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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 2013 - 2014. 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 2013 - 2014 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 £32 010 of taxable income Higher Rate:40% on taxable income between £32 010 and £150 000 Additional Rate45% on any taxable income above £150 000

  4. Example Katie earns £400 per week. Her personal tax allowance is £9440. 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 – £9440 = £11 360 Think aboutWhat methods could you use to work out 20%? Income Tax = 20% of £11 360 = £2272 per annum

  5. Example Liam earns £58 600 per annum. His personal tax allowance is £9440. To calculate the income tax Liam will pay: Taxable income = £58 600 – £9440 Think aboutWhat needs to be done first? = £49 160 Tax at basic rate = 20% of £32 010 = £6402 Tax at higher rate = 40% of (£49 160 – £32 010) = 40% of £17 150 = £6860 Think aboutWhat income tax will Liam pay each month? Total income tax = £6860 + £6402 = £13 262 per annum

  6. Question 1 Sam earns £2275 per month. His personal tax allowance is £9440. Sam’s annual income = £2275  12 = £27 300 Taxable income = £27 300 – £9440 = £17 860 = 20% of £17 860 Income tax at the basic rate = £3572 per annum

  7. Question 2 Meera earns £79 800 per annum. Her personal tax allowance is £9440. Taxable income = £79 800 – £9440 = £70 360 Income tax at basic rate = 20% of £32 010 = £6402 Income tax at higher rate = 40% of (£70 360 – £32 010) = 40% of £38 350 = £15 340 Total income tax = £15 340 + £6402 = £21 742 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 – £9440 = £20 560 Tax at basic rate = 20% of £20 560 = £4112 Income tax on £15 000 Taxable income = £15 000 – £9440 = £5560 Tax at basic rate = 20% of £5560 = £1112

  10. Graph of income tax against taxable income Income tax £53 598 Think aboutis income tax proportional to taxable income? £6402 £0 Taxable income £150 000 £32 010

  11. Graph of income tax against annual earnings Income tax Think aboutHow does the steepness of each line segment relate to the tax rates? £29 822 £6402 £100 000 £9440 £41 450 £0 Annual earnings

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