Pay as you earn
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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

Nuffield Free-Standing Mathematics Activity

Pay as you earn


Pay as you earn

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


Income tax 2012 2013

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


Example

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


Example1

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


Pay as you earn

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


Question 2

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


Pay as you earn

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.


Pay as you earn

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


Pay as you earn

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


Pay as you earn

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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