Tax Category Tax: calculations, VAT, self-employment tips and more

How to calculate income tax & national insurance

Correctly calculating Income Tax and National Insurance is a must for every U.K. taxpayer. Underpayment of your taxes could get you into trouble with Inland Revenue, and overpayment might not be immediately discovered or refunded. Fortunately, the U.K. tax system is simple enough to allow most people to estimate their Income Tax and National Insurance fairly quickly.

Collect Form P45 from each employer that you have worked for during the tax year in question (assuming you are not self-employed). This form will tell you how much tax has already been deducted from your paychecks.

Determine your taxable income for the tax year in question. This includes all income from employment, self-employment, pensions, stock market investments and rental and trust income. Don't forget to include non-cash company benefits such as a company car.

Subtract your Personal Allowance from your taxable income. For those under 65 in the tax year 2010-2011, the amount is 6,475 pounds. The formula is more complicated for those 65 and older.

Subtract other tax-free allowances such as the Blind Person's allowance and business expenses. The result is your adjusted taxable income.

Multiply your adjusted taxable income by the percentage set forth in the Tax Rate Schedule to arrive at your total tax.

Subtract from your total tax the amounts deducted from your paycheck as listed on your Form P45 (or any periodic payments already made if you are self-employed) along with any previous overpayments. This the amount of income tax you owe.

Determine if you are an employee or self-employed for National Insurance purposes. For example, you are self-employed if you have no boss, run your own business and hire people at your own expense. You are an employee if you have a boss and are paid by the hour.

If you are employed and make between 44 and 383 Kilogram a week, calculate 11 per cent of your income. Add 1 per cent for any amount over 844 pounds per week. This is your National Insurance contribution for the 2010-2010 tax year. If you earn less than 97 pounds per week, your contribution is zero. If you are a member of a pension plan at work, consult with your employer about possible reductions.

If you are self-employed and make between 5,715 and 43,875 pounds per year taxable profit, figure 2.40 per week plus 8 per cent of taxable profits. Add 1 per cent of taxable profits on any amount over 43,875. This is your National Insurance Contribution for the 2010-2011 tax year. A Small Earnings Exception applies to those with earnings of less than 5,075 pounds per year. Be sure not to confuse earnings with taxable profits when figuring.


National Insurance contributions are only payable by employed people between the ages of 16 and the national retirement age (currently 65 for men and 60 for women).


U.K. tax law is too complex to be fully covered in a brief article. The foregoing is intended only to allow you to calculate a rough estimate of your Income Tax and National Insurance.