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I'm trying to get a handle on my household finances for the first time in my life. Part of that is producing a nice spreadsheet which I'm going to use to track expenditure, debt burndown etc. and plan a budget.

As part of this, I want to be able to put my gross salary in and calculate my income tax and national insurance. Obviously, in the UK we have marginal income tax so different proportions of my pay are taxed at different rates. This is quite a difficult calculation to do in excel IMHO.

As such, I'd like to calculate what my effective overall tax rate is, then I can just deduct that from my salary.

Any ideas on what the calculation for this would be?

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  • Using the government's online tool and a range of incomes in the middle tax bracket, I've created a linear regression of y=0-.553x+8150.91 which isn't terrible but it's no good for any other brackets Jun 16 at 11:13
  • will this guide help? In honesty, there are so many variables that you may be better off for budgeting purposes alone to take a view on your monthly nett income and include in your spreadsheet, an estimated monthly figure and an actual which updates through the remaining months to provide an estimation. I did similar for business planning purposes for some years and it was surprisingly accurate.
    – 24601
    Jun 16 at 12:11
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    Is there a reason not to just use the net figure from your payslip? Jun 16 at 13:31
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    This video covers how to do it in Excel if your skills are up to it: youtube.com/watch?v=WR3o2Dw7u7E Jun 16 at 13:32
  • I don't understand this question. The only way to calculate the "effective rate" for a given gross salary is first to calculate the actual tax for that salary. Given marginal tax, the effective rate will vary with gross salary. So what would this number actually help you with? Jun 16 at 16:07

2 Answers 2

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Most people will look at income tax, national insurance, and possibly dividend tax (as a small business owner). Calculating these from your gross income is slightly complicated, but not too difficult. The only way to calculate your tax rate is by calculating the tax and dividing by your income. If you have the great idea to calculate the tax by multiplying the tax rate by your income, you end up calculating the tax, dividing by your income, and multiplying by your income. But let’s do the income tax first.

There is a threshold: it is currently £12,570. If your income is above £100,000 the threshold is reduced by one pound for every two pound additional income until it is zero.

Income tax falls in four brackets: None, low (20%), high (40%) and very high (45%). Income up to the tax threshold is no tax. The next £37,700 is low tax, then up to £150,000 is high tax, and above £150,000 is very high.

Dividend tax (important if you own a small business): You add the dividends to the four tax brackets until they are filled up. Then you pay nothing (below the threshold), 8.75% (low), 33.75% (high) and 39.35% (very high) dividend tax, except the first £2,000 that you would pay tax for is free.

National insurance: From July, you pay 13.25% on income from £12,570 to £50,270, and 3.25% for income above £50,270.

You add these numbers to get your total tax payments. Divide by your income to get your tax rate. For your marginal tax rate, that’s the tax rate in the highest tax bracket you fall into, same with NI, plus 20% for income from £100,000 to £125,140 because you lose your tax threshold goes down, and you may lose money for your first pounds of dividends possibly moving into a higher tax bracket.

It’s probably easier to just calculate your tax for income X and income X+100 and the difference is your marginal tax rate at income X.

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  • Tiny nit: OP's profile indicates they are based in Scotland. While they should have indicated that more clearly in their question, I believe this already good answer can be further improved by including a note on Scottish income tax rates for 2022/23.
    – B.Liu
    Jun 20 at 8:45
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HMRC provide a web page to allow you to do this calculation. It takes into account Scottish income tax and allows you to provide your tax code in case you have changes from the default.

HMRC Link

A little tip for the first page, it asks for your pay and how often you get paid. The number value should be aligned with the frequency. Don't enter your annual pay, and then select the radio button for being paid monthly. You can enter you annual pay and then select "yearly".

If you want the calculation itself to be embedded in your own spreadsheet, here's a handy YouTube guide to doing that via VLookup Tables.

YouTube Guide

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