It doesn’t matter if you’re self-employed, run a LTD company, or even just make income on the side from property investments or something similar – you still have to think about tax. Being proactive about tax keeps you out of hot water, which means working out how much tax to pay and when it’s due ahead of time.
By taking the time to understand your tax commitments and how to calculate them, you’re setting the foundation for less stress, increased productivity, and improved cash flow. So, how do you work out your tax? and how can you be sure your calculations are accurate?
We know tax isn’t something you’ll be excited to take care of, so we’re making it as straightforward as possible. This guide covers the basics of tax calculation, including tax codes, tax brackets, and estimating your tax when you have multiple income streams.
Tax shouldn’t be daunting, but if you still need support after reading this article, get in touch with Crunch for accessible, affordable support.
Understanding the Basics of Tax Calculation
In the UK, there are several different kinds of tax, with the amounts changing depending on your tax codes and brackets. It’s no wonder that newly self-employed people, and those running small businesses, struggle to get their heads around the minefield that is tax.
Firstly, let’s look at income tax. As the name suggests, this is the tax you pay on your income, but you don’t necessarily have to pay tax on all income. Income tax is calculated on a cumulative basis, meaning that it depends on your overall year-to-date earnings.
You will have to pay income tax if you:
- Are self-employed and earn more than £1,000
- Own and rent out a property and earn more than £1,000
- Received one or multiple types of financial support from the government during the pandemic (see the full list here).
- Receive a pension
- Gain benefits from your job
- Earn income from a trust
- Receive savings over your savings allowance
National Insurance contributions are also deducted from your wages, but they are calculated on a payment basis (rather than cumulative). You have to pay NI if you are:
- Employed and earn more than £242 a week
- Self-employed and make more than £11,980 in profit a year
You will likely pay income tax on multiple income streams and will continue to pay it when you retire. This differs from NI liability, which ends when you reach state pension age.
Understanding tax codes and tax brackets
So, where do tax codes come into all of this? Well, an employer will use a tax code to calculate how much income tax you will pay. You may have noticed your tax code on your payslip – it’s usually a number followed by a letter suffix. This code informs your employer how to calculate your tax. For example, if you are entitled to a tax-free Personal Allowance or pay a basic or higher rate on this particular income. You’ll also have a tax code on your payslip if you’re a Director of a LTD business and issuing yourself a salary from it. For a full list of tax codes and what they mean, visit the government website.
If you’re an employer, you may have employees on different tax codes depending on their individual circumstances. Getting this right is important, as it will impact how much take-home pay they receive. To ensure your tax codes are correct and payroll is running smoothly, get support from the experts at Crunch. Our smart software, cloud accounting, and automation will help you to save time and become more efficient when it comes to organising tax for yourself and your employees.
Like tax codes, tax brackets are determined by the person paying the tax. This could be you, as a self-employed person, or a business owner if it’s corporation tax. Tax brackets also apply to those in employment, as the amount of tax you pay will depend on overall earnings.
You will have a Personal Allowance, which is the amount you can earn before paying tax. This is currently £12,570 (2023) and could be higher, depending on your circumstances. If you earn more than £100,000, however, then your Personal Allowance is less, going down by £1 for every £2 you earn over that amount.
In the UK (not including Scotland, which has different income tax bands), the basic Income Tax bands look like this:
Up to £12,570
£12,571 to £50,270
£50,271 to £150,000
Calculating tax on dividends
If you’re a director of a LTD company, it may be more efficient to take a salary of below the National Insurance Primary Threshold (currently £12,570). You can then take additional income from the business in the form of dividends, which are taxed differently.
Every tax year, you have a dividend allowance of £2,000, and then additional dividends are taxed depending on your Income Tax band. The easiest way to calculate your tax band is to add your dividend income to your other income. Remember, you might pay tax at more than one rate.
Dividend tax bands
As we’ve covered in this guide so far, calculating even the simplest tax obligation can be complex. That’s where Crunch comes in. Speak to our team of expert accountants who are ready to help make paying your tax more efficient and less stressful, or keep reading to learn more. We also have a free dividend calculator for you to work out how much dividend tax you need to pay on any investments.
How to estimate your Income Tax for the current year (2023/2024)
The first step towards accurately calculating your income tax is to write a list of all of your earnings. You may have income from multiple sources, such as your employment, a side venture, a pension, savings, benefits, and other places.
Then, you’ll need to look at the different tax liabilities for each income. How much do you earn from each income stream, and where does this sit with regards to your Personal Allowance? Do you have any tax relief or deductions, such as Marriage Allowance?
HMRC provides a tax calculator on their website, which is a useful first step towards determining what you owe and when it’s due.
At Crunch, we also have a Personal Tax Estimator, which can help you to plan for the tax owed on your personal income across multiple streams, including self-employment, dividends, and savings - you can try our free calculator here.
If your tax situation is complicated, it’s worth inputting all your data into a spreadsheet.
Understanding and verifying your HMRC tax calculation
To get your HMRC tax calculation, you need to login into your Self Assessment account and head to “More Self Assessment details.” Here you will find your SA302, which is your official tax calculation from HMRC.
If you submit your tax return via post, you will need to call HMRC on 0300 200 3310 to get your tax overview.
If you have any doubts as to the accuracy of your tax calculation, speak to your accountant or get in touch with HMRC directly. Errors may occur if you have submitted information incorrectly or missed any details on your earnings. If you do make a mistake, then you may over or underpay on your tax, so it’s essential that you get it right the first time.
Frequently asked questions about tax calculation
Hopefully, this guide has answered some of your tax questions. If you’re still confused or need help with tax calculations, get in touch with Crunch, or check out the FAQs below to see if we’ve got your query covered.
How do I calculate my self-assessment tax?
Your tax is determined by your total income, you can estimate your tax with our Personal Tax Estimator. To get an accurate calculation of exactly how much you owe, you’ll need to compile and submit a tax return.
You have to register for Self Assessment if you are:
- Self-employed and earn more than £1,000
- A partner in a business partnership
- Earn more than £100,000
To learn more about paying your self-assessment tax, read our comprehensive guide.
How do I find my HMRC tax calculation?
You can find your HMRC tax calculation, also known as SA302, online at the government website. You’ll need to be registered for Self Assessment and have submitted your tax return.
How much tax do you pay in the UK?
The amount of tax you pay in the UK depends on a number of factors, including how much you earn, where you are located (England, Scotland, Wales or Northern Ireland), whether you receive any benefits and how you earn your money (self-employment, employment, dividends, etc.)
To find out exactly how much tax you’ll have to pay in the UK, you’ll need to work out your total earnings and determine whether you’re required to pay income tax, National Insurance, and any other obligations. In addition, you’ll need to find out whether you’re eligible for any tax deductions or relief.
Do you pay tax on pensions?
You’ll have to pay income tax on your pension if the total amount adds up to more than your Personal Allowance. This includes State Pension, any private pensions, and any other earnings or taxable benefits.
How do I find out my tax code?
You’ll find your tax code on your payslip, P60, or on your personal tax account. If you’re full-time self-employed, you won’t have a tax code. If in doubt, speak to your accountant or employer.
Get help working out your tax from Crunch
When you choose Crunch, we equip you with plenty of straightforward ways to take the headache out of tax. Whether it's through our onsite tax calculators, exploring our concise business guides, or seeking further help by speaking to our expert accountants directly, we're on hand to help. With support from our team and cutting-edge accounting software, we’ll help to automate your finances, including tax calculations. We understand that time is money in business, so save time and take a proactive approach to tax today. Get in touch with Crunch to start making your tax easier.