May, 2012

How Much Tax Should I Pay in 2012?

If you’re interested in finding out how much tax you should be paying in 2012, you’ve come to the right place.  In our easy to understand guide, we look at the tax allowances and tax rates for 2012 to help you work out what tax you should be paying.  Keep reading to learn more.

Income Tax allowances in 2012

Your Personal Allowance is the amount of income you are allowed to earn each year before you start paying tax.  The vast majority of taxpayers are eligible for the basic Personal Allowance.

In the tax year 2012/13, the basic Personal Allowance for people under the age of 65 is £8,105.  This means that you don’t pay any tax on the first £8,105 of your taxable income.

If you’re aged 65-74, your basic Personal Allowance is £10,500.  It is £10,660 if you’re aged 75 or over.

If you are married and living together, were married before 5 December 2005 and at least one spouse was born before 6 April 1935, you can claim Married Couple’s Allowance.  And, if you’re certified blind and are on a local authority register of blind persons you can claim Blind Person’s Allowance.  These are in addition to your Personal Allowance.

Income Tax rates in 2012

There are several different tax bands and rates depending on your income.  The question “How much tax should I pay in 2012?” will therefore depend very much on your specific personal circumstances such as the tax allowances that you are eligible for and where your income comes from.

Typically, you’ll pay the following tax in 2012:

  • 0% on the first £8,105 that you earn (this is your Personal Allowance)
  • 20% on the next £34,370 that you earn
  • 40% on the next £115,630 that you earn
  • 50% on anything over this

How to work out what tax you pay

In order to work out exactly what tax you will pay in 2012, you need to know your taxable income and your tax allowances.  Your PAYE Coding Notice should explain your tax allowances.  In order to work out your taxable income, remember to include both your salary/earnings and any other income such as investment or rental income.

An example

The example below assumes that you earn £20,000 and that you’re eligible for the basic Personal Allowance.

If you’re eligible for the basic Personal Allowance you won’t pay any tax on the first £8,105 of your earnings.  You’ll then pay 20% tax on the remainder.

This would be 20% of £11,895 (£20,000 minus £8,105) = £2,379.  You’d pay £2,379 income tax – around 12% of your income.

Another example

In this example, we’ll assume that you owe tax from a previous tax year and so your Personal Allowance is just £5,500.  We’ll also assume your taxable income is £45,000 in 2012.

Here, you’d pay no tax on the first £5,500 of your earnings.

You would then pay 20% tax on the next £34,370 of your earnings.  This would be £6,874.

You’d then pay 40% tax on the remainder of your earnings (£45,000 minus £5,500 minus £34,370 = £5,130).  This would be £2,052 (40% of £5,130).

Your total tax bill would be £6,874 plus £2,052 = £8,926 – around 20% of your earnings.