How is the computation of tax liability perform in a setup UK?


The working out of income tax is done on the taxable income with the order of non-savings income, followed by savings income and finally the dividend income. The rates of tax along with the charge of child benefit income tax and tax reducers will be a part of the discussion of this blog under the tax setup UK.

Rates of Tax

The computation of the payable income tax is done on the taxable income of an individual, which consists of net income minus the personal allowance or higher personal allowance. The application of the rates of tax is done on the taxable income which also follows the order of non-savings income, followed by the savings income and at last the dividend income.

Starting Rate of Savings Income

There is a rate of tax equal to 10% for the savings income up to £2,790 (the starting rate limit of savings income). This rate is known as the starting rate of savings income.

The starting rate of savings income is only applicable where the savings income falls partly or completely below the starting limit of rate. It should be remembered that the charge of income tax is made on non-savings income first. So, in most of the cases, the non-savings income of an individual will be more than the starting rate limit and the savings income starting rate will not be found on the savings income.

Higher Rate

The higher rate of tax for the years 2013 and 2014 is 40% for the savings and non-savings income. For the dividend income, this rate is 32.5% and the higher rate limit for the years 2013 and 2014 is £150,000.

Basic Rate

The basic rate of tax for the savings and non-savings income both for the years of 2013 and 2014 is 20%, that for dividend income is 10% and the basic rate limit for the years 2013 and 2014 is £32,010.

Additional Rate

For the savings and non-savings income, the additional rate of tax is 45% for the years of 2013 and 2014, 37.5% for dividend income and the additional rate of tax is applicable to taxable income in excess of £150,000.

Charge of Child Benefit Income Tax

There is a charge of income tax for the recovery of child benefit if the recipient or the partner of the recipient has adjusted total income over £50,000 in a year of tax. A charge of income tax is applicable in the case if a taxpayer acquires child benefit (or the child benefit is acquired by the partner) and an adjustment of net income has been made by the taxpayer over £50,000 in a year of tax. The definition of adjusted net income is given in the same way as for the restriction of personal allowance. A partner here can be a civil partner, a spouse or a partner who is unmarried in which case the couple has been living together as though they were civil partners or got into a marriage. The civil partners can be the members of same sex couple which has done its registration in the form of a civil partnership according to the act of civil partnerships 2004.

If the taxpayer has made an adjustment in the net income over £60,000, the charge is then equivalent to the total amount of acquired child benefit.

If the taxpayer has made an adjustment in the net income between £50,000 and £60,000, then the charge is equal to 1% of the child benefit amount for each £100 of net income adjusted in excess of £50,000, the partner with the higher adjusted net income is liable for the charge.

The collection of child benefit income tax charge is done with the help of self-assessment system. This comprises of the requirement for taxpayers for the submission of tax returns, that can be time consuming and expensive. In order to avoid this, the taxpayers can make a choice not to acquire child benefit at all so that the charge of income tax is not applicable.

Reducers of Tax

The reducers of tax result in the reduction on income at a set relief rate. The reducers of tax do not make an effect on income. The reducers of tax are:

  • Investments made in the Venture Capital Trusts (VCTs) and.
  • Investments according to the Seed Enterprise Investment Scheme (SEIS).
  • Investments made according to the Enterprise Investment Scheme (EIS).

Investments made in the above companies may pass for the reduction of tax of up to the lower of:

  • The tax liability of the individual.
  • A percentage of the amount subscribed for the qualification of investments.

As far as the investments in VCTs and under the EIS are considered, the percentage is 30%. For the case of investments according to the SEIS, the percentage is 50%.

Providing Reductions of Tax

The reducers of tax are subtracted during the computation of the income tax liability of an individual. The reduction to zero can only be done to the liability of tax: a repayment cannot be created by a reducer of tax.

Computation of Payable Tax

From the liability of tax, first subtract the credit for tax on dividend income and any income tax incurred at source to occur at payable tax. The repayment for credit for tax on the dividend income cannot be done if it is more than the liability of tax computed till date. The repayment of other tax incurred at source cannot be made.

