How is UK Tax Calculated? Philosophy and Significance

How To Decipher HMRC’s Legal Letter?

UK Tax; Philosophy and History

For centuries one of the key functions of Parliament has been raising money, originally at the request of the monarch but more recently, in order to support the machinery of the Government.

An important development in how Parliament scrutinises the Executive was the creation of Departmental Select Committees in the House of Commons in 1979, following the recommendations of a Procedure Select Committee, set up in 1976.

One such committee is the House of Commons Treasury Select Committee, which examines the how UK Tax is calculated, expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority. Together with the House of Commons and House of Lords, which scrutinises the annual Budget statement, Parliament continues to play a full role in holding to account the Government’s proposals for taxation.

Taxation has played a fundamental part in the evolution of British society. Parliament has authorised all kinds of different taxes and systems of collecting it, though the tax everyone is familiar with today is income tax.

Today income tax is a ‘direct’ tax paid by almost every working adult in the UK. There are also ‘indirect’ taxes on a wide range of commodities and consumables.

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services. For example, the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing. But to pay the tax one must first learn how UK Tax is calculated.


How is UK Tax Calculated?

How To Determine Taxable Income

Calculating UK Tax is simple if one understands a few basics. Before moving to the UK Tax calculator on, lets discuss how to plan for it.


Determine Filing Status

First, determine your filing status. If you are married, your best option is usually to file jointly. If you file your taxes jointly with your spouse, you are required to add all your income together to determine the total. You can combine your deductions, and you pay your taxes jointly.

Even if you are married, you can decide to file separately. When you file separately, it means each of you adds up their income, and pay taxes separately. You have to divide your deductions. Both of you can’t use the same expenses to calculate separate deductions. If you are not married, you file as single. In some cases, single people and those that are considered unmarried for tax purposes may file as head of household.


Consider Types of Income

The IRS requires you to report all your income. This includes side income, interest income, and other income on top of what you might have earned from wages and tips. All of this income is reported directly on Form 1040 or Schedule 1.

Your total gross income is determined by adding all types of income that you have received during the calendar/tax year. There are different lines on the front of the Form 1040 and Schedule 1 for different types of income, but by the time you get to the end, you will have added it all up.

If you file separately instead, you will need to be careful about which income belongs on yours and your spouse’s return. You will need to verify whose name is on which assets and report incomes accordingly. You will also need good records dividing up deductions since you both won’t be able to use the same expenses when you calculate your deductions. The UK calculator gives u all these options clearly.


Calculate Deductions and Taxable Income

Once you have reported all your income on Form 1040 and Schedule 1, you will then have the chance to adjust your income on Schedule 1.

Using Schedule 1, you may be able to reduce your income with the help of contributions to a traditional IRA, student loan interest, self-employment deductions, and other expenses. Adding these up on line 22 of Schedule 1 gives you total adjustments. Your Adjusted Gross Income (AGI) is then calculated by subtracting the adjustments from your total income.

Your AGI is the next step in figuring out your taxable income. You then subtract certain deductions from your AGI. The resulting amount is the taxable income on which your taxes are calculated. Typically, you can take either the standard deduction or itemized deductions. If you’re a business owner, you may also be eligible for qualified business income deductions.

After you figure your tax, you may be eligible for certain credits that lower your tax liability, such as the child tax credit and education credits.

If you are married, it’s possible to run calculations more than one way to decide what would result in the lowest household tax liability. After your plan is complete you can now head on to the UK Tax calculator to complete your return.


Help with UK Tax Calculations

If you would rather not go it alone, Lanop is always here to help. Whether you make an appointment with one of our expert tax practitioners or choose one of our online tax filing products, like our UK Tax Calculator, we’ll help you determine taxable income as part of preparing your return, as well as filing it on your behalf, so you don’t have to dive in the complexities of how UK Tax is calculated and filed. Plus, you can always count on Lanop to help get back the most money possible.


UK Tax Calculations (UK Tax Calculator)

UK Tax calculations are straight forward, and our UK Tax Calculator makes it even easier. But be careful, the devil’s in the detail. That is why Lanop is at your service.

Income Tax is charged on most types of income. The most common way is on your wages and salary from work.

But you also need to pay Income Tax on:

  1. profits, if you run a business
  2. interest and dividends from savings and investments
  3. rent, if you are a landlord.

