ACCA Applied Skills · Taxation (UK)

The comprehensive computation of taxable income and income tax liability: formula sheet

Full chapter guide

Key formulas

Computation flow: Total income − reliefs = Net income; Net income − personal allowance = Taxable income; Show each line. The personal allowance is deducted from non-savings income first, then savings, then dividends.
Order of income: Non-savings → Savings → Dividends; Applies both to deducting the personal allowance and to using up the basic rate band.
Normal income tax rates: Basic £1 – £37,700: 20%; Higher £37,701 – £125,140: 40%; Additional over £125,140: 45%; Apply to non-savings and savings income. These are the rates and bands in the ACCA tax tables.
Dividend rates: Basic 8·75%; Higher 33·75%; Additional 39·35%; The dividend nil rate band is £500. Dividends covered by it are taxed at 0% but still use up a band.
Savings nil rates: Starting rate 0% on savings within the first £5,000 of taxable income; savings nil rate band £1,000 (basic rate taxpayer) or £500 (higher rate taxpayer); The starting rate is only available if non-savings taxable income is below £5,000. Additional rate taxpayers get no savings nil rate band.
Personal allowance: £12,570, reduced where adjusted net income exceeds £100,000; The allowance is reduced to zero when adjusted net income is £125,140 or more.
Standard personal allowance: Personal allowance = £12,570; Given in the tax rates and allowances you receive in the exam. Available in full if adjusted net income is £100,000 or less.
Income limit: Income limit = £100,000; The allowance is reduced only on adjusted net income above this figure.
Reduction: Reduction = (Adjusted net income − £100,000) ÷ 2; Ignore any odd pounds or pence in the excess, then halve. Reduce the allowance by this amount, but not below zero.
Adjusted net income: Adjusted net income = Total income − gross Gift Aid donations − gross personal pension contributions (and other specified deductions); Use the figure after allowable reliefs, not taxable income, because the allowance itself has not yet been deducted.
Nil allowance point: Allowance is nil if adjusted net income ≥ £125,140; Between £100,000 and £125,140 the effective marginal rate on normal income taxed at 40% is 60%.
Order of set-off: Personal allowance: non-savings income first, then savings income, then dividend income; Apply this order every time, since each type of income is taxed at its own rates.
Order of taxation: Non-savings income → Savings income → Dividend income; Fill the bands in this order. The personal allowance is deducted in the same order.
Income tax bands (taxable income): Basic: £1 – £37,700 | Higher: £37,701 – £125,140 | Additional: over £125,140; Bands apply to taxable income, after the personal allowance.
Rates on non-savings and savings income: Basic 20% | Higher 40% | Additional 45%; Savings income uses the same rates as non-savings income.
Rates on dividend income: Basic 8.75% | Higher 33.75% | Additional 39.35%; Dividends are taxed last, on top of other income.
Starting rate for savings: Starting rate band = £5,000 − non-savings taxable income (minimum nil); Savings in this band are taxed at 0%. It applies only if non-savings taxable income is below £5,000.
Personal savings allowance: Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate taxpayer nil; Tax is 0% on this amount of savings income, but it still uses up the band.
Dividend nil rate band: £500 taxed at 0%; Available at all levels of income. It still uses up the band.
Personal allowance: £12,570, reduced where adjusted net income exceeds £100,000, and nil at £125,140 or more; Deducted from non-savings income first, then savings, then dividends.
Grossing up a net payment: Gross = Net × 100 ÷ 80; Applies to Gift Aid donations and personal pension contributions paid net of basic rate tax.
Extended basic rate band: £37,700 + gross Gift Aid + gross personal pension contributions; The basic rate band limit of £37,700 is increased by the gross payments, so the band at 40% starts later. The additional rate threshold of £125,140 of taxable income is also increased by the same gross payments.
Rates on non-savings income: 20% up to the extended basic rate limit (£37,700 + gross payments), 40% above that up to the extended additional rate limit (£125,140 + gross payments), 45% on taxable income above that extended limit; Savings and dividend rates apply within the same extended bands. Dividend rates are 8.75%, 33.75% and 39.35%.
Adjusted net income for personal allowance: Net income − gross Gift Aid − gross personal pension contributions; Personal allowance is £12,570. It reduces by £1 for every £2 of adjusted net income above £100,000, and is nil at £125,140 or more.
Annual allowance: £60,000 for 2023–24 to 2025–26; The minimum allowance is £10,000 and the income limit is £260,000. The allowance reduces by £1 for every £2 of adjusted income above the limit, down to the minimum, for high earners.
