How Is The MSE Tax Calculator Used In The UK?

Income tax calculations are helpful in forecasting future finances; however, one might be required to keep minute details of their income(s) and expenses for an accurate estimate. Through this blog post, we aim to focus on tax calculations using the MSE link, while exploring details of income tax calculations and deductions in the UK.

How Is The MSE Tax Calculator Used In The UK?

To use the MSE calculator for estimating your annual income tax, you will have to keep the below information available with you so that it may be entered into the online calculator for a correct estimate:

gross income (pretax income before any deductions)
the year of tax
your age
your tax code
the amount of student loan to be repaid (if any)
any other allowances or deductions

Once you enter the required information on the website, you will be asked to click on the “calculate” button which will give you an accurate estimate of the income tax deduction that you can expect for the given tax term.

Alternatively, you can also check your income tax calculations on the HM Revenue and Customs website. If you are employed in more than one job, you will have to conduct multiple calculations to have an estimate for income tax deductions for each source of earnings.

However, in case of any of the following conditions, you will not be able to conduct an online calculation for your income tax calculation:

the applicant is not a pay as you earn (PAYE) taxpayer
the applicant’s sole source of income is either through self-employment or state benefits
the applicant contributes to a pension scheme through their employer
the applicant is currently repaying a student loan

The UK government has announced that with effect from April 2022, National Insurance will increase by 1.25 percentage points to cater to increased social care costs. Therefore, any calculations made before this time must account for this increased deduction as well when someone is calculating their tax details. However, the updates are not yet available on the MSE tax calculator website

How Are Tax Codes Calculated?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year.

For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.

The following steps are followed by the authorities while assigning tax codes:

Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.

Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.

Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.

This link can help you with details of what each tax code means.

If you don’t know your tax code, you can find it through any of the below-listed documents:

Payslip
P45 form
P60
PAYE coding notice
Pension advice slip
HMRC website

How Are Tax Identification Numbers Used In The UK?

Tax identification numbers are used to track and monitor the tax accounts of individuals. Although the term TIN Number is not specifically used in the UK in its strictest sense, the HMRC issues two TIN-like numbers to members of the public. The purpose and use of these are described below:

The Unique Tax Payer Reference (UTR): This is a ten-digit set of numbers issued by the HMRC to individuals and businesses who qualify for paying tax returns in the UK. You will find this number on the front page of the tax return (form SA100 or CT600). In addition to this, you will find it on a “Notice to complete Tax Return” (form SA316 or CT603) or a Statement of Account. It is also printed next to the headings of “Tax Reference”, “UTR” or “Official Use”; but the appearance and terms that are used will depend on the type of document issued.

The National Insurance Number (NINO): This includes two letters which are followed by six numbers and then only one of the letters between A, B, C and D. Individuals residing in the UK will be issued a NINO once they are 16 years of age. They will be informed by the Department for Work and Pensions (DWP) or the HMRC. If you are an employee, you will find this number on your payslip as well as on a Statement of Account issued by HMRC. It links individuals to their records of national insurance contributions, tax payments, student loans as well as social security benefits.

How Much Income Tax Do I Have To Pay?

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

0 per cent income tax when income is up to £12,570
20 per cent income tax when income is between £12,571 and £50,270
40 per cent income tax when income is between £50,271 and £150,000
45 per cent income tax when income is above £150,001

If you are self-employed, you are required to file a self-employed tax return to pay your taxes through a self-assessment.

How Can I Calculate Bonus Tax?

You can calculate the amount of tax that you pay on your salary bonus in the same way that the tax on your monthly income is calculated. Therefore, salaried individuals pay income tax and national insurance on a bonus as they would on a regular income. The reason for this is that when employees receive a bonus in the UK, it is treated in the same way as their income when it comes to tax calculations.

This means that if you earn £30,000 a year and are classified as a basic rate taxpayer, you will be paying 20% tax and 12% national insurance on incomes in excess of £12,570. If you get a bonus of £3,000, you will still be paying 20% tax and 12% national insurance on this as well.

Sometimes the bonus that you earn may raise the level of your tax bracket which means that incomes (salary plus bonus) below a certain threshold will be taxed at a separate rate, while those in excess of the minimum limit will be taxed at a higher rate.

For instance, you earn $45,000 a year and are considered as a basic rate taxpayer, paying 20% tax and 12% national insurance on incomes in excess of £12,570. However, you receive a bonus of £10,000 making your annual income £55,000; taking your annual earnings to a higher tax bracket. This means that high incomes and larger bonuses increase the tax deductions.

In order to be able to calculate your annual bonus tax, you need to be able to learn about income tax rates and the band that your annual income may be classified under.

Which Incomes Are Tax-Free?

Incomes derived from any of the following sources are considered to be tax-free in the UK:

Transport costs of an employee’s (and their immediate family) relocation for work in the UK
Winnings from games, pool betting, lotteries or competitions with prizes
Long service employee awards (certain limitations apply)
Individual savings account amounting to £20,000
Incomes such as interest or dividends arising from savings accounts
Pensions paid to war widows and dependents
Social security and state benefits include maternity allowance, employment and support allowance, attendance allowance, child tax credit and housing benefit.

What Are The Different Taxes In The UK?

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol.

Direct taxes are automatically deducted from your wages, income or pension before you receive them. This is termed as Pay As You Earn. Anyone earning equal to or less than £12,750 is not eligible for PAYE as the amount is considered under the law as an individual’s allowance.

Therefore, basic taxes in the UK include the following:

Income Taxes
Property Taxes
Capital Gains
UK Inheritance Taxes
Value Added Tax

These are all progressive taxes; which means that the tax increases with an increase in income.

Conclusion:

To be able to calculate your taxes accurately, not only do you need minute details of your incomes and expenses but also your correct tax code. You will also need to account for any anticipated changes such as the increase in national insurance expected in April 2022. In addition to this, it will also be helpful to be aware of incomes that are not taxed and the details of all applicable taxes as it may help in planning for one’s finances in the near future.

FAQs: How Is The MSE Tax Calculator Used In The UK?

What is the marginal tax rate in the UK?

For the tax term of 2021-22, there are three marginal tax rates applicable in the UK. The basic rate is 20 per cent, the higher rate is 40 per cent and the additional rate is 45 per cent.

How do tax brackets work in the UK?

Incomes below £12,750 in the UK are not taxed. As they continue to rise between £12,571 to £50,270 the applied tax rate is 20 per cent. Similarly, as taxes rise from £50,271 to £150,000 the applicable tax rate is 40 per cent while for incomes above £150,000, the taxation rate is 45 per cent.

How accurate is the tax calculator?

While online tax calculators are a fair estimate of one’s anticipated taxes, they cannot be expected to be a hundred per cent accurate. It is advisable to seek the professional service of an expert who can provide an accurate forecast.

How much can I earn before I pay 40% tax?

Incomes between £50,271 to £150,000 are eligible for a 40% tax rate.

How is UK NI calculated?

National Insurance is calculated on an individual’s gross earnings (these are incomes before tax or pension deductions) that lie above an ‘earnings threshold’. It also takes into account the amount by which an employee’s earnings falls within assigned bands.