ACCA Applied Skills · Taxation (UK)

Income from employment: formula sheet

Full chapter guide

Key formulas

Class 1 employee NIC: Nil on £1 – £12,570; 8% on £12,571 – £50,270; 2% above £50,270 (per year); Applies to employees, deducted through payroll.
Class 1 employer NIC: Nil on first £5,000; 15% above £5,000 (per year); Employer cost only arises if the worker is an employee. Employment allowance is £10,500, subject to eligibility.
Class 4 NIC: Nil on £1 – £12,570; 6% on £12,571 – £50,270; 2% above £50,270; Paid by the self-employed on trading profits, with no employer NIC.
Class 1A NIC: 15% of taxable benefits; Paid by the employer only. It arises on benefits given to employees.
Status decision: Weigh all badges: control, substitution, mutuality of obligation, equipment, risk, integration, other terms; No single badge is decisive. State the conclusion and give reasons.
Receipts basis: Taxable in the tax year in which earnings are received; Received at the earlier of actual payment and entitlement to payment. Directors have extra rules.
General deduction test: Expense must be wholly, exclusively and necessarily incurred in performing the duties; All three words must be met. Commuting to a permanent workplace fails.
Approved mileage allowance (cars): Up to 10,000 miles: 45p per mile. Over 10,000 miles: 25p per mile; Applies to business miles in the employee's own car. Count miles for the whole tax year.
Mileage allowance comparison: Approved amount − amount paid by employer = deductible shortfall (or taxable excess if negative); Excess paid over approved rates is taxable. Shortfall can be claimed as a deduction.
Taxable employment income: Salary + bonus + commission + taxable benefits + taxable excess mileage − allowable expenses − allowable deductions; Gross figures are used. Income tax deducted under PAYE is not deducted from earnings.
Car benefit: List price (less capital contributions, max £5,000) × appropriate percentage × months available ÷ 12; Base level is 55 g/km, which gives 17%. 51 to 54 g/km gives 16%. Zero-emission electric cars give 3%. Hybrids use the electric range table. The exam provides the percentage table, so do not rely on memory. Employee contributions for private use reduce the benefit pound for pound.
Car fuel benefit: £28,200 × same percentage as the car × months available ÷ 12; Applies only if the employer pays for fuel for private journeys. If the employee repays all private fuel cost, the benefit is nil. Part repayment gives no reduction.
Van benefit: £4,020 scale charge; van fuel benefit £769; Applies to private use of a company van. Zero-emission vans have a 0% benefit. Reduce for periods unavailable.
Beneficial loan (average method): (Opening balance + closing balance) ÷ 2 × official rate (3.75%) less interest paid by employee; Exempt if the total of all employer loans never exceeds £10,000 in the tax year. The average method is the default. The strict (day by day) method applies if the taxpayer or HMRC elects for it, so use it if the question tells you to.
Living accommodation: basic charge: Annual value (or rent paid by employer if higher) × period provided; Not taxed if the accommodation is job-related, for example the employee must live there to do the job properly.
Living accommodation: additional charge: (Cost of property − £75,000) × official rate (3.75%); Only where cost exceeds £75,000. Cost includes improvements made before the start of the tax year. Employee payments reduce the total charge.
Use of an asset (not a car or accommodation): 20% × market value when first provided, per year; If the employer rents the asset, use the higher of 20% of market value and the rent paid.
Gift of an asset: New asset: market value at the gift date. Used asset: higher of (a) market value at the gift date and (b) market value when first provided less amounts already taxed as use of the asset; For a used asset, the original market value when first provided is used, not cost. Deduct the benefits already taxed for use of the asset, then compare with current market value and take the higher.
Class 1A NIC: Taxable benefits × 15%; Paid by the employer only, once a year.
Approved mileage allowances (cars): 45p per mile up to 10,000 miles; 25p per mile above 10,000; Payments up to these rates are exempt. Any excess paid is taxable. If the employer pays less than the approved rate, the employee can claim relief for the shortfall.
Tax code number: Code number = (Allowances − deductions) ÷ 10, ignoring the last digit, plus letter; Standard personal allowance £12,570 gives 1257L. Benefits taxed through the code reduce the number.
Payroll giving cost: Net cost of gift = Gift × (1 − marginal rate of income tax); Relief is via PAYE. NIC is not reduced.
Key PAYE dates: P60: 31 May. P11D: 6 July. Class 1A NIC: 22 July (19 July by post); PAYE paid monthly by the 22nd after the month end if paid electronically (19th by post). RTI is sent on or before payday.