Maximum pension contributions qualifying for relief: Higher of relevant earnings and £3,600 (gross personal contributions); With no earnings, the maximum contribution qualifying for relief is £3,600.
Annual allowance carry forward: Available allowance = current year allowance + unused allowance from the previous three tax years; Use the current year first, then the earliest of the three years. The person must have been a member of a registered pension scheme in the earlier years.
Annual allowance charge: Excess pension input over available allowance × taxpayer's marginal rate(s); The excess is treated as the top slice of income and taxed at the rates that apply to it.
Tax layout order: Total income − reliefs (qualifying interest, loss relief) = Net income; Net income − personal allowance = Taxable income; Reliefs are deducted before the personal allowance.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% × income; Applies unless the relief is otherwise restricted. Use income before the reliefs being capped.
Restricted relief: Relief given = lower of (reliefs claimed that are subject to the cap) and the cap; Compare the total of capped reliefs with the cap, not each relief on its own.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil at £125,140 or more; Net income after reliefs drives the reduction, so a loss claim can protect the allowance.
Unrelieved trading loss: Loss carried forward = loss − loss relief used; Carried forward against future profits of the same trade.
Charge percentage: Charge % = (Adjusted net income − £60,000) ÷ £200, rounded down to a whole number, as a % of child benefit; Each full £200 of income above £60,000 adds 1%. Ignore any part of £200. The percentage cannot exceed 100%.
Child benefit charge: Charge = child benefit received × charge %; Use the child benefit received in the tax year. The charge applies only where income is between £60,000 and £80,000 for the percentage to be below 100%.
Full clawback: Adjusted net income of £80,000 or more → charge = 100% of child benefit; This follows from 20,000 ÷ 200 = 100 steps of 1%.
Adjusted net income: Adjusted net income = net income − grossed-up Gift Aid donations − grossed-up personal pension contributions paid net; Gross up net payments by multiplying by 100 ÷ 80. This is the income measure used for the charge.
Marriage allowance transfer: Transferable amount £1,260; recipient's reduction = £1,260 × 20% = £252; Transferor's personal allowance falls to £12,570 − £1,260 = £11,310.
Marriage allowance conditions: Married or civil partners; transferor's income does not exceed the personal allowance (no taxable income); recipient not a higher or additional rate taxpayer; If the recipient pays any tax above the basic rate, no claim is possible. The transfer costs the transferor nothing only if their income does not exceed £11,310.
EIS relief: 30% × amount invested; Tax reducer. Rate and holding period (usually three years) are rules to learn, not in the supplied tax tables. Use the figures in the question.
SEIS relief: 50% × amount invested; Tax reducer. Rate and holding period (usually three years) are rules to learn, not in the supplied tax tables. Use the figures in the question.
VCT relief: 30% × amount invested; Tax reducer. Rate and holding period (usually five years) are rules to learn, not in the supplied tax tables. Use the figures in the question.
Tax reducer treatment: Income tax liability − reducers = income tax payable (not below nil); Reducers come off the tax figure, not off income. They cannot reduce the liability below nil.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Applies to certain deductions from income. It does not apply to EIS, SEIS or VCT relief, which are reducers.
Income tax payable: Income tax liability − tax deducted at source (PAYE etc.) = income tax payable (or repayable); A negative answer is a repayment. Only deduct tax shown in the question.
Each payment on account: 50% × (prior year income tax liability − prior year tax deducted at source + prior year Class 4 NIC); Two equal payments: 31 January in the tax year and 31 July after it. Class 2 NIC and capital gains tax are not included.
When payments on account are not required: Prior year net amount < £1,000, or prior year tax deducted at source ≥ 80% of the prior year income tax liability; If either test is met, no payments on account are due. The net amount for the £1,000 test is the income tax liability less tax deducted at source, not including NIC.
Balancing payment: Actual net liability for the year − payments on account made; Due 31 January following the end of the tax year. Class 4 NIC is included in the actual net liability. Capital gains tax is also due on 31 January.
Interest rates (assumed in the exam): Underpaid tax 8·50%; overpaid tax 3·50%; Interest on underpaid tax runs from the due date to the date of payment. Official rate for benefits is a separate 3·75%.
Interest calculation: Unpaid tax × rate × months late ÷ 12; Round to the nearest £. Count whole months unless the question gives days.

