Nuffield Mathematics Activity Pay as you earn

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

Income tax 2017 - 2018 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 £33 500 of taxable income Higher Rate: 40% on taxable income from £33 501 to £150 000 Additional Rate 45% on any taxable income above £150 001

Her personal tax allowance is £11 500. Example Katie earns £400 per week. Her personal tax allowance is £11 500. To calculate the income tax Katie will pay: Think about What needs to be done first? Katie’s annual income = £400  52 = £20 800 Taxable income = £20 800 – £11 500 = £9300 Think about What methods could you use to work out 20%? Income Tax = 20% of £9300 = £1860 per annum

His personal tax allowance is £11 500. Example Liam earns £58 600 per annum. His personal tax allowance is £11 500. To calculate the income tax Liam will pay: Taxable income = £58 600 – £11 500 Think about What needs to be done first? = £47 100 Tax at basic rate = 20% of £33 500 = £6700 Tax at higher rate = 40% of (£47 100 – £33 500) = 40% of £13 600 = £5440 Think about What income tax will Liam pay each month? Total income tax = £5440 + £6700 = £12 140 per annum

Question 1 Sam earns £2275 per month. His personal tax allowance is £11 500. Sam’s annual income = £2275  12 = £27 300 Taxable income = £27 300 – £11 500 = £15 800 Income tax at the basic rate = 20% of £15 800 = £3160 per annum

Question 2 Meera earns £79 800 per annum. Her personal tax allowance is £11 500. Taxable income = £79 800 – £11 500 = £68 300 Income tax at basic rate = 20% of £33 500 = £6700 Income tax at higher rate = 40% of (£68 300 – £33 500) = 40% of £34 800 = £13 920 Total income tax = £13 920 + £6700 = £20 620 per annum

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 earnings for earnings up to £100 000.

Income tax on £30 000 Taxable income = £30 000 – £11 500 = £18 500 Think about What do you need to assume? Taxable income = £30 000 – £11 500 = £18 500 Tax at basic rate = 20% of £18 500 = £3700 Income tax on £15 000 Taxable income = £15 000 – £11 500 = £3500 Tax at basic rate = 20% of £3500 = £700

Graph of income tax against taxable income £0 Taxable income Income tax £53 300 Think about Is income tax proportional to taxable income? £6700 £33 500 £150 000

Graph of income tax against annual earnings £0 Annual earnings Income tax Think about How does the steepness of each line segment relate to the tax rates? £28 700 £6700 £11 500 £45 000 £100 000