Personal Tax Calc - Example 1

This example is for a salary of £30,000 (gross) and interest of £1,000 ie basic rate tax payer with some interest income:

Personal tax pyramid 2

1. Draw the salary income (£30,000 gross) on the earned income pyramid. The lowest layer is filled, with the first £7,475 of income on which no tax is paid (as this is the personal tax allowance). The remaining income £22,525 (ie £30,000 - £7,475) all fits into the second layer. This is taxed at 20% (represented by the red area of this layer). Tax owed on salary is £4,505 (ie 20% of £22,525).

2. Gross up the interest income (see net to gross) yielding £1,250 of gross interest income (ie £1,000 * 1.25). The gross interest income is drawn on the interest income pyramid. We add the £1,250 to the second layer, starting at the level the earned income pyramid finished. I will explain why that is key below. As the full £1,250 fits into the second layer it is taxed at 20%. Hence £250 is owed as interest income tax (£1,250 * 20%). As this £250 was taken before you were paid, you do not owe any further tax - the £1,000 is the correct payment after tax.  

If we had added the interest income to the bottom of the interest income pyramid, then it would have been taxed at 0%. That would not be the case as the personal allowance was utilised by the salary income.

The rule to follow being to draw earned income first, then interest income and then dividend income (which we did not include in the example above). The interest income is drawn starting at the level the earned income finished. Likewise, the dividend income starts at the level the interest income finished at.