Contents

Introduction and historical note
How to work out income tax
Tables and rates
Working examples of calculating the tax
Obligation by Agent or Tenant to deduct basic rate tax from rental income
Mortgage interest on the property in the case of Republic of Ireland Investors who own UK property
Double taxation agreement as it affects Republic of Ireland investors

Introduction and historical note

Approximately 28% of the UK Government's revenue is collected from income tax.  Yet income tax is a relatively new way of collecting tax.  This may seem strange to some because an appropriately structured income tax system is the fairest way of taxing the general population. The concept is much older than its introduction.  The Chinese Emperor Wang Mang introduced an income tax in the year 10AD levying 10% on the profits of professionals and skilled labour.  This was not an income tax in the modern sense.  For income tax of the general population to work, you need a trusted and orderly society as well as a good system of record keeping.  The first nation to properly implement income tax was Britain.  The innovation was driven by necessity.  In December 1798, William Pitt (the younger) introduced income tax out of need to finance the increasingly costly war against Napoleon and France.  The first tax rate was 10% on the total income of the taxpayer from all sources above £60, with reductions on income up to £200.  The first income tax applied to Great Britain but not Ireland.

Moving to the 21st century, income tax is now a very sophisticated and complex tax. Paradoxically, in its basic form it is still a simple tax to understand.  On this website, we show here the basic tables and rates explain how to work out tax and give some working examples.  Quite obviously, income tax is a vast subject and if you are researching it, you may wish to visit the Inland Revenue Website by clicking here.  However, Property Law is our specialist area and we have also set out on this page some information on income tax which would be of use to property investors, particularly those based in the Republic of Ireland.

How to work out income tax

The following procedure is how to work out your tax if all of the income is earned.  If there are savings or dividends involved as well as earned income, it could be more complicated.  Before you start, know the tax year in which the income is earned and stick with the tables for that particular year.

(i)    Total up all the allowances available and deduct them from the total income for the tax year.  If the result is less than zero, there is no tax to pay.  If it is above zero, this is the amount of your taxable income.  
(ii)    Deduct from your taxable income the upper limit in the starting rate band. If there is anything left over (we call that "A"), keep A to one side and go to
(iii)   If there is nothing left over, the tax payable is the whole taxable income applied at the starting rate band rate.  Multiply the earned starting rate by the taxable income. The result of this is the amount of tax you pay. 
(iii)   If you are left with A from the calculation in (ii) above, you keep in mind that all of your first slice of income is taxed at the starting rate.  The first piece of your tax is therefore the earned starting rate multiplied by the maximum figure in the starting rate band.  We call the result of that multiplication "B". Keep B to one side.
(iv)   Work out the difference between the lower and the upper limit of the basic rate band. We call that "C".  Deduct C from A.  If there is anything left over, go to (v)  If there is nothing left over, multiply the earned basic rate by A.  Your answer we call "D".  The tax payable is B + D. 
(v)    If there was something left over when you deducted C from A under (iv) above, the amount left over, we call "E".  Keep E to one side.  Before going onto the next stage, multiply the basic rate by C. Your answer is all of the amount which you can tax at the earned basic rate.  We call that figure "F". Keep F to one side.
(vi)   Multiply E by the earned higher rate.  Your answer is G.  The tax payable is B+F+G

Well done if you can follow that!  Confused?  We have set out below an example and hope that this will be clearer to you when you have seen it. 

 Note: For people born before 1934, there may also be allowances which reduce the amount of tax payable.  We have not published these details here. 

Tables and Rates

(a)        Income Tax Bands  

 Note:  Savings starting rate for £2008-9 still exists.  The band is still 0-£2230 and the tax is still 10%

(b)        Personal Allowances

 The following table shows the personal allowances available.  If the allowance is available and the income is below the allowance, there is no income tax to pay. 

 Note: We have not published married couples allowance (which reduces tax – not taxable income) and which is only available to the very elderly.  We have not published either the allowances relating to special tax shelters.

