Taxable Income Explained

In this tax guide we explain taxable income and explain how taxable income is calculated in the UK. It is important that you know how to calculate your taxable income as this figure is used to calculate the amount of income tax you pay in 2019. The taxable income amount becomes particularly important if you are completing a self assessment tax return in 2019, we cover the 2019 self-assessment in detail in our dedicated self-assessment section.

What is Taxable Income?

How to Calculate Taxable Income in the UK. This image shows the UK flag and information relating to the tax formula used to calculate taxable income in the UK

Taxable income is the portion of your income on which you pay income tax. In the UK, income tax is calculated using Personal Income tax Rates and Thresholds and they are published for each tax year by HMRC. The Personal Income Tax Rates and Thresholds also contain details on specific allowances which apply to income and therefore shape how taxable income is calculated. It is important to check that you always use the latest personal allowances, rates and thresholds for 2019 as using old rates or forecast tax rates will produce an incorrect tax calculation.

How to Calculate Taxable Income in the UK

Personal income is calculated by calculating your annual income (you may have to estimate this if you are self-employed and calculating your income tax commitments to keep the money in the bank until you need to pay your tax after your accountant completes your tax return). You then need to identify which allowances you are entitled too. Most people in the UK qualify for an annual personal allowance, this is an amount of income that can be earned before income tax is paid. Some people do not qualify for the Personal Allowance because they earn above a certain threshold or are exempt from personal allowance due to other specific UK tax laws.

The next step is to calculate the annual amount of payments into schemes which are deducted from tax before income tax is calculated. These include payments into pension schemes (both private and company pension schemes are subject to tax relief, ensure you claim for your personal pension savings when filing your self-assessment tax return in 2019, particularly if you are self employed.)

The final step to calculating taxable income is to calculate the amount of National Insurance you pay, it is worth noting there are a number of ways you can legally pay less National Insurance. For those who are self employed, you may need to consider Employers National Insurance Contributions (ENIC's). Although ENIC's do not influence the taxable income calculation, it is important for them to be factored in as a salary cost as failing to do so leave you with circa 13% of additional payroll costs per annum. This is however unusual with the PAYE system which deducts employee and employer income tax on each wage payment as a proportion of estimated annual income before tax.

Having calculated all the various elements, you can now calculate your taxable income using the taxable income formula:

TI = GI - PS - IT - TE - NI

Where:

  • TI = Taxable Income
  • GI = Gross Income
  • PS = Personal Allowance(s
  • IT = Income Tax Free Schemes
  • TE = Tax Exempt Expenses
  • NI = National Insurance Contributions

Do I need to Know my Taxable Income?

It's an interesting question and the answer is no, you don't need to know your taxable income and the fact is that a significant number of UK Taxpayers don't know their taxable income as the PAYE system has made paying income tax a seamless experience for most.

Whilst PAYE has made income tax payments easier (and much faster for the treasury), it does not make knowing and being able to calculate your taxable income any less important, in fact, it could be argued it makes it more important. The less knowledge and understanding a taxpayer has about the UK tax system and tax laws, the more likely they are to pay too much tax. It is in your financial interests to ensure that you understand the tax system that you are duty bound to. If you overpay your tax, it is upto you to claim for that overpaid tax from HMRC and worth noting that any overpaid tax will have accumulated interest, if you are not sure, it may be worth looking into whether you are due a tax rebate..

Summary

In this guide to taxable income we have reviewed what taxable income, how taxable income is calculated and why it is important, as a UK taxpayer, to know your taxable income. We hope that the information in this tax guide has improved your knowledge of taxable income and how it is calculated. Remember, taxable income is fully illustrated, including full calculations in the 2019 Tax Calculator.