Novices of taxation have used the terms chargeable income, taxable income and tax payable incorrectly. This article will clarify their correct meaning and usage.
What is chargeable income?
Chargeable income is the available amount after deducting tax-exempt and rent relief from the gross emolument. It is the amount at which the tax rates are applied.
When computing annual PAYE tax, income such as salaries, commission, dividends, benefits in kind, and so on are added to form the gross earnings. Then, items like the National Housing fund, the National pension fund, the National Health Insurance Fund, interest on loans from the owner's building, and life assurance are summed up as tax-exempt deductions.
Next, the rent relief allowance is computed. The total deductions including rent relief are subtracted from the gross earnings to arrive at chargeable income.
For company income tax, the chargeable income is arrived at after allowable expenses are deducted from revenue.
The formula is:
Chargeable income = Gross Pay - Total deductions
Or
Chargeable income = Profit before tax + Depreciation + Non-Allowable Expenses
What is taxable income?
Taxable income has the same meaning as chargeable income. They are synonyms. That means they can be used interchangeably.
What is tax payable?
Tax payable is the amount the taxable person must pay as tax. It is the amount arrived at using the tax rate to multiply the taxable income.
The formula is
Tax payable = Chargeable income × Tax rate
Differences between chargeable income and tax payable
Chargeable income is gross income less total deductions. But tax payable is taxable income multiplied by the tax rate.
The amount of taxable income reveals the amount available that the tax authority can deduct taxes from. However, tax payable is the amount expected to be paid by the taxpayer.
Another name for chargeable income is taxable income. Another name for tax payable is taxable liability.
The main use for taxable income is to compute the tax liability. Tax payable is used to determine the net pay and disposable income of the taxable person.