Question

Salim, a self-employed plumber, received the following income in 2017/2018:

Building society interest £ 4,200

Dividends from a UK company ​£ 3,800

Trading Income ​​​​ ​£ 80,000

He paid allowable interest of £3,000 on 15 August 2017/2018.

The following tax rates are applicable during the fiscal year.

BAND

CATEGORY

TAX RATE

OTHER INCOME

Basic rate

0 - £37,400

20%

Higher rate

37401-150,000

40%

SAVING INCOME

Starting rate

0 - £2,440

10%

Basic rate

2441-37400

20%

Higher rate

37401-150,000

40%

DIVIDEND INCOME

Starting rate and Basic rate

0 - £37,400

10%

Higher rate

37401-150,000

32.5%

Required:

Calculate Abdullah’s income tax liability for 2017/2018.

Answer 1

Salim has 3 categories of income:
1. Building society interest of £ 4,200 - comes in saving income
2. Dividends from a UK company of ​£ 3,800 - comes in dividend income
3. Trading Income ​​​​of ​£ 80,000 - comes in other income (from which £3000 deduction is allowed)

Computation taxes of each category of income:

1. For savings income the tax rates for the year 2017/2018 are
    0 to £2,440 - 10%
    Then next 2441-37400: 20%
    Then next 37401-150,000: 40%

    Computation of the Tax liability on saving income:
                Income   Rate   Calculation       Tax
    First   £2,440   10%   £2440*10/100   £244
    Next    £1760      20%   £1760*20/100   £352
    Total   £4200      -    -      £596

    Thus the tax on savings income is £596

2. For dividend the tax ratesfor the year 2017/2018 are
    0 - £37,400 - 10%
    Then next 37401-150,000 - 32.5%

    Computation of the Tax liability on dividend income:
              Income   Rate   Calculation        Tax
    First   £3,800   10%   £3800*10/100   £380
    Total   £3,800    -       -       £380

Thus the tax on dividend income is £380

3. From other income allowable interest of £3000 can be deducted
    Thus the net other income is £80,000 - £3,000 = £77,000

    For the other income the tax rates for the year 2017/2018 are

    0 - £37,400 - 20%
    Then next 37401-150,000: 40%

    Computation of the Tax liability on other income:
               Income       Rate   Calculation           Tax
    First   £37,400       20%   £37,400*20/100   £7,480
    Next    £39,600       40%   £39,600*40/100   £15,840
    Total   £77,000       -         -      £23,320

Thus the tax on other income is £23320

Total tax liability is the sum total of tax on savings income, dividend income and other income.
Total tax liability for 2017/2018 = £596 + £380 + £23,320 = £24,296

Note: The incomes were given for Salim but the question mentioned was to calculate Abdullah’s income tax liability