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© Nuffield Foundation 2011 Nuffield Free-Standing Mathematics Activity Pay as you earn

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. - PowerPoint PPT Presentation

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Page 1: Pay as you earn

© Nuffield Foundation 2011

Nuffield Free-Standing Mathematics Activity

Pay as you earn

Page 2: Pay as you earn

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

Page 3: Pay as you earn

Income tax 2012 - 2013Income tax is paid on ‘taxable income’ above a certain level.

Taxable income = annual income – personal tax allowance

Basic Rate:20% on the first £34 370 of taxable income

How to calculate income tax

Higher Rate:40% on taxable income between £34 370 and £150 000

Additional Rate50% on any taxable income above £150 000

Page 4: Pay as you earn

Example Katie earns £400 per week. Her personal tax allowance is £8105.

Taxable income

To calculate the income tax Katie will pay:

Katie’s annual income

Income Tax

Think aboutWhat needs to be done first?

Think aboutWhat methods could you use to work out 20%?

= £400 52

= £20 800

= 20% of £12 695

= £20 800 – £8105

= £12 695

= £2539 per annum

Page 5: Pay as you earn

Example Liam earns £58 600 per annum. His personal tax allowance is £8105.

Taxable income

To calculate the income tax Liam will pay:

Tax at basic rate

Think aboutWhat needs to be done first?

Think aboutWhat income tax will Liam pay each month?

= 20% of £34 370

= £58 600 – £8105

= £50 495

= £6874

Tax at higher rate = 40% of (£50 495 – £34 370)= 40% of £16 125

= £6450

Total income tax = £6874 + £6450

= £13 324 per annum

Page 6: Pay as you earn

Question 1 Sam earns £2275 per month. His personal tax allowance is £8105.

Taxable income

Income tax at the basic rate = 20% of £19 195

= £27 300 – £8105

= £19 195

= £3839 per annum

Sam’s annual income = £2275 12

= £27 300

Page 7: Pay as you earn

Question 2 Meera earns £79 800 per annum. His personal tax allowance is £8105.

Taxable income

Income tax at basic rate = 20% of £34 370

= £79 800 – £8105

= £71 695

= £6874

Income tax at higher rate= 40% of (£71 695 – £34 370)= 40% of £37 325

= £14 930Total income tax = £6874 + £14 930

= £21 804 per annum

Page 8: Pay as you earn

• 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.

At the end of the activity

Pay as you earn

Page 9: Pay as you earn

Taxable income

Income tax on £30 000

Tax at basic rate

Think aboutWhat do you need to assume?

= 20% of £21 895

= £30 000 – £8105

= £21 895

= £4379

Taxable income

Income tax on £15 000

Tax at basic rate = 20% of £6895

= £15 000 – £8105

= £6895

= £1379

Page 10: Pay as you earn

Graph of income tax against taxable income

Think aboutis income tax proportional to taxable income?

£34 370

£6874

£150 000

£53 126

£0 Taxable income

Income tax

Page 11: Pay as you earn

Graph of income tax against annual earnings

Think aboutHow does the steepness of each line segment relate to the tax rates?

£8105

£6874

£100 000 £0 Annual earnings

Income tax

£29 884

£42 475