Among the various class of taxes lies the Income Tax, which is the amount of tax imposed over the individual or an entity where both these are classified as tax payers. The tax determination is carried upon the value of profits or income generated by an individual or the organization in terms of their profits or incomes which is then multiplied with a determined tax rate to assess the tax liability. The variation exists over the tax rate as the taxable income fluctuates.
The total taxable income for an individual or an entity comprises of the non-savings income, saving income and dividend income with each based on their own characteristics and tax treatments, which is then aggregated and charged tax over the total income. All of these incomes except the non-savings income are grossed up before the calculation of tax is computed to determine the net tax liability. The savings income is grossed up by 100/80 whereas the dividend income is grossed up by 100/90.
Non-savings income comprises of the employment income, profits from trades, professional and vocational income along with the property income whereas the saving income consists of the income generated in form of the interest whether the interest is paid on Bank and Building Societies, Government securities or company loan stock. The dividend income incorporates the amount of dividend earned over the shares with certain exemptions existing for each of these categories. These exempt incomes includes scholarships, betting and gaming income including premium bond prizes, interest on National Security and Investments Certificates, Social security and child benefits or the income from Individual Savings Accounts (ISAs).
The deductible interest is also deducted from the total income to obtain the net income on which the tax liability would be calculated where the interest could be on the loan for buying machinery or plant, to acquire a business venture or a proportion of the business, obtaining control in an employee-controlled business, investing in the partnership or to invest in the co-operative.
Moving further towards the tax liability, we deduct the personal allowance from the total income which is the amount of allowance entitled to an individual as free from the charge of tax by the tax authorities. The net taxable income is then derived which is correspondingly multiplied with their respective rates as based on their thresholds and income type to get the tax liability. Lastly, the tax liability diminishes due to the tax reducers which include the Venture Capital Trust or Seeds Enterprise Investment Schemes.
It should also be remembered that the spouses, civil partners and children are separate taxpayers and should not be exploited by mixing up their treatments or utilizing the personal allowance for the children.
Lastly, the residential status or the overseas aspect is also to be assessed through the Tiers provided as per the tax regulations which then aid to determine whether the tax liability exist as resident or overseas individual.