Alternative ways of achieving personal or business outcomes and their tax consequences: formula sheet

Key formulas

Corporation tax rates

Profits ≤ lower limit: 19%. Profits ≥ upper limit: 25%. In between: 25% with marginal relief

Lower limit £50,000, upper limit £250,000, for a standalone company with a 12-month period.

Marginal relief

(Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Deduct from corporation tax at 25%. Use limits adjusted for associated companies and short periods.

Adjusted limits

Limit ÷ (1 + number of other associated companies); short period: limit × months ÷ 12

Apply both adjustments together where they both arise.

Augmented profits

Taxable total profits + dividends received from non-group companies

Used only for the rate test and marginal relief. Tax is charged on taxable total profits.

Dividend rates and nil rate

Basic 8.75%, higher 33.75%, additional 39.35%; dividend nil rate band £500

Dividends are not tax deductible for the company. The nil rate band still uses up part of the band.

Cap on income tax reliefs

Cap = higher of £50,000 or 25% of income

Applies unless the relief is otherwise restricted or not subject to the cap.

Income tax bands

Basic £1 to £37,700 at 20%; higher to £125,140 at 40%; additional above that at 45%

Personal allowance £12,570, reduced to zero when adjusted net income is £125,140 or more.

Income tax rates (normal)

Basic £1 – £37,700: 20%; Higher £37,701 – £125,140: 40%; Additional over £125,140: 45%

Apply to salary, bonus and benefits. Bands are taken from the tax tables.

Dividend rates

Basic 8.75%; Higher 33.75%; Additional 39.35%

Dividends are the top slice of income. The first £500 is the dividend nil rate band, taxed at 0%, but it still uses up part of the band.

Personal allowance

£12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil at £125,140 or more

Effective marginal rate on income between £100,000 and £125,140 is higher than the headline rate. Pension contributions reduce adjusted net income.

Corporation tax

Small profits rate 19% (profits up to £50,000); main rate 25% (profits over £250,000)

Limits are divided between associated companies. Marginal relief applies between the limits.

Marginal relief

(Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Upper limit £250,000. Used where profits fall between £50,000 and £250,000.

Salary deduction test

Salary is deductible only if wholly and exclusively for the trade and not excessive

Dividends are never deductible. Salary to family members must reflect real work.

Pension limits

Annual allowance £60,000 (2023/24 to 2025/26); minimum allowance £10,000; threshold income £200,000; income limit £260,000

Maximum contribution with no earnings that qualifies for relief is £3,600. Employer contributions are not limited to earnings but must pass the wholly and exclusively test.

Benefit scales

Car fuel base £28,200; van benefit £4,020; van fuel £769; zero-emission van 0%; electric car 3%

Car benefit = list price × percentage. Company pays Class 1A NIC on benefits. Use the tax tables for NIC rates.

Interest rates

Official rate 3.75%; underpaid tax 8.50%; overpaid tax 3.50%

Official rate is used for beneficial loans. Loan routes to extract cash have their own rules.

CGT rates and annual exempt amount

Lower rate 18%; higher rate 24%; annual exempt amount £3,000

The tax tables give these figures for 2025/26. Apply the annual exempt amount first against gains taxed at the highest rate.

BADR and investors' relief

Rate 14%; lifetime limit £1,000,000 for each relief

The two limits are separate. Gains above the remaining limit are taxed at 18% or 24%.

Incorporation relief where shares and other consideration are received

Gain deferred = Total gain × Value of shares ÷ Total consideration

The remaining gain is taxable now. The base cost of the shares = market value of shares − gain deferred.

Base cost of shares after incorporation relief

Base cost = Value of shares received − gain deferred

If shares are the only consideration, all the chargeable gains are deferred.

Gift relief

Donee's base cost = Market value at gift − gain held over

This needs a joint election. The donor pays no tax on the held-over gain.

