Taxable Income

Not every unit of income is taxed. Tax systems allow certain amounts to be deducted or excluded before calculating tax. What remains is taxable income.

For example, suppose someone earns 60,000 in a year. Under a hypothetical system, they can deduct 5,000 of pension contributions and receive a personal allowance of 12,000. Their taxable income is 43,000, and tax is calculated on that amount rather than on the full 60,000.

What counts as taxable income, and what can be deducted, varies by country. Income usually includes wages, self-employment profits, interest, dividends, rent and sometimes capital gains. Common deductions or allowances may include pension contributions, certain work expenses, charitable donations and personal allowances.

Businesses also have taxable income, which is broadly their revenue minus allowable expenses. It often differs from the profit shown in their accounts, because tax rules treat some items differently.

Understanding taxable income helps people see how much tax they will actually pay and how deductions or allowances can reduce their tax bill legally.