the electricity costs for a home office, fuel mileage for business meetings, and industry magazine subscriptions), yet many others are unique to your trade. You need to know exactly what counts and what doesn’t.

By listing the payment evidence for each item, service or training course, you can reduce your total taxable income. For example, our £54,000 sole trader may spend £6,000 a year on critical business running costs and investments. They can deduct it from the earning amount, leaving £48,000 of taxable turnover.

Collecting receipts and bank statements – and ensuring they match – is important if you wish to claim expenses effectively and compliantly. To do so, try GoSimpleTax: the mobile tax tool for freelancers, contractors, SMEs and any independent earner.

You can input data over the course of your financial year and add it your Self Assessment as you go. Additionally, it functions as a salary tax calculator. You’ll see real-time tax figures rise or fall with 100% accuracy.

Try GoSimpleTax for free and transform your tax behaviour for the better.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.