Salary Income Tax and National Insurance Calculations 2015-16 Financial Year

There is a fabulous quote by HMRC, “Tax doesn’t have to be taxing”.  My goodness what an understatement.  I’ve always wondered how much different salary bands paid in both Income Tax, and, National Insurance, so I decided to develop a small Excel spreadsheet to undertake some calculations, for different salary bands.  In all honesty there are a myriad of online calculators that work out these figures for you, but I decided to go back to first principles to see if I could figure it out.  I have limited my calculations to just Income Tax and National Insurance, and hence,  the calculations do not take into account the effect of other salary related deductions for example, pension contributions.  I found it difficult enough without adding in more complexity.  I have based the calculations on the 2015/16 rates.

Income Tax

If you earn less than £100,000, each person is entitled to a tax free allowance of £10,600.  Any earnings between £10,600 and £42,385 are taxed at 20%; earnings between £42,386 and £150,000 are taxed at 40%; and, finally earnings over £150,000 are taxed at 45%.  In addition if you earn over £100,000, your personal allowance reduces £1 for every £2 of earnings, for example a person earning £110,000, will only be entitled to a tax free personal allowance of £5,600.  This loss of personal allowance is taxed at the 40% rate.

National Insurance

There are a myriad of National Insurance rates.  I have taken a simple example, but different rules apply to people under 21, whether you are contracted in or out for the second state pension, etc.  In my examples you do not pay National Insurance on earnings upto £8,060; earnings between £8,061 and £42,385 are taxed at 12%; with earnings above £42,385 at 2%.

I have taken all the above and calculated the amount of Income Tax, and, National Insurance due on various salary amounts of £15,000, £45,000, £150,000, and, a £1,000,000.  I have also added the total rate of tax for each calculation.

Salary				15,000			45,000			150,000			1,000,000
			Rate		Tax			Tax			Tax			Tax
Personal Allowance	0	10600	0%	15,000	0		10,600	0		10,600	0		10,600	0
Basic Rate	10,600	42385	20%	4,400	880		31,785	6,357		31,785	6,357		31,785	6,357
Higher Rate	42,386	150000	40%	0	0		2,615	1,046		107,615	43,046		-42,385	-16,954
Additional Rate	150,000	+	45%	0	0		0	0		0	0		1,000,000	450,000
PA Adjustment				0	0		0	0		10,600	4,240		10,600	4,240
Total Income Tax					880			7,403			53,643			443,643
Primary threshold	0	8060	0%	8,060	0		8,060	0		8,060	0		8,060	0
	8,061	42385	12%	6,940	833		34,325	4,119		34,325	4,119		34,325	4,119
Above UEL	42,386	+	2%	0	0		2,615	52		107,615	2,152		957,615	19,152
Total Nat. Insur.					833			4,171			6,271			23,271
Total Tax					1,713			11,574			59,914			466,914
Total Tax Rate					11.42%			25.72%			39.94%			46.69%

Well the good news is that you can see from the above examples that the tax system is progressive. The total tax rate increase from 11% to 46%, although I am led to believe that there is anomaly for income between £100,000 and £120,000, due to the reduction in the personal allowance. There is a lot of debate around whether reducing the additional tax rate from 45%, would increase the amount of tax collected. I can see that if you are paying out 46% of your income in tax you may be quite upset, however, I do believe in the first instance we need to close all the loopholes that are being used to avoid paying income tax. This in itself will increase the tax collected, and, then the rates can be adjusted to for the benefit of everyone. I would love to see a tax calculation for a high earner, so if you have one feel free to forward it. As always the figures are just provided for information purposes. I am not a tax professional so do not rely on the information provided. Please seek your own professional advice.