How do I work out how much tax I owe?

At Towerstone Accountants we provide specialist personal tax services, for self employed, and individuals across the UK. This article has been written to explain How do I work out how much tax I owe, in clear practical terms, so you understand how personal tax and Self Assessment rules apply in real situations. Our aim is to help you stay compliant, avoid costly mistakes, and make confident tax decisions.

This is one of the most common questions I am asked and it is also one of the most misunderstood. People often assume there is a simple calculator somewhere that will give them a definitive answer. In reality working out how much tax you owe in the UK is a process rather than a single calculation. It depends on what income you have how it is taxed what reliefs apply and how HMRC expects that tax to be paid.

From my experience as a chartered accountant specialising in Self Assessment the people who struggle most with tax are not usually those with complex finances. They are the ones who do not fully understand how their tax bill is built up. Once you understand the structure the uncertainty drops away and tax becomes something you can plan for rather than fear.

In this article I want to explain clearly and calmly how to work out how much tax you owe. I will cover the different types of tax that may apply how to calculate them in practical terms and where people most often go wrong. This is written from real world experience dealing with HMRC and preparing tax returns every day.

The aim is not to turn you into an accountant. It is to give you enough clarity to understand your position and make informed decisions.

Start With What HMRC Means by Tax You Owe

When people talk about how much tax they owe they often mean different things. For some it is income tax only. For others it includes National Insurance student loans or payments on account.

HMRC treats tax as a combination of charges depending on your circumstances. Your total liability may include:

• Income tax

• National Insurance contributions

• Student loan repayments

• High Income Child Benefit Charge

• Capital Gains Tax

• Payments on account for the next tax year

Understanding this upfront matters because many people underestimate their bill by only thinking about income tax.

Step One Identify All Your Income

The starting point for any tax calculation is identifying all taxable income for the tax year which runs from 6 April to 5 April.

This includes more than people expect. Common income sources are:

• Employment income from PAYE

• Self employed or freelance income

• Rental income from property

• Dividends from companies

• Bank interest and savings income

• Pension income

• Benefits that are taxable

• Capital gains from selling assets

One of the most common mistakes I see is income being missed because it did not feel like income. Payments into a personal bank account freelance work done alongside employment or occasional sales can all be taxable.

If HMRC considers it income it needs to be included whether or not tax was already deducted.

Employment Income Under PAYE

If you are employed your employer deducts tax through PAYE. This does not mean you owe nothing else. It means tax has been collected on your behalf based on estimates.

To work out your employment income you should use your P60 or final payslip for the tax year. This shows:

• Total gross pay

• Tax deducted

• National Insurance deducted

These figures feed into your overall calculation. If PAYE has worked perfectly you may owe nothing further on this income. If your tax code was wrong or you had benefits in kind there may be more to pay or a refund due.

Self Employed Income and Profits

If you are self employed tax is not deducted as you go. You pay tax on your profits which is your income minus allowable business expenses.

This is where things often become unclear.

To calculate taxable profit you need to:

• Total all business income for the year

• Deduct allowable expenses only

• Exclude personal costs

• Apply any capital allowances if relevant

The resulting figure is your taxable profit. This profit is what income tax and National Insurance are calculated on.

Guessing or estimating expenses is risky. HMRC expects figures to be supported by records.

Rental Income From Property

Rental income is taxed on the profit not the rent received. This means rent minus allowable costs.

Allowable costs may include:

• Letting agent fees

• Repairs and maintenance

• Insurance

• Service charges

• Certain legal and professional fees

Mortgage interest is treated differently and usually gives tax relief rather than a direct deduction. This is an area where calculations often go wrong.

Once the property profit is calculated it is added to your other income and taxed accordingly.

Dividends and Savings Income

Dividends and savings income are taxed at different rates and have specific allowances.

Dividends have an annual allowance after which tax applies at rates linked to your income band. Savings interest may be partly tax free depending on your total income.

These income types are often taxed at source or reported automatically which leads people to assume they do not need to be included. That assumption is frequently wrong.

Step Two Apply Allowances

Once all income is identified the next step is applying allowances.

