ACCA Applied Skills · Taxation (UK)

The use of exemptions and reliefs in deferring and minimising income tax liabilities: formula sheet

Full chapter guide

Key formulas

Tax planning (mitigation): Legal use of reliefs and allowances as intended = planning; Examples: pension contributions, ISAs, using the personal allowance and nil rate bands, transfers between spouses.
Tax avoidance: Within the letter of the law + artificial steps + main aim of a tax advantage = avoidance; Legal in form but can be counteracted, for example under the GAAR. Do not call it a crime.
Tax evasion: Deliberate dishonesty to reduce tax = evasion (illegal); Includes omitting income, false claims and false documents. Penalties and prosecution are possible.
Planning figures you may use: Personal allowance £12,570; basic rate band £37,700; cap on reliefs: higher of £50,000 or 25% of income; Use the rates and allowances ACCA provides. Planning is often shown by using these thresholds fully.
Pension planning limits: Annual allowance £60,000 (2023–24 to 2025–26); relief without earnings up to £3,600; A legitimate planning route if the client has earnings and room within the annual allowance.
Personal allowance: £12,570; Available in full when adjusted net income is £100,000 or less.
Personal allowance reduction: Reduction = (adjusted net income − £100,000) ÷ 2; Round down the excess to a whole pound if needed. Allowance is zero when adjusted net income is £125,140 or more.
Income tax bands (non-savings and savings): £1–£37,700 at 20%; £37,701–£125,140 at 40%; over £125,140 at 45%; Bands are measured on taxable income, after the personal allowance.
Dividend rates: 8.75% basic; 33.75% higher; 39.35% additional; Dividends are taxed last, on top of other income.
Savings nil rate band: £1,000 basic rate; £500 higher rate; nil for additional rate; Based on the taxpayer's highest band of taxable income. The nil rate income still uses up band.
Dividend nil rate band: £500; Available to all taxpayers. Taxed at 0% but counted in the band.
Starting rate for savings: 0% on savings income within the first £5,000 of taxable income; Reduced by non-savings taxable income. It is not available if non-savings taxable income is £5,000 or more.
Marriage allowance: Transfer £1,260; tax reducer = £1,260 × 20% = £252; For spouses or civil partners where the transferor is a non-taxpayer and the recipient is not a higher or additional rate taxpayer. The transferor's allowance falls by £1,260.
Basic rate band extension: Gift Aid gross donation or gross personal pension contribution added to £37,700; Gross amount extends the basic and higher rate thresholds. It also lowers adjusted net income.
Child benefit charge rate: Charge % = number of complete £200 of adjusted net income over £60,000 × 1%; Applies where income is between £60,000 and £80,000. Ignore any part of £200.
Child benefit charge: Charge = child benefit received × charge %; The charge is 100% of the benefit once income reaches £80,000. It cannot exceed the benefit.
Adjusted net income: Adjusted net income = net income − gross personal pension contributions − gross Gift Aid donations; Gross up payments made net under relief at source: net ÷ 80%.
Gross up a net payment: Gross payment = net payment × 100 ÷ 80; Basic rate is 20%, so a net £8,000 becomes a gross £10,000.
Annual allowance: 2023–24 to 2025–26: £60,000 (2022–23: £40,000); Tested against your gross personal contributions plus employer contributions for the tax year.
Tapered annual allowance: Allowance = £60,000 − ((adjusted income − £260,000) ÷ 2), minimum £10,000; Applies only where adjusted income is above the £260,000 income limit. Adjusted income includes employer pension contributions. Example: £300,000 gives a reduction of £20,000 and an allowance of £40,000.
Maximum relief without earnings: £3,600 gross; Equals £2,880 paid net of 20% basic rate relief.
Relief limit with earnings: Gross personal contributions qualifying for relief ≤ relevant earnings; Employer contributions are not limited by your earnings for relief purposes. They only face the annual allowance and the wholly and exclusively test for the employer.
Net to gross: Gross contribution = net payment ÷ 80%; Personal contributions to a personal pension are paid net of 20% basic rate relief. Example: £16,000 net = £20,000 gross.
Higher and additional rate relief: Extend the basic rate band and higher rate threshold by the gross contribution; This gives extra relief at 20% (or 25% for additional rate) on the gross amount. Basic rate relief is already given at source.
Carry forward: Available allowance = current year allowance + unused allowance of the previous 3 tax years; Use the current year's allowance first, then the earliest of the three years. You must have been a scheme member in each year you carry forward from.
Annual allowance charge: Excess over available allowance × your marginal rate; The excess is treated as the top slice of your income.
ISA subscription limit: Maximum investment = £20,000 per tax year (all ISA types combined); Given in the ACCA rates tables. Income and gains in the ISA are exempt. No relief for the money invested.
EIS income tax reducer: Reducer = 30% × amount invested (maximum £1,000,000 a year, or £2,000,000 if the excess is in knowledge-intensive companies); Learn these figures: they are not in the rates tables. Shares must be held for 3 years. Can be carried back to the previous tax year. Reducer cannot exceed income tax liability.
SEIS income tax reducer: Reducer = 50% × amount invested (maximum £200,000 a year); Hold the shares for 3 years. Can be carried back to the previous year.
