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Pay as you earn

Nuffield Free-Standing Mathematics Activity. Pay as you earn. In this activity you will work out how much income tax typical workers pay. Income tax 2012 - 2013. Income tax is paid on ‘taxable income’ above a certain level. How to calculate income tax.

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Pay as you earn

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  1. Nuffield Free-Standing Mathematics Activity Pay as you earn

  2. In this activity you will work out how much income tax typical workers pay.

  3. Income tax 2012 - 2013 Income tax is paid on ‘taxable income’ above a certain level. How to calculate income tax Taxable income = annual income – personal tax allowance Basic Rate:20% on the first £34 370 of taxable income Higher Rate:40% on taxable income between £34 370 and £150 000 Additional Rate50% on any taxable income above £150 000

  4. Example Katie earns £400 per week. Her personal tax allowance is £8105. To calculate the income tax Katie will pay: Think aboutWhat needs to be done first? Katie’s annual income = £400  52 = £20 800 Taxable income = £20 800 – £8105 = £12 695 Think aboutWhat methods could you use to work out 20%? Income Tax = 20% of £12 695 = £2539 per annum

  5. Example Liam earns £58 600 per annum. His personal tax allowance is £8105. To calculate the income tax Liam will pay: Taxable income = £58 600 – £8105 Think aboutWhat needs to be done first? = £50 495 Tax at basic rate = 20% of £34 370 = £6874 Tax at higher rate = 40% of (£50 495 – £34 370) = 40% of £16 125 = £6450 Think aboutWhat income tax will Liam pay each month? Total income tax = £6874 + £6450 = £13 324 per annum

  6. Question 1 Sam earns £2275 per month. His personal tax allowance is £8105. Sam’s annual income = £2275  12 = £27 300 Taxable income = £27 300 – £8105 = £19 195 = 20% of £19 195 Income tax at the basic rate = £3839 per annum

  7. Question 2 Meera earns £79 800 per annum. His personal tax allowance is £8105. Taxable income = £79 800 – £8105 = £71 695 Income tax at basic rate = 20% of £34 370 = £6874 Income tax at higher rate = 40% of (£71 695 – £34 370) = 40% of £37 325 = £14 930 Total income tax = £6874 + £14 930 = £21 804 per annum

  8. Pay as you earn At the end of the activity • Does a person who earns £30 000 per year pay twice as much tax as someone who earns £15 000 per year? • Sketch a graph of income tax against taxable income. • How much do you need to earn before you become a higher rate tax payer? • Sketch a graph of income tax against annual earningsfor earnings up to £100 000.

  9. Income tax on £30 000 Think aboutWhat do you need to assume? Taxable income = £30 000 – £8105 = £21 895 Tax at basic rate = 20% of £21 895 = £4379 Income tax on £15 000 Taxable income = £15 000 – £8105 = £6895 Tax at basic rate = 20% of £6895 = £1379

  10. Graph of income tax against taxable income Income tax £53 126 Think aboutis income tax proportional to taxable income? £6874 £0 Taxable income £150 000 £34 370

  11. Graph of income tax against annual earnings Income tax Think aboutHow does the steepness of each line segment relate to the tax rates? £29 884 £6874 £100 000 £8105 £42 475 £0 Annual earnings

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