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What’s the best way to calculate my taxes?

Whether you’re self-employed, manage a LTD company, or generate additional income through property investments or similar ventures, tax considerations are essential. Taking a proactive approach to taxes ensures you avoid penalties by determining your tax dues and their due dates in advance.
By dedicating time to understanding your tax obligations and how to calculate them, you create a foundation for reduced stress, increased productivity, and improved cash flow. So, how do you calculate your tax, and how can you ensure the accuracy of your calculations?

Firstly, we recognize that managing taxes may not be your favorite task, so our goal is to simplify the process as much as possible. As a result, this guide will walk you through the essentials of tax calculation, including how to understand tax codes, tax brackets, and estimate your taxes from multiple income streams.

Tax doesn’t have to be overwhelming. If you need further support after reading this article, Count offers accessible and affordable assistance.

Tax Calculation Basics in the UK

income tax overview

The UK’s tax system includes various taxes, with the amounts owed varying according to your tax codes and brackets. This complexity often overwhelms newly self-employed individuals and small business owners.

Income Tax Overview

Income tax, as its name implies, is the tax on your income, although not all income is taxable. The calculation of income tax is cumulative, based on your total earnings for the year.

You must pay income tax if you:

  • Are self-employed and earn over £1,000
  • Own and rent out property with earnings exceeding £1,000
  • Received government financial support during the pandemic (detailed list available)
  • Receive a pension
  • Benefit from your employment
  • Earn income from a trust
  • Exceed your savings allowance

National Insurance (NI) contributions, deducted from wages, are based on each payment, not cumulatively. You’re required to pay NI if you:

  • Are employed and earn more than £242 per week
  • Are self-employed and profit more than £11,980 annually

Income tax applies to various income sources and persists into retirement, unlike NI contributions, which cease upon reaching the state pension age.

Understanding Tax Codes and Brackets

revenue


Employers determine the amount of income tax to deduct using tax codes. Simultaneously, your payslip displays your tax code, guiding your employer on how much tax to deduct. This guidance includes whether you qualify for a tax-free Personal Allowance or fall under basic or higher tax rates. Furthermore, Directors of LTD companies also encounter their tax code when they draw a salary. For a thorough understanding of tax codes, you should visit the government’s website.

Moreover, employers have the responsibility to apply tax codes correctly, impacting employees’ net pay. On another note, taxpayers determine tax brackets, which affect self-employed individuals, business owners (for corporation tax), and employees, based on their total earnings.

Lastly, the government sets your Personal Allowance, the earnings threshold before tax is applied, at £12,570 as of 2023, and it may increase under certain conditions. Notably, earnings above £100,000 reduce the Personal Allowance incrementally.

Calculating Dividend Tax

calculating dividend tax

LTD company directors can achieve more tax efficiency by taking a salary below the National Insurance threshold plus dividends. The first £2,000 of dividends are tax-free, and any dividends above this amount are taxed according to your Income Tax band.

Count offers assistance with complex tax issues. Our team of expert accountants can make the process of paying taxes more efficient and less stressful for you. Additionally, we provide a free dividend calculator to help you determine the tax on any dividends.

Estimating Current Year Income Tax

List all your earnings first, considering the tax liabilities for each source of income in relation to your Personal Allowance and any applicable tax reliefs or deductions.

Use the HMRC tax calculator as a helpful tool to estimate your taxes due. For an official calculation, access your SA302 through your Self Assessment account or contact HMRC for submissions by post.

If you are unsure about the accuracy of your tax calculation, consult an accountant or HMRC directly to avoid overpayment or underpayment due to errors or omissions. It is crucial to ensure accuracy from the outset.

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