Personal Tax - Intro

For most of us, what we get paid makes up the majority of all the money we ever receive. Understanding what tax we pay on that income is often taken for granted and not really checked or understood - hence I call it “the amazingly ignored”. While we care about money, we appear not to care about money.

Unfortunately, this is quite a complex method getting from income to tax owed. The underlying rules are plentiful and so I have to take you through quite a journey. You will see lots of upside down pyramids, for example:

Personal tax pyramid 1

These try to divide income into what you keep (in the centre) and what you pay in tax (in the outer columns). The obvious point being that the more you earn the higher the percentage paid in tax.  

We are going to cover taxation on earned income then interest income then dividend income. Each has a different treatment and each will have its own “upside down pyramid”. The rates of taxation are given in Earned Income Tax Rates 2011/2012, Interest Income Tax Rates 2011/2012 and  Dividend Income Tax Rates 2011/2012

The upside down pyramid chart is used to check what you ought to be paying on those sources of tax. There are reams of details we have not explained (see out of bounds) but we have to start somewhere . . .

The final term to help with is the personal allowance. At its very core, this is the amount of salary you can earn per year tax free. It does of course get messed about with but that is the essence.

In all these examples we plot gross amounts ie amounts before any tax was paid. If you want to work your own figures out, then in many cases you have received net amounts ie amounts after some tax has been removed. See Net to Gross in the glossary for an explanation.

The best way of explaining this is via a set of examples. For the first example I explain the mechanism in detail. For the other examples you would have to understand that mechanism.

Please note that we use 2011/2012 tax rates as actuals within this section of the website.