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I've recently been trying to calculate different take home amounts from different salaries, and have ended up getting confused over how the different tax brackets work. If I try to calculate the amount for a salary below the higher tax bracket (£35k - 40%), then I don't have any troubles, so I'm assuming I'm misunderstanding what happens exactly after this, and further, tax brackets.

Simple example

Working out take-home amount for £45,000.

Currently, UK Income Tax rates are:

£0 - £7,475         0%  
£7,476 - £35,000    20%  
£35,001 - £150,000  40%  
£150,000+           50%

So, from what I know, on a £45,000 salary:

(45,000 - 35,000) * 0.4
    = 4000
(35,000 - 7475) * 0.2
    = 27525 * 0.2 = 5505

Meaning £9,505 to be taken off as tax. Correct?

But when I use The Salary Calculator site, it tells me that £8,010 is income tax.

Can anyone tell me what the correct figure should be, and where I'm going wrong in my calculations? Also, if you could point me in the direction of some decent tutorials/articles on this sort of stuff, that would be most welcome!

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  • Your math looks right to me... – Sean W. May 17 '11 at 15:39
  • Nevermind, Ganesh Sittampalam nailed it in his answer. – Sean W. May 17 '11 at 17:25
  • Wow, thanks for sharing the UK tax brackets. It gives a great perspective on the US tax brackets. – Stainsor May 18 '11 at 14:23
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The taxable bands are on top of the personal allowance (though by the 50% band, the personal allowance has reduced to 0 so there's no difference).

So the right calculation is

(45000 - 42475) * 0.4
    = 1010
(42475 - 7475) * 0.2
    = 7000

making £8,010 as expected.

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  • So at the 50% band, if working out for £200,000, the calculation would be: (200000 - 192475) * 0.5? Or (200000 - 157475) * 0.5? I'm not sure what you mean by the personal allowance being reduced to 0... – Jaymz May 18 '11 at 11:33
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    No, (200000 - 150000) * 0.5. The bands are on top of the personal allowance, but not cumulative. If you check footnote 1 in the HMRC link you gave, it describes how the personal allowance is reduced for income over 100K. The actual impact of this is that there's a band from 100-115K where the real marginal tax rate is 60%, but they don't present it that way. – GS - Apologise to Monica♦ May 18 '11 at 12:20
  • Aaahhh, I see. Thanks for the explanation - seems a lot more complicated than it should be at first, but it makes sense now. Thanks. – Jaymz May 18 '11 at 12:44

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