Class 1 NIC rates (ACCA tables): Employee: nil to £12,570, 8% to £50,270, then 2%. Employer: nil to £5,000, then 15%; Employment allowance is £10,500. Class 1A is 15%.
Share scheme limits to learn: SAYE: £5–£500 a month, 3 or 5 years. SIP: free shares £3,600 a year, partnership £1,800 a year. CSOP: £60,000 of options. EMI: £250,000 of options per employee; These are examinable but not all are in the ACCA tax tables. Learn them and check your study text.
Annual allowance: £60,000 (2023–24 to 2025–26); £40,000 (2022–23); Counts gross employee and employer contributions together for the tax year.
Maximum individual contribution with relief: Higher of relevant earnings and £3,600 (gross); Employer contributions are not limited by your earnings.
Relief at source: gross contribution: Gross = Net paid × 100 ÷ 80; Basic rate relief of 20% is added by the scheme. Extend the basic rate band by the gross amount for higher rate relief.
Net pay arrangement: Taxable pay = Gross pay − employee contribution; Relief at your marginal rate through PAYE. The deduction does not reduce earnings for NIC.
Tapered annual allowance: £60,000 − ((Adjusted income − £260,000) ÷ 2), minimum £10,000; Applies only where the threshold income test is also failed. At adjusted income of £360,000 or more the minimum applies.
Carry forward: Unused allowance of the previous 3 tax years, earliest year first, after the current year allowance; You must have been a member of a registered scheme in each year you draw on.
Annual allowance charge: (Total pension input − allowance − unused allowance brought forward) × marginal rate; Excess is treated as the top slice of your income.
Employer contributions: Deductible trading expense; no taxable benefit; no NIC; Subject to the 'wholly and exclusively' rule for the employer's deduction.
Personal allowance: £12,570; Reduced if adjusted net income is over £100,000. Nil when adjusted net income is £125,140 or more.
Personal allowance abatement: PA = £12,570 − [(adjusted net income − £100,000) ÷ 2]; Only when adjusted net income is above £100,000. Cannot go below nil. Round the reduction as exam instructions suggest, usually whole pounds.
Normal rates: Basic £1–£37,700: 20%. Higher £37,701–£125,140: 40%. Additional over £125,140: 45%; Apply to non-savings income and savings income. Bands are on taxable income.
Dividend rates: Basic 8·75%. Higher 33·75%. Additional 39·35%; Dividends are taxed last. The first £500 is at 0% (dividend nil rate band).
Savings nil rate band and starting rate: Basic rate taxpayer £1,000. Higher rate taxpayer £500. Additional rate nil. Starting rate 0% on savings within the first £5,000 of taxable income; The starting rate is only available if non-savings taxable income is below £5,000. Savings taxed at 0% still use up band.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of adjusted total income; Applies unless the relief is otherwise restricted. Use the cap figure given in the question.
Threshold and range: Charge applies where adjusted net income > £60,000; full clawback at £80,000; The charge is 1% of child benefit received for every £200 of income over £60,000, between £60,000 and £80,000.
Charge percentage: Percentage = (adjusted net income − £60,000) ÷ £200, rounded down to a whole number, as a % of child benefit; Round down to whole £200 steps. For example, £1,999 over the threshold gives 9%, not 10%.
Charge: Charge = child benefit received × percentage; Use the child benefit actually received in the tax year. Cap the percentage at 100%.
Adjusted net income: Adjusted net income = net income − gross Gift Aid donations − gross relief-at-source personal pension contributions; Net income is total income less reliefs such as trading losses and qualifying interest, before the personal allowance. Gift Aid donations and relief-at-source pension payments are grossed up by 100/80 if given as net amounts.
Gross-up of net payments: Gross = net paid × 100 ÷ 80; Basic rate relief is given at source on Gift Aid and on personal pension contributions paid under relief at source.
Class 1 primary (employee): 8% × (earnings between £12,570 and £50,270) + 2% × (earnings above £50,270); Applied to annual cash earnings. Nil on the first £12,570. Nothing is charged on benefits in kind.
Class 1 secondary (employer): 15% × (earnings − £5,000); Only where earnings exceed £5,000 a year. Apply it to each employee separately, then total.
Employment allowance: Class 1 secondary payable = total secondary − £10,500 (minimum nil); The allowance is £10,500 a year. It offsets Class 1 secondary only, not Class 1A or Class 4.
Class 1A: 15% × total taxable benefits; Paid by the employer only. No threshold. Use the taxable benefit figure after any employee contribution.
Class 4: 6% × (profits between £12,570 and £50,270) + 2% × (profits above £50,270); Paid by the self-employed on taxable trading profits. Nil on the first £12,570.