VCT income tax reducer: Reducer = 30% × amount invested (maximum £200,000 a year); Hold the shares for 5 years to keep the income tax relief. The 5 years does not affect the CGT exemption. Cannot be carried back to the previous year. VCT dividends are exempt from income tax.
Capital gains exemption on sale: EIS and SEIS: gain exempt if income tax relief was given and not withdrawn (3-year period met). VCT: gain on disposal of ordinary shares in a VCT is exempt if the shares were acquired within the £200,000 annual limit, whatever the holding period; For a VCT, the 5-year period only protects the income tax relief. The gain exemption depends on the shares being ordinary shares in a VCT acquired within the annual limit, not on how long you hold them.
Allowable loss on EIS/SEIS shares: Loss = cost − income tax relief given − sale proceeds; Can be set against income of the year of loss and/or the previous year (by claim), or against gains. Relief against income is itself subject to the cap on income tax reliefs. VCT losses are not allowable.
EIS deferral relief window: Reinvest from 1 year before to 3 years after the gain arises; Any amount of gain on any asset can be deferred. Deferred gain is taxed when the EIS shares are disposed of.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of income; The cap applies to reliefs deducted from income, such as trading loss relief against general income, qualifying loan interest and share loss relief against income. EIS, SEIS and VCT reducers are not within this cap, as they reduce tax and are not deductions from income.
Cap on reliefs: Cap = higher of £50,000 and 25% × adjusted total income; Adjusted total income is total income before the capped reliefs, less gross personal pension contributions. With no pension contributions it equals total income before the reliefs. This is the ACCA tax table rule.
Break-even income: 25% × adjusted total income > £50,000 when adjusted total income > £200,000; At or below £200,000 of adjusted total income, the cap is £50,000.
Relief allowed: Relief allowed = lower of (total capped reliefs claimed, cap); Add the capped reliefs together first. The cap is one limit for all of them, not one per relief. The taxpayer chooses how to use the cap between the reliefs.
Net income: Net income = total income − relief allowed; Deduct the allowed relief before the personal allowance.
Carry forward relief: Loss c/f → first available profits of the same trade, as early as possible; Automatic and cannot be restricted. Relieves trading profits only, so it never touches other income.
Current year / previous year claim: Loss → general income of the loss year and/or the previous year, either order; Claim within 12 months of the 31 January following the end of the loss tax year. The claim for a year takes all the income available, so the personal allowance can be wasted.
Opening-year loss relief: Loss in first 4 tax years → general income of the 3 preceding tax years, earliest first; Same claim deadline as above. Also available against the loss year itself.
Terminal loss relief: Loss of final 12 months → trading profits of the final tax year and the 3 preceding years, latest first; Claim within 4 years of the end of the tax year in which the trade ceased.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of income; Applies unless otherwise restricted. Figures from the ACCA tax tables.
Tax saved: Tax saved = tax before the claim − tax after the claim; Use this to compare options. Ignore Class 4 NIC unless told otherwise.
BADR tax: Tax (BADR gains only) = (Qualifying gain − annual exempt amount) × 14%; Use this layout only where BADR gains are the only gains. Where BADR gains are mixed with other gains, set the £3,000 annual exempt amount against gains taxed at 24% first, then 18%, and against BADR gains last. Lifetime limit £1,000,000 of qualifying gains. Gains above the limit are taxed at 18% or 24%.
CGT rates without BADR: 18% lower rate; 24% higher rate; Applies to gains within the basic rate band and above it respectively, after taxable income is considered.
Dividend tax rates: 8·75% basic; 33·75% higher; 39·35% additional; first £500 at nil rate; The nil rate band still uses up part of the tax band.
Employee Class 1 NIC: Nil to £12,570; 8% from £12,571 to £50,270; 2% above; Not payable on dividends.
Employer Class 1 NIC: 15% × (salary − £5,000); employment allowance £10,500; Employer NIC is a deductible expense for the company. The employment allowance of £10,500 can only be claimed if the company is eligible. It is not available to a company where the director is the only employee, so check who else is employed and any other facts in the question before deducting it.
Class 4 NIC (sole trader): Nil to £12,570; 6% from £12,571 to £50,270; 2% above; Charged on profits, not drawings.
Corporation tax rates: 19% small profits (up to £50,000); 25% main (over £250,000); Marginal relief = (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits. The £50,000 and £250,000 limits are divided by (1 + the number of associated companies) and are reduced proportionally for accounting periods shorter than 12 months.
IHT rates: Death 40%; lifetime 20% on excess over the nil rate band; Nil rate band £325,000; residence nil rate band £175,000.
Taper relief on death tax for lifetime gifts: More than 3 but less than 4 years 20%; more than 4 but less than 5 years 40%; more than 5 but less than 6 years 60%; more than 6 but less than 7 years 80% reduction; Reduces the tax, not the value. No relief if death is within 3 years of the gift. Check the exact number of years, as the boundaries matter. It only helps where the gift exceeds the available nil rate band.

