In brief
FutureClear calculates tax year by year by combining income tax, capital gains tax, and dividend tax into a single annual figure, using the tax parameters set on the scenario.
In plain English
Every year of the projection produces taxable income, taxable gains, and taxable dividends. FutureClear computes the tax owed on each category separately, then adds them together to produce the tax figure shown in the results.
The three components are distinct. Income tax applies to earnings, pension income, and rental income. Capital gains tax applies to disposals from a General Investment Account. Dividend tax applies to dividends paid inside a General Investment Account.
Each year is calculated independently, using the tax bands, allowances, and rates defined in the scenario's tax parameters.
How FutureClear models it
Income tax
The engine sums all taxable income in the year — employment, self-employment, defined benefit pensions, the State Pension, taxable pension withdrawals, and rental income. It then applies the personal allowance, tapering it above £100,000, and runs the remainder through the basic, higher, and additional rate bands.
Capital gains tax
When a disposal occurs in a General Investment Account, the engine calculates the gain as proceeds minus cost basis. Gains are pooled across the year, the annual CGT allowance is deducted, and the remainder is taxed at the rate matching the marginal income tax band for that year.
Dividend tax
Dividends received inside a General Investment Account are aggregated for the year. The dividend allowance is deducted, and the remainder is taxed at the dividend rate matching the marginal income tax band.
Combining the components
The three figures are added to produce the total tax for the year. The cashflow table displays this combined figure under the Tax column. UK self-assessment timing is reflected by showing the tax in the year it is paid, one year after the income that generated it.
SIPP, ISA, and pension wrappers do not trigger CGT or dividend tax inside the wrapper. Only withdrawals from a SIPP in excess of the tax-free portion feed into income tax.
Worked example
Assume a single scenario year with the following figures, under stated assumptions: personal allowance £12,570, basic rate 20%, higher rate 40%, CGT allowance £3,000, higher-rate CGT 24%, dividend allowance £500, higher-rate dividend rate 33.75%.
- Taxable income: £60,000 (State Pension plus SIPP drawdown)
- GIA gain on disposal: £8,000
- GIA dividends: £2,000
Income tax:
- £60,000 − £12,570 allowance = £47,430 taxable
- Basic rate: (£50,270 − £12,570) × 20% = £7,540
- Higher rate: (£60,000 − £50,270) × 40% = £3,892
- Income tax = £11,432
Capital gains tax:
- £8,000 − £3,000 allowance = £5,000 taxable
- £5,000 × 24% = £1,200
Dividend tax:
- £2,000 − £500 allowance = £1,500 taxable
- £1,500 × 33.75% = £506.25
Total tax for the year = £11,432 + £1,200 + £506.25 = £13,138.25. The cashflow table presents this figure in the Tax column for the relevant payment year.
Assumptions and limitations
FutureClear applies the tax parameters uniformly across every year of the projection. Thresholds do not move with inflation unless the user edits the parameters. Scottish income tax bands apply only when configured in the tax parameters panel.
The engine models tax at the aggregate level. It does not handle every edge of the UK tax code. Items not modelled include the High Income Child Benefit Charge, the tapered pension annual allowance in full generality, marriage allowance transfers, and any reliefs claimed through self-assessment outside the simulated categories.
Capital gains are calculated on a pooled-average cost basis, not Section 104 share-matching rules. Results are illustrative figures under stated assumptions, not a tax computation for filing purposes.