You don’t usually pay Income Tax on all your taxable income. This is because most people qualify for one or more allowances.

An allowance is an amount of otherwise taxable income that you can earn each year, without paying tax on it. The UK Tax calculator allows for this.


UK Tax Calculators – What shall I pay?


Allowance or threshold 2022/23 2021/22
Personal Allowance £12,570 £12,570
Income threshold for Personal Allowance £100,000 £100,000
Marriage Allowance £1,260 £1,260
Personal Savings Allowance £1,000 / £500 / £0 £1,000 / £500 / £0
Dividend Tax Allowance £2,000 £2,000

If you earn above the threshold, your Personal Allowance is reduced by £1 for every £2 you earn above it, until it reaches £0.

20% of the Marriage Allowance is given as a reduction in your tax bill. This is unlike the Personal Allowance and Age Allowance, which are deducted from your taxable income before tax is worked out).

Personal Savings Allowance is £1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.


What is a Personal Allowance?

Allowances are an important part of how UK Tax is calculated. Everyone, including students, has something called a Personal Allowance. This is the amount of money you’re allowed to earn each year before you start paying Income Tax.

For the 2022/23 tax year, the Personal Allowance is £12,570. If you earn less than this, you usually won’t have to pay any income tax.

Your Personal Allowance might be bigger if you claim Marriage Allowance or Blind Person’s Allowance. Or it might be smaller if you’re a high earner or if you owe tax from a previous tax year.

Check the most up-to-date Personal Allowance figures on Our UK Tax calculators are always up to date for your convenience.


The Personal Allowance if you earn over £100,000

If you earn over £100,000, the figure of £12,570 will be reduced by £1 for every £2 earned over the £100,000 limit. If you earn £125,000, you pay Income Tax on everything and there’s no tax-free allowance.


How much Income Tax will I pay?

One needs to know How UK Tax is calculated before answering this question.

Income Tax is made up of different bands. This means as your income increases, so does the amount of Income Tax you pay.

The table below shows the rates of Income Tax depending on how much you earn.


UK Tax Calculator with Example

Rates of Income Tax


Income Income Tax bands 2022/23
£0 to £12,570 0%
£12,571 to £50,270 Basic rate: 20%
£50,271 to £150,000 Higher rate: 40%
Over £150,000 Additional rate: 45%

Remember, you don’t pay Income Tax at the same rate on all your income. You only pay the rate of Income Tax on your income in the bracket. For example, if you earn £52,000 a year, the Income Tax you’ll pay works out like this:

Calculations on earning £52,000 per annum


Income Income Tax band Tax you pay
Up to £12,570 0% No income tax on first £12,570
Between £12,571 and £50,270 20% 20% Income Tax on your next £37,500 income

(£50,270 – £12,570 = £37,700)

Between £50,271 and £150,000 40% 40% on the final £1,730 of income

(£52,000 – £50,270 = £1,730)

Over £150,000 45% No Income Tax paid at this rate


Calculate your income tax and National Insurance contributions for the current year on our UK Tax calculator

If you live in Wales, your Income Tax rates are now set by the Welsh Government. At the moment, these are the same as for England and Northern Ireland for the 2022/23 tax year.

If you live in Scotland, your Income Tax rates are set by the Scottish Government and are different.

Get the R38 form to reclaim tax from


National Insurance

Income Tax is not the only deduction made to your income.

You might also make National Insurance contributions. These helps to build your entitlement to certain state benefits, including State Pension and Maternity Allowance.


Tax if you’re self-employed

If you’re self-employed, Income Tax is paid at the same rate as everyone else. But you pay it a year in arrears through Self-Assessment. Lanop is always Here  if you don’t know how UK Tax is calculated.


Need More Help?

Just fill in your details here if you need help in dealing effectively with HMRC Tax Investigations. Checks or wish to discuss some other matters.   

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Aurangzaib Chawla

At Lanop, I am providing my services as the Managing Partner and Tax Specialist. My expertise includes helping medium and small-scale businesses in their accountancy and legal requirements, business start-up support, strategic review, payroll system review and implementation, VAT and tax compliance to cloud accounting. I am also an expert in financial reporting, identifying and monitoring risks, strategic business development, client retention, market acquisition and deals closure by carefully planning my sales cycle. 

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