ITEM SIX – Questions & Solutions (with Tax Table)
QUESTION
James, a petroleum engineering master's graduate from Makerere University, has landed a
job at a Ugandan NGO. The organization offers a comprehensive benefits package,
including:
• Housing allowance: Shs. 14,000 per month
• Marriage allowance: y
• Medical allowance: Shs. 50,700 per annum
• Transport allowance: Shs. 10,000 per month
However, James must pay an annual insurance premium of Shs. 68,900. He has five
children, with three under 8, one 16-year-old, and a 20-year-old. The NGO provides a family
allowance for four children, as follows: Shs. 3,400 for each child above 18 years; Shs. 4,200
for each child between 10–18 years; Shs. 5,400 for each child below 9 years.
The tax rates for working■class citizens in Uganda are shown in the table below.
The accountant revealed to James that his annual income taxes would be Shs 100,320.
James was confused because he didn't understand how his income was calculated, and he
didn't know how to figure out his gross annual income. He also learned that his annual total
tax■free income would exceed his taxable income by 24%.
James aims to consistently set aside half of his annual net income to purchase a 40 m × 22
m plot in Kayunga village within the next ten years, taking advantage of the stable land
prices. The land is expected to be priced at UGX 4,000 per square meter within this time
frame.
TASK
a) (i) Help James arrive at his accurate taxable income figure through careful calculation and
logical thinking.
(ii) Assist James in understanding his annual marriage allowance compensation.
(iii) Support James in figuring out his annual take■home pay.
b) Assist James in determining if he can reach his goal of purchasing the land within the
desired timeframe.
Income (Shs) per annum Tax rate (%)
1 – 80,000 7.5
80,001 – 160,000 12.5
160,001 – 240,000 20.0
240,001 – 320,000 25.0
320,001 – 400,000 30.0
400,001 – 480,000 35.0
Above 480,000 42.0
SOLUTION
a) (i) Compute Taxable Income from known annual tax (Shs 100,320)
We accumulate tax up to each threshold to reach the known total tax (Shs 100,320).
Income band taxed Rate Tax on band (Shs) Cumulative tax (Shs)
1 – 80,000 7.5% 6,000 6,000
80,001 – 160,000 12.5% 10,000 16,000
160,001 – 240,000 20% 16,000 32,000
240,001 – 320,000 25% 20,000 52,000
320,001 – 400,000 30% 24,000 76,000
400,001 – T 35% 24,320 100,320
Remainder tax after 400,000 band = 100,320 − 76,000 = 24,320, which belongs to the 35%
band.
Income within 35% band = 24,320 ÷ 0.35 = 69,485.714 ≈ 69,486.
Therefore, Taxable income T = 400,000 + 69,486 = 469,486 shs.
a) (ii) Understand the marriage allowance (y)
Let taxable income be T and tax■free income be F. The accountant stated that James’s
annual tax■free income is 24% of his taxable income. Hence F = 0.24T. Gross income G =
T + F = 1.24T.
With T = 469,486 shs, F = 0.24 × 469,486 = 112,677 shs; so Gross income G = 582,163
shs.
Allowances given: Housing 168,000; Transport 120,000; Medical 50,700; Family 23,800;
Marriage = y. Insurance premium of 68,900 is an expense (deducted after tax for
take■home). Thus the marriage allowance y is the balancing part of gross income after
other allowances.
So, y = G − (168,000 + 120,000 + 50,700 + 23,800) = 582,163 − 362,500 = 219,663 shs (per
annum).
a) (iii) Annual take■home pay
Take■home = Gross income − Income tax − Insurance premium = 582,163 − 100,320 −
68,900 = 412,943 shs per annum.
b) Can James reach his land■purchase goal in 10 years?
Land size = 40 m × 22 m = 880 m²; Price = 4,000 shs/m² ⇒ Total cost = 3,520,000 shs.
He saves half of take■home yearly: ½ × 412,943 = 206,472 shs. In 10 years: 206,472 × 10 =
2,064,720 shs.
Comparison: 2,064,720 < 3,520,000 ⇒ short by 1,455,280 shs.
Conclusion: James cannot afford the land within 10 years under the current plan.