Steps for the Computation of Personal Tax

  • The first step in the preparation of a computation of personal tax is setting up three columns. One column for savings income, one for non-savings income and one for the income from dividend. The income from various sources should also be added up. The total sum of these is called the total income. Subtract deductible interest and losses of trade for the computation of net income. Subtract the personal allowance or higher personal allowance for the computation of taxable income.
  • The non-savings income should be dealt with first. Any non-savings income up to the basic rate limit of £32,010 is made liable to tax at 20%. The non-savings income between the basic rate limit and the higher rate limit of £150,000 is made subject to tax at a rate of 40%. The taxation of any further non-savings income is done at 45%.
  • Now the dealing of savings income should be considered. In the case if the savings income is below the starting rate limit of £2,790, the taxation is done at the savings income starting rate of 10%. The savings income between the starting rate limit and the basic rate limit of £32,010 is taxed at 20%. Savings income between the basic rate limit and the higher rate limit of £150,000 is made subject to tax at a rate of 40%. The taxation of any further is done at 45%. In majority of the cases, the savings income and the non-savings income can be summed up together and the calculated tax on the total, under the condition that the savings income starting rate is not applicable.
  • Finally, the tax dividend income. The taxation of dividend income is done at 10% in the case if it is less than the basic rate limit of £32,010. The dividend income between the basic rate limit and the higher rate limit of £150,000 is made subject to tax at 32.5%. The taxation of any further dividend income is done at a rate of 37.5%.
  • The amounts of tax are added together.
  • Once the computation of tax has been done, subtract any available reducers of tax, such as EIS.
  • Then you should calculate the amount of any charge of child benefit income tax and add to the remaining tax after the 6th step. The resultant figure is the liability of income tax.
  • As a next step, subtract the credit of tax on dividends. Although deductible, this credit of tax cannot be paid again if it is more than the liability of tax computed so far.
  • As a final step, subtract the deducted tax at source from the savings income and any PAYE. The repayment of these amounts can be done to the extent that they exceed the liability of income tax.

Calculation of Due Additional Tax

Higher rate taxpayers make a payment of an effective rate of 25% on their income from dividends. Additional rate taxpayer makes the payment of an effective rate of 30.555% on their income dividend.

In most of the cases, a taxpayer has more interest in having a look at the after return of tax from a specific transaction or investment.

Taxation of Income as Top Slice of Income

The taxation of one type of income is done after the dividend income, so that the dividend income does not always remain the top slice of income. This is the taxable part of partly exempt payments on the end of an employment. So someone with the pay of £21,450 (making use of the personal allowance of £9,440 and £12,010 of basic rate band), £20,000 of dividend income and a termination payment of £50,000 will have the taxation of dividend income at 10%, rather than 32.5% as the income from dividends will be within the basic rate band. The taxation of the termination payment will be done completely at 40% as it is more than the basic rate limit of £32,010.

Families

Civil partners, spouses and children are all distinct taxpayers according to the tax formation of Great Britain. Special rules apply to stop parents from the exploitation of the personal allowance of a child.

Civil Partners and Spouses

The taxation of the spouses and the civil partners is done as two different people. Every civil partner or spouse has an entitlement to a personal allowance or a personal allowance related to the age on his or her own income and age.

Case of Joint Property


In the case when the civil partners or the spouses own property that generates income, in a joint form, it is supposed that they have an equal entitlement of the shares of the income. This is not applicable to the income acquired from the shares held in the close companies house set up after new company formation UK.

If the civil partners or the spouses do not have an entitlement to equal shares in the property that generates income (except the shares in the close companies house set up after new company formation UK) they may make a declaration to the HMRC in a joint form, making the specification of the proportion to which each of them has an entitlement. The use of these proportions is made for the taxation of each of them in a separate manner, in respect of the income occurring on or after the declaration date. For the purposes of capital gains tax, the consideration of this underlying beneficial ownership is done.

Consider the example of Mr. Buckle who was born in 1965 is a higher rate taxpayer who is the owner of a rental property producing £23,000 of the property income on which he makes the payment of tax at 40%, giving him a liability of tax of £9,200. His spouse doesn’t have any income.

If he makes the transfer of only 5% of the asset to his wife, their treatment will be done as jointly having the ownership of the property and the taxation of each will be done on 50% of the income. The tax liability of Mr. Buckle will be lessened to £4,600.

Minor Children

The income which is transferred directly by a parent to their minor child, or is acquired from the capital hence transferred, remains income of the parent for the purposes of tax. However, this is applicable only to parents and not to any other relatives. Even where the involvement of a parent is done, the income of child is not treated as the parent’s if it is not more than £100 (gross) a year.

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