Quick revision

Layout: non-savings income first, then savings, then dividends, each in its own column.
Taxed order: non-savings, then savings, then dividends. Allowance is set against non-savings first.
Personal allowance is £12,570 and starts to reduce once adjusted net income passes £100,000.
The allowance is zero where adjusted net income is £125,140 or more.
Basic rate band is £37,700; higher rate runs to £125,140; additional rate above that.
Normal rates are 20%, 40% and 45%; dividend rates are 8·75%, 33·75% and 39·35%.
Savings nil rate band is £1,000 for basic rate and £500 for higher rate taxpayers; dividend nil rate band is £500.
Savings starting rate of 0% applies only to savings income within the first £5,000 of taxable income.
Gift Aid and pension contributions extend the basic rate band rather than reducing income.
Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
Child benefit charge applies at income between £60,000 and £80,000: 1% of child benefit for every £200 over £60,000.
Tax reducers come off the tax liability, not off income.

Common mistakes

Including ISA interest or NS&I certificate interest in total income. Fix: Check each item for an exempt label before you add it. Cross it out in your layout and write 'exempt'.
Putting dividends or interest in the non-savings column. Fix: Learn the three lists: non-savings is employment, trading and property; savings is interest; dividends is dividends.
Using taxable income or total income instead of adjusted net income for the £100,000 test. Fix: Always compute adjusted net income by deducting gross donations and gross personal pension contributions first.
Reducing the allowance by the full excess over £100,000. Fix: Halve the excess. Check: the allowance should hit nil at £125,140.
Taxing dividends or savings before non-savings income. Fix: Always sort the income into three columns and tax them in the fixed order: non-savings, savings, dividends.
Using the non-savings rates of 20%/40% on dividends. Fix: Write the dividend rates, 8.75%, 33.75% and 39.35%, at the top of your workings before you start.
Deducting the gross Gift Aid or personal pension from income to reach taxable income. Fix: Only extend the bands. The deduction is used just for adjusted net income, which tests the personal allowance.
Extending only the higher rate band, or only the basic rate band. Fix: Add the gross amount to the basic rate band. The higher rate threshold moves up by the same amount automatically.
Always using £50,000 as the cap. Fix: Always compute 25% of income too and take the higher. It only matters when income is over £200,000.
Deducting the personal allowance before the reliefs. Fix: Follow the layout: total income, reliefs, net income, then personal allowance.

Exam tips

Always set out three columns. Even in a short question this shows the marker the classification step.
Read for exempt items first. ISA income and NS&I certificate interest are favourite traps in objective test questions.
Label every line, such as 'total income' and 'net income'. Marks are given for the right layout, not just the final figure.
Check the savings nil rate band by working out whether the taxpayer is basic or higher rate. Use the figures in the tax tables supplied in the exam.
In objective test questions, work out which line of the computation is asked for and stop there.
In objective test questions, check first whether the question gives net or gross payments. Grossing up is often the trap.
Learn the three thresholds: £100,000, £125,140 and the 60% effective rate. They are standard exam hooks.
In Section C, show the allowance workings on their own line, including adjusted net income, so you collect method marks even if a later figure is wrong.