Quick revision

Avoidance is lawful planning within the rules; evasion is illegal and involves concealing or misstating facts.
Personal allowance is £12,570 and is reduced where adjusted net income is above £100,000; it is zero at £125,140 or more.
Basic rate band is £37,700 at 20%; the higher rate applies to £37,701 to £125,140 at 40%; the additional rate is 45%.
Savings nil rate band is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers; the dividend nil rate band is £500.
Child benefit charge: 1% of the benefit received for every £200 of income over £60,000, for income between £60,000 and £80,000.
Pension annual allowance is £60,000 for 2023-24 to 2025-26, with a minimum allowance of £10,000.
Contributions without earnings can qualify for relief only up to £3,600.
The ISA overall investment limit is £20,000.
Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
Inheritance tax: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20%, death rate 40%.
Taper relief reduces death tax on lifetime gifts: 20% for more than 3 but less than 4 years, rising to 80% for more than 6 but less than 7 years.
In every planning answer, state the saving and check for limits.

Common mistakes

Calling tax avoidance illegal. Fix: Avoidance is within the letter of the law but can be challenged. Only evasion is a criminal matter.
Treating all tax saving as avoidance. Fix: Using ISAs, pensions or allowances as intended is acceptable planning.
Applying the personal allowance reduction to taxable income instead of adjusted net income. Fix: Use adjusted net income, which is total income less gross Gift Aid donations and gross pension contributions. Then work out the reduction at £1 for every £2 over £100,000.
Giving a higher rate taxpayer a £1,000 savings nil rate band. Fix: Basic rate taxpayers get £1,000, higher rate taxpayers £500 and additional rate taxpayers nil. Decide the band first.
Using total income instead of adjusted net income Fix: Always write an adjusted net income line first and deduct gross pension and Gift Aid payments.
Deducting the net pension payment Fix: Gross up by dividing by 80% before deducting from income.
Treating the net payment as the amount tested against the annual allowance. Fix: Always gross up by ÷ 80% for personal pension payments before testing the annual allowance or extending bands.
Leaving out employer contributions when testing the annual allowance. Fix: Total pension input is personal gross plus employer. Write both numbers on one line.
Treating the EIS, SEIS or VCT relief as a deduction from income. Fix: The relief is a tax reducer. Work out the tax first, then subtract the percentage of the investment.
Letting the reducer take tax below zero or giving a refund. Fix: Compare the reducer with the income tax liability. Use the lower figure. For EIS and SEIS only, the investor can instead carry the investment back to the previous tax year. VCT relief cannot be carried back.

Exam tips

In objective questions, look for the key words: 'conceal' or 'omit' means evasion, 'artificial' means avoidance, and 'as intended' means planning.
In written answers, define the term first, then apply it to the facts, then give the consequence.
Never say that avoidance is a criminal offence, and never say that planning is wrong.
Add an ethical sentence when you are asked to advise a client.
Write the order of income at the top: non-savings, savings, dividends. Then place the bands and nil rate bands carefully in that order.
If income is between £100,000 and £125,140, check the personal allowance first. Mention the 60% effective rate and say Gift Aid or pension contributions could help.
Planning answers should state that gifts between spouses must be outright, and the saving should be quantified with a computation.
In objective test questions, watch for the taxpayer's band: it decides the savings nil rate band amount (£1,000 or £500).