Ordering of gains with BADR

BADR gains are taxed at 14% and are treated as using the basic rate band first; annual exempt amount against gains taxed at the highest rate first

BADR gains are taxed at a flat 14%, whichever band they fall in. They still use up the basic rate band, so other gains are more likely to fall in the 24% band.

CGT rates (individuals)

18% lower rate; 24% higher rate; annual exempt amount £3,000

Use the tables. Gains are taxed after income, so the band left in the basic rate band decides the rate.

BADR

14% on gains up to a £1,000,000 lifetime limit

Applies to qualifying disposals, including shares in a trading company where the conditions are met. Investors' relief has the same rate and limit but different conditions.

Share sale gain

Gain = sale proceeds − allowable costs (usually the cost of the shares)

Tax is paid once by the shareholder.

Asset sale, two-layer charge

Company: corporation tax on the gain. Owner: tax on extraction (dividend or liquidation)

Net cash to owner = proceeds − corporation tax − owner's tax on extraction.

Dividend rates

8.75% basic; 33.75% higher; 39.35% additional; £500 dividend nil rate band

Use this for dividends and for a buy-back treated as a distribution.

Buy-back, default treatment

Distribution = price paid − original subscription (nominal value plus share premium)

Taxed as dividend income. The company pays stamp duty of 0.5% on the price.

Buy-back, capital treatment conditions

Unquoted trading company (or holding company of a trading group); UK-resident shareholder; shares held at least five years (three if inherited); purpose to benefit the trade, not tax avoidance; holding falls to 75% or less of the former holding; holding after is 30% or less

All must be met. If not, it is income. HMRC clearance can be sought in advance.

Stamp taxes

Stamp duty on shares 0.5%. SDLT non-residential: 0% to £150,000; 2% on £150,001 to £250,000; 5% above £250,000

The buyer pays. Stamp duty is on shares and SDLT is on non-residential land.

Nil rate band (NRB)

NRB = £325,000

Taken from the tax tables. Applies to cumulative chargeable transfers in the seven years before each transfer. Any unused proportion of a deceased spouse's or civil partner's NRB can be added to the survivor's.

Residence nil rate band (RNRB)

RNRB = £175,000 (maximum)

Available on death where a home passes to direct descendants. Limited to the value of the home passing to them. Reduced by £1 for every £2 the estate exceeds £2,000,000. Unused RNRB can be transferred to a surviving spouse or civil partner.

IHT rates

Lifetime rate 20%; death rate 40%

Both apply to the excess over the available nil rate band. A lifetime rate applies to CLTs when made. The death rate applies to the estate and to gifts made within seven years of death.

Taper relief

Tax payable on death × (1 − taper %)

Reduction applies to the tax. Over 3 but under 4 years: 20%. Over 4 but under 5: 40%. Over 5 but under 6: 60%. Over 6 but under 7: 80%. No relief if death is within 3 years.

Grossing up a CLT

Gross = net gift above NRB × 100 ÷ 80

Use when the donor pays the lifetime tax. The tax is then 20% of the gross excess. If the donee pays, no gross up is needed.

Main annual exemptions

Annual £3,000; small gifts £250 per donee; marriage gifts £5,000 parent, £2,500 grandparent, £1,000 others

The annual exemption can carry forward one year if unused. It is applied to the earliest gift in the tax year. Normal expenditure out of income is also exempt if the conditions are met.

Seven-year cumulation

Look back seven years from each chargeable transfer

Earlier chargeable transfers use up the NRB before later ones. PETs count only if they became chargeable.

SDLT on non-residential property

£1 to £150,000 at 0%; £150,001 to £250,000 at 2%; above £250,000 at 5%

Slice-based. Tax each slice of the price at its own rate, then add up. Buyer pays.

Stamp duty on shares

Stamp duty = 0.5% × price paid

Applies to transfers of shares. Paid by the buyer. Do not use it for land.

VAT registration limit

Register if taxable turnover exceeds £90,000

Use the limit given in the tax tables and the facts about turnover in the question.

