Let me first explain a few definitions and some pre knowledge you must know before get into the equations.
A wage is a fixed regular payment earned for work or services
- has a certain rate usually per week depending on the hours worked.
A salary is a fixed annual sum of money, usually paid each month.
Also note that per annum means per year.
Gross Income = The income before tax and other cuts
Personal allowance = The earnings that are "tax free"
Taxable Income = Total Income - Personal Allowance
Net Income = income that remains after tax and other deductions have been taken out.
So when you are calculating tax for a person, I like to break the countries tax rates into slabs.
Example,
Republic Of Lexica's Tax Rates (per annum)
Personal allowance (between $0-$5,000) has no Tax
Basic Rate (between $5,000-$70,000) has 20% tax
Higher Rate(anything over $70,000)has 45% tax.
So basically all this is saying is that if say you are earning $120,000.
$120,000 is broken into slabs.
This means that the first $5,000 of the $120,000 are credited as personal allowance towards yourself, you keep that and dont get taxed on that.
The amount that you are getting taxed on now can be expressed as the following - $120,000-$5,000.
This means that your $115,000 is taxed.
Now the second slab is the basic rate...
You first do $70,000 - $5,000 to get the taxable income at the basic rate. (You only do 70,000-5,000 if the earn more than 70,000, otherwise you do "their income" - 5,000 and tax that at 20%)
This means that $65,000 of the $115,000 will be taxed at 20%
And the rest from the remainder above will be taxed at 45%.---This is the third slab (Higher Rate)
This means that she will pay
0.2 * (70,000-5,000) + 0.45 * (115,000-70,000)
Lets Try another one
Suppose Paul earns $60,000 per annum, calculate his annual tax bill.
So using the methodology we first keep the $5,000 aside for personal allowance.
So taxable income = $60,000 - $5,000
= 5,5000
Using lexica rates, we add 20% tax
5,5000 * 0.2
=11,000
So Paul's annual tax bill is $11,000.
