Proforma income tax calculation

Produced by Tolley
  • (Updated for Budget 2021)

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Proforma income tax calculation
  • Computation of total income (Step 1)
  • Deductions from total income (Step 2)
  • Personal allowances (Step 3)
  • Calculate the tax liability (Step 4 and 5)
  • Top-sliced income
  • Tax bands
  • Extension of the tax bands
  • Scottish taxpayers (2017/18 onwards)
  • Welsh taxpayers (2019/20 onwards)
  • More...

Proforma income tax calculation

The proforma for calculating an individual’s tax liability is very important. The method for arriving at the tax due is set out step by step in ITA 2007, s 23. This is illustrated in the attached proforma and is explained in words below.

The tax software will calculate the tax due automatically based on the entries made on the tax return; however, it is important to know the principles of the income tax computation so that you can check that it is correct.

Computation of total income (Step 1)

Firstly, it is necessary to identify the amount(s) of income on which the individual is taxable in the tax year, using the rules applicable for each source of income. Each type of income is a component of the total tax liability.

The following are all components of total income:

  1. savings income

  2. dividend income

  3. trading income *

  4. partnership income *

  5. employment income *

  6. pension income *

  7. property income *

  8. miscellaneous income *

  9. trust income

* These sources of income are collectively known as non-savings income for the purpose of calculating the tax liability. ‘Non-savings income’ is income which is not savings income or dividend income.

Trust income may or may not be non-savings income, depending on the type of trust and the type of income. See the Interest in possession beneficiaries, Discretionary trust beneficiaries and Settlor-interested trusts guidance notes.

Remember, where tax has been deducted at source (eg on salary) it is the gross amount of the income that is included in the income tax computation.

Foreign income tends to be taxed in the same way as its source. For example, foreign bank interest is taxable as savings income and foreign pension income is taxable as pension income. The exception to this is where the taxpayer has accessed the remittance basis of assessment, in which case they are only taxable on the foreign income which they remit (brings) to the UK in the tax year and this remitted income is treated

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