VAT deregistration limit

Deregister if taxable turnover is expected to be £88,000 or less

Voluntary deregistration is a choice, so check input VAT recovery too.

Late VAT payment penalty

Up to 15 days: none; 16 to 30 days: 3%; over 30 days: 6% plus a daily penalty at an annual rate of 10%

Use the table in the exam and count the days late carefully.

VAT standard rate

Standard rate = 20%

VAT on a standard-rated net price is 20% of that price.

Quick revision

• Compare routes on the same basis: total tax for the company and the individual, over the same period.
• CGT rates are 18% and 24%, and the annual exempt amount is £3,000.
• Business asset disposal relief taxes qualifying gains at 14%, with a £1,000,000 lifetime limit.
• Corporation tax: small profits rate 19%, main rate 25%, with marginal relief between £50,000 and £250,000.
• Marginal relief = (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
• 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 gifts made more than three years before death, starting at 20%.
• Non-residential SDLT is 0% to £150,000, 2% to £250,000 and 5% above; stamp duty on shares is 0.5%.
• VAT standard rate is 20%; registration limit £90,000 and deregistration limit £88,000.
• Error penalties depend on behaviour: careless up to 30%, deliberate not concealed up to 70%, deliberate and concealed up to 100%.
• Quarterly instalments apply to companies with profits above £1,500,000, subject to the detailed conditions.
• Always end with a clear recommendation and mention non-tax factors.

Common mistakes

• Using the full £50,000 and £250,000 limits when the company has associated companies. Fix: Count associated companies first and divide both limits by one plus the number of others.
• Taxing dividends received from unconnected companies in the company's computation. Fix: Leave such dividends out of taxable total profits but add them to augmented profits for the rate test and marginal relief.
• Treating dividends as deductible for the company. Fix: Dividends are paid from after-tax profit. Always deduct corporation tax before calculating the dividend available.
• Ignoring NIC when comparing salary and dividends. Fix: Include employer and employee NIC on salary and bonus, and Class 1A on benefits. Read the NIC rates in the tax tables. Dividends carry no NIC.
• Treating incorporation relief as optional to claim. Fix: State that incorporation relief applies automatically when the conditions are met. Say that an election is needed only to disapply it.
• Deferring the whole gain when some consideration is cash or a loan account. Fix: Use Gain × Shares ÷ Total consideration. Tax the balance now, and reduce the share base cost by the amount deferred only.
• Ignoring the second layer of tax on an asset sale. Fix: Always carry the post-tax cash into a second step: dividend tax or liquidation CGT. Net cash to the owner is the figure to compare.
• Giving the company BADR or an annual exempt amount. Fix: Company gains bear corporation tax with no BADR and no annual exempt amount. These reliefs are for individuals.
• Applying taper relief to the value of the gift instead of the tax. Fix: Compute tax at 40% on the excess over the NRB first. Then multiply the tax by (1 − taper %).
• Thinking taper relief helps when the gift is covered by the nil rate band. Fix: If the gift falls within the NRB, the tax is nil already. The gift still uses the NRB, which can increase the tax on the death estate.

Exam tips

• Show the structure in the first lines: two layers of tax for a company, one for an unincorporated business.
• Check for associated companies and short accounting periods before you use any corporation tax limit.
• Use the tax tables for NIC and dividend rates rather than learning them. Spend the time on layout and assumptions.
• State assumptions clearly, for example that the owner is a higher rate taxpayer or that all profit is extracted.
• End with a recommendation and at least two non-tax factors, because the professional skills marks reward judgement.
• Always calculate the owner's adjusted net income first. Many ATX scenarios are built around the £100,000 to £125,140 personal allowance trap.
• Show corporation tax, income tax and NIC separately in a table of workings. This earns marks even if one figure is wrong.
• Use the NIC rates and the tax rates in the exam tax tables. Never rely on memory for NIC.