No tax surprises: How accurate income tax estimates can help you plan ahead

Income tax planning is essential to securing your future finances. Being aware of the taxes you owe, and ways to either reduce your tax liabilities or calculate tax correctly, will benefit your financial planning and help you to make smart decisions with your money.

A full tax year runs between the 6th of April to the 5th of April the following year. The return deadline is 31st January following the tax year which gives you a set amount of time to prepare for your income tax payments if you complete your own tax returns, or chase tax rebates if you have paid too much tax on your Self Assessment or through the PAYE scheme. Gathering an accurate tax estimate can help you to avoid a potentially large tax demand if you have paid too little, or plan your finances around a rebate if you have paid too much.

In this blog, we will explain tips for estimating your taxes, as well as provide answers to important questions. You can also use our income tax calculator on this page.

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Benefits to income tax preparation 

By efficiently preparing your taxes each year you have the potential to either save money on your tax, or free-up cash to invest in personal or business ventures such as making smart investments, hiring new staff, or improving the quality of your services or products. 

If you are an individual who completes Self Assessments then you may be able to inject more cash into your personal life to better plan your future or simply enjoy throughout the year, and for these reasons it is important to consider your tax liabilities as part of your yearly financial plans.

Navigating the often complex UK tax system can be difficult if you are unprepared, and without gaining an understanding of how the relevant systems affect your tax can lead to unforeseen consequences such as further tax liabilities, or even tax audits in rare cases.

In order to properly plan for your tax liabilities it is important to understand the basic principles of tax planning, detailed below.

What are the principles of tax preparation?

There are a few basic principles to be aware of for tax preparation. Essentially, these are considerations that will help you to identify opportunities in your tax liabilities that could reduce your overall bill.

The principles of tax planning include:

1. Remaining tax compliant by following the rules set out by HMRC. By ensuring compliance you can help to avoid penalties and unexpected bills.

2. Taking into consideration any deductions, allowances, exemptions, or reliefs you are eligible for to reduce your yearly tax bill.

3. Maintain records of your finances throughout the year for reference during your tax returns process.

4. Regularly review your finances throughout the year to identify any further opportunities to reduce your bill.

How to estimate my tax return - tax calculations explained

You can estimate your tax returns online using our income tax calculator below, or by following the steps provided to figure out how much tax you may owe. Bear in mind that different rules may apply to you if you are earning over £100,000 a year.

If you are using the HMRC website to estimate your tax returns then you can only do this if you earn under £100,000 a year, you do not get taxable state benefits, and you do not claim Married Couple’s Allowance.

Steps to work out your tax

1) Is your income taxable?

Taxable income includes money earned through wages or salaries, your profits as a self-employed individual, pensions, benefits, reimbursed expenses, or redundancy payments over £30,000. Generally speaking most people will only receive taxable income in the form of wages or salary, and will therefore not need to consider other taxable sources. However, if you are self-employed or run a small business, or receive taxable benefits through work, you should consider how much of this is classed as taxable income.

2) Are there tax reliefs or allowances that can reduce your tax liability?

Your taxable income is reduced by a personal allowance of up to £12,570 in the UK for the tax year 2024/25. This means you will only pay tax on income above this threshold. If you earn over £100,000 a year, your personal allowance decreases by £1 for every £2 you earn above this limit.

Other allowances and tax reliefs can also help reduce your tax liability, including the Marriage Allowance, pension contributions, and the Blind Person’s Allowance. Additionally, if you are self-employed or own a business, you may be able to claim allowable expenses, such as capital allowances. Here’s a closer look at some of these options:

• Marriage Allowance: If you are married or in a civil partnership and one partner earns less than the personal allowance, they can transfer up to £1,260 of their unused personal allowance to their partner, potentially saving up to £252 in tax for the tax year 2024/25.

• Pension Contributions: Contributions to a registered pension scheme can receive tax relief, reducing your overall taxable income. For basic rate taxpayers, contributions are made after tax, and the pension provider reclaims tax relief on your behalf. Higher-rate taxpayers can claim additional relief through a Self Assessment tax return.

• Blind Person’s Allowance: If you are registered as blind, you can claim an extra allowance of £3,070 for the tax year 2024/25, which reduces your overall taxable income.

• Allowable Expenses for Self-Employed Individuals or Businesses: If you are self-employed or own a business, you may be able to claim allowable expenses to reduce your taxable income. For example, you can deduct the cost of certain capital items, such as equipment or vehicles, as part of capital allowances.

3) Which tax band are you in?

Understanding which tax band affects you is important to estimating your tax and take home pay. In the UK, your income is taxed based on bands, meaning that different portions of your income are taxed at different rates. For the 2024/2025 tax year, income up to £12,570 is covered by your personal allowance and not taxed. 

The basic rate tax band covers income from £12,571 to £50,270, which is taxed at 20%. If your income falls between £50,271 and £125,140, it is taxed at 40%, which is the higher rate. Income above £125,140 is taxed at the additional rate of 45%. Different rates apply to Scotland. 

Bear in mind that if your income exceeds £100,000, your personal allowance will decrease, which effectively pushes more of your income into higher tax bands. Understanding which tax band your income falls into helps you calculate how much tax you will owe overall.

4) Can you make any other deductions from your tax bill?

Beyond allowances and reliefs, there are some additional deductions that can reduce your overall tax bill. For instance, if you are self-employed you can deduct business expenses that are deemed essential for running your business, such as office supplies, utility bills, or travel costs for business purposes.

If you’re a landlord, you may also deduct the cost of repairs and maintenance on your rental property. Certain personal investments, like Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCT), offer tax relief to encourage investment in startups and small businesses. 