 (c)        Tax rates

 (i)         The normal rates (which apply to everybody except trusts) 

 (ii)        Rates involving Trusts

 Tax bands are not relevant 

Working example of calculating the tax

Mary is aged 40 and is working as a supermarket manager.  She is not disabled.  Her salary from her job is £45,000 per annum during the tax year 2007-8.  She has no other form of income.

(i)    Ascertain the allowances.  She has a personal allowance of £5225.  Deduct from her annual income the personal allowance to ascertain the taxable income.  The taxable income is £39,775          (45,000 minus £5225 = £39,775)
(ii)   Work out the first slice of tax at the standard rate.  This is 10% of £2,230 which is £223  (1). 
(iii)  The next slice of tax is at the basic rate.  The basic rate band for the year 2007-8 is £32,370       (£34,600 minus £2230 = £32,370)
The first 2,230 of the income has been taxed at the standard rate so we deduct that from the taxable income and that leaves us £37,545.        (£39,775 minus 2230 = £37,545)
The figure £37,545 exceeds the maximum taxable in the basic rate band.  We now work out the tax for the basic rate band.
This is 22% of £32,370 which is £7121.40.  The Revenue does not deal in fractions of a pound so the second figure we keep to one side is £7121 (2)
(iv)  So far, we have worked out the tax on £34,600 of Mary's taxable income.  The remainder is £3375      (£39,775 minus £34,600 = £3375)
£3375 is taxed at the higher rate.  The total higher rate tax is 40% of £3375 which is £1,350 (3)
(v)   The tax on the different portions of the taxable income are now added together.  This is (223+7121+1350=8694)
The tax payable by Mary is £8,694

Note that in the year 2008-9 this example would be simpler as there is no longer a starting rate band.

Obligation by Agent or Tenant to deduct basic rate tax from rental income
 

Under UK law, a letting agent or (where there is no letting agent) the tenant is obliged to deduct from any rental payable to the landlord tax on the rent at the basic rate and send it to the Inland Revenue.  UK law obliges a letting agent or where there is no letting agent the tenant to deduct tax from the rental payment and pay it directly to the Inland Revenue. The landlord is basically only entitled to 78% of the rent.  However, the Landlord now has a tax credit of 22%.  If he is a higher rate taxpayer, he can use this to offset his final tax liability.  The arrangement is usually inconvenient as it takes away control.  The position is even more inconvenient if the Landlord has to apply for a rebate or if the Landlord is domiciled abroad, such as in the Republic of Ireland. 

That inconvenience can be alleviated if the Landlord is registered with the Revenue.  In doing so, the Landlord can obtain certification that he is dealing with his tax affairs directly with the revenue.  Once the Agent or the Tenant receives proof of this, they are no longer required to deduct the 22%.

Mortgage interest on the property in the case of Republic of Ireland Investors who own UK property

(i)  All Mortgage interests or loan interests (but capital repayments) obtained is tax deductible in both the UK and Ireland

(ii) It is not a requirement that the mortgage money borrowed be borrowed in the UK.   Interest paid to an ROI Bank on a loan or mortgage for UK property is deductible against the rental income for UK Tax purposes

Double taxation agreement as it affects Republic of Ireland investors

If you are domiciled in the Republic of Ireland, the Double taxation agreement will affect you as follows:

• Though you are obliged to account to the UK Inland Revenue, any rental income must also be disclosed to the Revenue Commissioners in the Republic of Ireland and tax is recalculated in the Republic of Ireland applying Irish Tax Rules and Rates.

• The tax already paid in the UK is allowed as a credit against the Irish tax liability. 

• The amount of credit for UK Tax cannot exceed the Irish Tax charged on that income

• If the UK tax liability is higher than the Irish tax liability arising on the UK rental income, the excess cannot be offset against income sources that arise in the Republic of Ireland.  For example (assuming a rate of £1.00 = €1.50) if your UK rental income tax liability is £2,000 (€3,000) and your Irish Tax liability is €2,500 on your UK Rental Income, you are entitled to offset €2,500 of UK tax paid (but no more) against the €2500 Irish tax liability so that you have nothing further to pay in the Republic of Ireland BUT the surplus €500  cannot be used as a tax credit for other Irish sources of income

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