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 what you’re meant to pay. Estimate your Income Tax before it can sting you.

The fines are extensive for a missed deadline or – even worse – paying less and launching an investigation.

GoSimpleTax are here to assist. We’ve written a guide to help you figure out the tax you’ll be liable for. From self-employed expenses to National Insurance (NI) and income scales, the answer will reveal itself if you use this as a reference for your own tax situation…

Determine your earning status

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

The percentages for each are:

Earnings per yearIncome Tax*
£11,850-£46,35020%
£46,351-£150,00040%
£150,001+45%

You may notice that anything below £11,850 isn’t taxed at all. That’s because you are given a Personal Allowance. The first £11,849 per year does not carry a tax bill. It’s applicable to every taxpayer in the UK, even for additional rate earners.

Furthermore, you don’t pay the same amount of Income Tax on the total of your earnings. So, for instance, a contractor earning £50,000 would pay 0% on the initial £11,849, 20% on anything between that and £46,350, and 40% on the rest.

In this case, the final bill would be £8,359.80, comprised of £6,900.20 (basic rate) and £1,459.60 (higher rate).

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.

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

The first is that NI only kicks in once you’re earning more than £162 a week. It’ll be charged at 12% of net pay from £162 to £892. The minimum monthly figure, then, is £77.76, whilst the highest at this level is £428.16.

As soon as you’re earning £893 per week or more, NI falls to 2%. So, the worker in our previous example – the contractor that earns £50,000 a year – would pay £428.16 a month for the 12% charge and £11.89 for 2% on the remaining earnings.

Consider additional benefits

Whilst the Personal Allowance applies to everyone, 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 2018/19, 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:

Earnings per yearDividend tax*
£11,850-£46,3507.5%
£46,351-£150,00032.5%
£150,001+38.1%

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 £1,190.

You can save up to £238 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 £50,000 worker may spend £6,000 a year on critical business running costs and investments. They can deduct it from the earning amount, leaving £46,000 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 for 14 days and transform your tax behaviour for the better…

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