E1.101E Income tax calculation for individuals—income tax rates
The income tax calculation for individuals is prescribed by the steps in ITA 2007, s 23 and is discussed in detail in E1.101B.
Step 1 of the income tax calculation involves identifying the amount of component income (eg employment income, self-employment income, savings income and dividend income) that is taxable in the tax year. At Step 2, deductions are made from either component income or total income, depending on the underlying rules for the reliefs. Examples of Step 2 reliefs are trading losses, property business losses and qualifying loan interest, see E1.101C. Allowances such as the personal allowance are deducted at Step 3.
The commentary below concerns Step 4 of the income tax calculation, where the tax bands and rates are applied to the individual's income for the tax year.
In terms of the later stages of the calculation, at Step 5 these amounts are added together to give the total tax liability for the year. To find the amount of tax payable or repayable in relation to the tax year, any tax reducers (such as enterprise investment scheme income tax relief and foreign tax credits) are deducted at Step 6 of the calculation, any additional tax, such as the annual allowance charge, is added at Step 7 and any tax already paid in relation to the tax year is deducted. See E1.102 for a discussion of Step 6 tax reducers and see E1.101B for a discussion of Step 7 additional tax and tax already