By identifying all relevant deductions, you can ensure that your final tax bill is as low as possible.

Income tax calculator

Use our free income tax calculator to estimate the tax you owe this tax year. 

Considerations when estimating income tax

Whilst creating an estimate of your income taxes at the beginning of a financial year is a great first step to planning, you should be aware that changes throughout the year could make this estimation inaccurate by the time it comes to paying your tax, and as such it is important to reassess and adjust this estimation throughout the year if necessary. There are a few factors that could affect your estimation throughout the year, such as:

Fluctuations in your income

• Bonuses, Overtime, or Commission: If your income includes irregular payments like bonuses or overtime, your tax estimate can change unexpectedly. These payments can push you into a higher tax band temporarily.

• Self-Employment Income: If you're self-employed, your income can vary significantly from month to month. It’s harder to predict your total earnings for the year, making it difficult to estimate taxes accurately.

Changes in your personal circumstance

• Marriage or Civil Partnership: If you get married or enter a civil partnership, you might become eligible for the Marriage Allowance, reducing your taxable income.

• Children: If you start claiming Child Benefit, you may need to consider the High Income Child Benefit Charge if your income exceeds £50,000.

• Starting or Ending Employment: Moving between jobs or switching to self-employment can alter your tax situation, especially if you're receiving multiple sources of income in a single tax year.

Tax code changes

• Your tax code dictates how much tax-free income you’re entitled to. If HMRC adjusts your tax code due to underpayments, benefits, or changes in your circumstances, your tax liability could change mid-year. Keep an eye on any notices from HMRC about changes to your code.

Changes to relief allowances

• Changes in pension contributions, charitable donations (under Gift Aid), or employment-related expenses (like working from home allowances) can affect your taxable income and require a tax recalculation.

• New tax reliefs introduced by the government, for example changes to personal allowances, rates, or thresholds, can also impact how much tax you owe.

Income from investments

• Dividends, savings interest, and rental income: If you receive income from investments or property, changes in market performance or rental yields can make it hard to estimate your total income for the year.

• There’s also a risk of exceeding allowances like the Dividend Allowance or Personal Savings Allowance, which could unexpectedly push you into a higher tax bracket.

Changes to tax rates

• Income tax rates, bands, and thresholds are often adjusted annually in the Budget. If these change after you’ve made your initial estimate, it could significantly affect your tax calculation. For example, Scotland has different tax bands and rates compared to the rest of the UK, so where you live matters.

Selling assets

• Selling investments, property, or other assets can trigger Capital Gains Tax. If you plan to sell something part-way through the year, you’ll need to account for this in your overall tax liability. The tax-free allowance for capital gains might be reduced or exceeded.

While estimating your income tax, it's crucial to monitor any changes in your income, personal circumstances, and the tax landscape. Regularly reviewing your situation throughout the year and adjusting your estimates accordingly will help avoid surprises at the end of the tax year. Using tools like QuickBooks’ tax estimation features or seeking professional advice can also ensure more reliable estimates.

Estimating tax FAQs

How do you calculate how much your refund will be?

To calculate your tax refund, follow these steps:

• Check your total income: Determine your total income for the tax year from all sources, including salary, self-employment, and investments.

• Deduct allowances and reliefs: Subtract the Personal Allowance (£12,570 for 2024/25), along with any other tax-deductible expenses like pension contributions, charitable donations (Gift Aid), and work-related expenses.

• Calculate your tax liability: Apply the appropriate tax rates to your taxable income. This depends on whether you fall under the basic, higher, or additional tax rate bands.

• Compare tax paid: Compare the tax you’ve already paid through PAYE or Self Assessment to the tax you owe based on your calculations. If you’ve paid more than required, the difference will be your refund.

Tools like HMRC's tax calculator or QuickBooks’ tax estimation tool can help simplify this process.

Is there software that can help me estimate by tax?

QuickBooks offers integrated tax estimation features, helping both self-employed individuals and small business owners calculate their income tax and manage allowable expenses throughout the year.

Learn more about enhancing your tax estimation capabilities with QuickBooks.

What are the benefits to estimating income tax?

Estimating your income tax throughout the year offers several key benefits:

• Avoid underpayment penalties: Estimating helps ensure that you don’t underpay your taxes, which could result in penalties or interest charges.

• Manage cash flow better: By estimating your tax liability in advance, you can set aside funds to cover your tax bill, avoiding a financial crunch at the end of the tax year.

• Make use of reliefs and deductions: Tracking your estimated tax liability helps you identify and maximise available tax reliefs, such as pension contributions or charitable donations, potentially reducing your tax bill.

• Plan for refunds: Estimating your tax allows you to forecast whether you're due a refund, so you can factor it into your financial planning.

Will HMRC automatically refund overpaid tax?

Yes, HMRC will usually refund overpaid tax automatically. If you’re employed, this often happens through the PAYE system. If HMRC identifies that you’ve overpaid, they will issue a refund either directly to your bank account or by cheque.

However, in some cases (e.g., if you’ve changed jobs, had fluctuating income, or are self-employed), HMRC may not catch the overpayment immediately. In these instances, you can claim a refund by:

• Filing a Self Assessment tax return: If you file one annually, HMRC will reconcile your tax payments and refunds.

• Using HMRC's online service: You can log in to your personal tax account and claim a refund.

• Submitting a P800 form: If you’ve overpaid through PAYE, HMRC may issue a P800 form, outlining any refund owed, and provide options to claim it.

Regularly reviewing your tax payments can help ensure any overpaid taxes are refunded promptly.

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