Quick revision

An employee is taxed on employment income. A self-employed person is taxed on trading profits. Status affects both the tax rules and the NIC class.
The personal allowance is £12,570. Where adjusted net income is £125,140 or more, it is reduced to zero. It is also reduced for income above £100,000.
Income tax bands: basic rate £1 to £37,700 at 20%, higher rate to £125,140 at 40%, and additional rate above that at 45%. Dividend rates are 8·75%, 33·75% and 39·35%.
Savings nil rate band: £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. The dividend nil rate band is £500.
Class 1 employee NIC: nil to £12,570, then 8% up to £50,270 and 2% above. Employer Class 1 is 15% above £5,000. The employment allowance is £10,500.
Class 1A NIC is 15% and is paid by the employer on most taxable benefits. Class 4 for the self-employed is 6% from £12,571 to £50,270 and 2% above.
Electric cars with zero CO2 emissions have a 3% car benefit percentage. For hybrids with 1 to 50 g/km, the electric range decides the percentage.
The car fuel benefit uses a base figure of £28,200. The van benefit scale charge is £4,020 and the van fuel benefit is £769.
The pension annual allowance is £60,000 for 2023–24 to 2025–26. The minimum allowance is £10,000 and the income limit is £260,000. Without earnings, the maximum that qualifies for relief is £3,600.
Child benefit charge: for income between £60,000 and £80,000, 1% of the child benefit received for every £200 of income over £60,000.
Objective test questions are all or nothing. Read the question, check which tax year and rates apply, then compute.

Common mistakes

Deciding status from one badge only, such as the contract label. Fix: Weigh all badges and say the real working arrangement matters more than what the contract calls it.
Giving a list of badges without a conclusion. Fix: Always finish with a clear sentence such as 'On balance Sam is self-employed' and justify it.
Taxing a bonus in the year it was earned rather than the year it was received. Fix: Employment income uses the receipts basis. Find the date of payment or entitlement, whichever is earlier.
Deducting income tax and National Insurance from salary before taxing it. Fix: Start with gross pay. PAYE is a payment on account of the tax, not a deduction from income.
Applying a £8,500 lower-paid test Fix: Treat every employee the same. Only look at exemptions and specific rules for each benefit.
Using the car's list price instead of the £28,200 base figure for the fuel benefit Fix: Fuel benefit is £28,200 × the car's percentage. The list price is never used.
Getting the tax code number wrong by not dividing by 10 or dropping the last digit. Fix: Write the allowance in full, divide by 10 and drop the final digit. 12,570 becomes 1257.
Saying payroll giving reduces NIC. Fix: Payroll giving reduces taxable pay for income tax only. NIC is on pay before the gift.
Using the net payment as the gross contribution under relief at source. Fix: Gross up by 100 ÷ 80 first. The band extension and the allowance test both use the gross figure.
Counting only the employee's contributions in the annual allowance test. Fix: Add employer and employee contributions together. Both count towards the allowance.

Exam tips

Always give a conclusion on status. A list of badges alone loses marks.
Quote the facts from the scenario next to each badge. Marks are for application, not definitions.
Never rely on the contract label alone. Say the actual working practice counts.
Learn the NIC rates by class so you can calculate quickly if the question asks for it.
In objective tests, watch for options that treat one badge as decisive. They are usually wrong.
Read every date in the question and compare it with 5 April before adding any bonus.
In objective test questions, the wrong options are usually built from common traps: tax deducted, wrong year or 45p on all miles. Work out your own answer first.
In Section C, set out a short computation with labelled lines. Show the mileage calculation separately so you earn method marks even if a figure is wrong.