The most important is the personal allowance which shelters a portion of income from tax. This allowance can be reduced or lost entirely if income exceeds certain thresholds.

Other allowances may include:

• Marriage allowance

• Blind person’s allowance

• Dividend allowance

• Savings allowance

Allowances reduce the amount of income that is taxed. They do not reduce the tax rate itself.

Missing an allowance can materially change the final bill.

Step Three Apply the Correct Tax Rates

Income in the UK is taxed in bands. Different portions of income are taxed at different rates.

This is where people often misunderstand their tax position. Earning into a higher band does not mean all income is taxed at that rate. Only the portion above the threshold is.

Income tax rates depend on the type of income and your total earnings. Dividends savings and employment income are treated differently.

This layered approach is why simple calculators often confuse people. The order matters.

National Insurance Contributions

National Insurance is separate from income tax but calculated alongside it.

If you are employed National Insurance is deducted through PAYE. If you are self employed you may pay:

• Class 2 National Insurance

• Class 4 National Insurance

These are based on profit levels and thresholds. They are often overlooked when people estimate tax bills.

National Insurance does not appear on the income tax calculation but it still forms part of what you owe HMRC.

Student Loan Repayments

If you have a student loan repayments are calculated based on income above a threshold.

These repayments are collected through Self Assessment if you are self employed or have untaxed income.

Many people forget to include student loan repayments when estimating their bill which leads to unpleasant surprises.

High Income Child Benefit Charge

If you or your partner receive Child Benefit and one of you earns above the threshold a tax charge may apply.

This charge effectively claws back some or all of the benefit received.

It is calculated through Self Assessment and often catches people out because it feels disconnected from income tax.

Capital Gains Tax

Capital Gains Tax applies when you sell assets such as property shares or valuable items.

It is not based on cash received but on the gain made which is sale proceeds minus allowable costs and reliefs.

Capital gains are reported separately but often paid alongside income tax. This adds complexity to the total figure owed.

Step Four Consider Payments on Account

If you are self employed or have significant untaxed income HMRC may require payments on account.

These are advance payments towards next year’s tax based on the current year’s bill.

This is where many people feel their tax bill doubles. In reality part of the payment relates to the future.

When working out how much tax you owe you need to separate:

• The balancing payment for the year just ended

• Payments on account for the next year

Failing to account for this distinction causes confusion and panic.

Using HMRC Calculators and Software

HMRC provides calculators and Self Assessment software that can help estimate tax.

These tools are useful but only as accurate as the information entered. They do not warn you if something has been missed or treated inefficiently.

I regularly see returns where the software calculation is technically correct but the input data is wrong.

Use tools as support not as a substitute for understanding.

Common Mistakes When Estimating Tax

From experience the most common errors include:

• Forgetting National Insurance

• Ignoring student loan repayments

• Missing rental or side income

• Assuming PAYE income needs no review

• Underestimating payments on account

• Misunderstanding allowances

• Treating gross income as profit

Any one of these can materially change the amount owed.

Should You Estimate or Wait for the Final Calculation

It is sensible to estimate tax during the year for planning purposes. It is risky to rely on rough guesses.

I encourage clients to work with estimates early then refine them once full figures are available.

Waiting until January to find out how much you owe removes your ability to plan.

When to Get Professional Help

If your income comes from more than one source or if you are unsure how something is taxed it is usually worth getting advice.

An accountant does not just calculate the tax. They ensure the calculation is correct complete and defensible.

In many cases the fee is outweighed by clarity reduced risk and avoided mistakes.

Key takeaways

Working out how much tax you owe is not about finding a single number. It is about understanding how that number is built.

Once you break the process into steps it becomes far more manageable. Income allowances rates and timing all play a role.

From my experience the people who feel most in control of their tax are not those with the simplest finances. They are the ones who understand the mechanics and plan accordingly.

Clarity removes fear. And with tax clarity comes confidence.

You may also find our guidance on How do I pay my tax bill once I have submitted my return, and How can I set aside money for my tax bill each month, helpful when reviewing related personal tax questions. For a broader overview of Self Assessment deadlines, reporting, and obligations, you can visit our self assessment guidance hub.