… How shares of a company work… Here is a short video that to explain the process whereby a company can sell shares to the public investors in order to raise money for the company’s activities. In doing this, the company agrees to pay the investors a ‘dividend’, which is a share of the profits.
Shares are then sold and bought on the ‘stock market’ between investors at a particular price, which is what the investors think the shares are worth.
https://youtu.be/F3QpgXBtDeo
Taxation Calculations
Here are some example tax ‘bands’:
Personal allowance = £11,000:
* First find your TAXABLE INCOME by deducting the personal allowance for your gross annual salary.*
Then apply these tax bands to the remaining taxable income:
Basic Rate Tax @ 20% charged on the first £32,000
Higher Rate Tax @ 40% charged on the next £32,001 – £150,000
Additional Rate Tax @ 45% charged on any income over £150 000
National insurance (another type of tax) is also calculated on a ‘bands’ basis but is a little different to income tax. Apply the TOTAL annual salary (no allowance deducted) to the following bands:
NI @ 0% on income up to £8,060
NI @ 12% charged on income between £8,060 and £43,004
NI @ 2% charged on income over £43,004
Or on a monthly basis (which more often used):
NI @ 0% on income up to £672
NI @ 12% charged on income between £672 and £3,584
NI @ 2% charged on income over £3,584
*** Example question ***
An employee who earns £54,000/year ‘gross’ income (which means before tax or any other deductions are made). Calculate her ‘net’ take home pay (which means her earnings after tax and other deductions).
Gross annual income = £54,000
Gross monthly income = £54,000/12 = £4,500
Taxable income = £54,000 – £11,000 (personal allowance) = £43,000
Basic rate income tax liability per month
For the 40% higher rate band = (£43,000 – £32,000) × 0.40 ÷ 12 = £366.67
For the 20% basic rate band = (£32,000 × 0.20) ÷ 12 = £533.33
National insurance liabilities per month (note: use the full gross income without first subtracting an allowance!):
For the 2% band = (£4,500 – £3,584) x 0.02 = £18.32
For the 12% band = (£3,584 – £672) x 0.12 = £349.44
⇒ take home monthly pay = £4,500 – £533.33 – £366.67 – £349.44 – £18.32
= £3,232.24
… The ‘Pay As You Earn’ (PAYE) system is a method of paying income tax and national insurance contributions. Your employer deducts tax and national insurance contributions from your wages, usually each month.
… Try to save 10% of your net ‘take home pay’ in a long-term investment savings account. Over time, this will grow at a compounded rate – a very powerful savings approach!
… ‘Tax relief’ on Pension contributions… Tax relief means some of your money that would have gone to the government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.
If you’re a UK taxpayer, in the tax year 2016-17 the standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.
For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you’ll only get tax relief on £20,000.
Similarly, if you earn £60,000 and want to put that amount in your pension scheme in a single year, you’ll normally only get tax relief on £40,000.
… Normally, any pension paid to you (when you retire) is treated as earned income and may be liable to income tax. However, on the plus side, you don’t pay any National Insurance contributions on your pension income.
At the present time, when you retire and take money from your pension pot, 25% is tax free. You then pay Income Tax on the other 75%.
… A useful personal finance ‘tip’ is to save into a ‘short term’ savings account (for spending on holidays etc) as well as a ‘long term’ savings account (for longer term goals)
… Self-employed business expenses can be ‘tax deductible’. This means that a self-employed person’s taxable income can be reduced – and therefore the amount of tax paid is less.
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