ACCA Strategic Professional · Advanced Taxation (UK)

Income tax: the comprehensive computation of taxable income and the income tax liability: formula sheet

Full chapter guide

Key formulas

Computation layout: Income by type (non-savings, savings, dividend) → total income − reliefs = net income − personal allowance = taxable income; Show the three columns separately. Set the personal allowance against non-savings first, then savings, then dividends.
Order of taxation: Non-savings first → savings second → dividends last; Applies to filling the personal allowance and the bands.
Income tax rates and bands: Basic rate band £37,700; higher rate £37,701 to £125,140; additional rate above £125,140. Normal rates 20% / 40% / 45%. Dividend rates 8.75% / 33.75% / 39.35%; Non-savings and savings income use the normal rates. Take the figures from the tax tables.
Nil rate slices: Savings nil rate band: £1,000 (basic rate taxpayer), £500 (higher rate taxpayer). Dividend nil rate band: £500. Starting rate for savings: 0% on savings within the first £5,000 of taxable income; Your status (basic or higher rate taxpayer) is decided by taxable income. The starting rate is cut by non-savings taxable income, so it is only available if non-savings taxable income is below £5,000. The nil rate slices are taxed at 0% but use up the band.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil when adjusted net income is £125,140 or more; Adjusted net income is net income less certain items such as gross Gift Aid and gross personal pension contributions.
Personal allowance: £12,570; From the tax tables. The income limit is £100,000.
Abatement: Reduction = (Adjusted net income − £100,000) ÷ 2; Round down for exam purposes only if the question says so. The allowance cannot go below nil. It is nil where adjusted net income is £125,140 or more.
Adjusted net income: Net income − gross gift aid donations − gross relevant pension contributions (paid net of basic rate tax); Net income is total income less reliefs deducted in arriving at net income, such as qualifying loan interest. Use the gross amount of gifts and contributions.
Gross from net gift aid: Gross = net paid × 100 ÷ 80; Basic rate tax at 20% is treated as deducted at source.
Extended basic rate band: £37,700 + gross gift aid donation (and gross relevant pension contribution); Taxable income in the extended band is taxed at 20% instead of 40%, and the higher rate bands move up too.
Marriage allowance: Transferable amount £1,260; Given in the tables. The transferor must not use it fully; the recipient must not be a higher or additional rate taxpayer.
Order of taxing income: Non-savings income → savings income → dividend income; Deduct the personal allowance in the same order. Slot each type into the bands in this order.
Bands (taxable income): Basic: £1 − £37,700 | Higher: £37,701 − £125,140 | Additional: over £125,140; Measured after the personal allowance, and nil rate band income counts towards the bands.
Non-savings and savings rates: 20% | 40% | 45%; Same rates for non-savings and savings income. Savings income is taxed at these rates once any nil rate bands are used.
Dividend rates: 8.75% | 33.75% | 39.35%; Apply to dividends above the dividend nil rate band, within each band.
Starting rate band for savings: Starting rate band = £5,000 − non-savings taxable income (if positive). Taxed at 0%.; If non-savings taxable income is £5,000 or more, there is no starting rate band.
Savings nil rate band: Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate taxpayer nil; Decide the taxpayer's status from taxable income including savings and dividends.
Dividend nil rate band: £500 for all taxpayers; Taxed at 0%, but uses up the band it falls in.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil at £125,140 or more; The reduction creates an effective 60% rate on non-savings income between £100,000 and £125,140.
Cap on income tax reliefs: Cap = higher of £50,000 and 25% × adjusted total income; The tax tables give: "Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income." 25% only wins if adjusted total income exceeds £200,000.
Breakeven income: 25% × income > £50,000 when income > £200,000; Below £200,000 of adjusted total income, the cap is simply £50,000.
Relief allowed: Relief allowed = lower of (capped reliefs claimed) and (cap); The restricted excess is not deducted against general income this year. Do not assume it is carried forward automatically. Consider other options, such as relief against chargeable gains, carry-back or carry-forward where available, or withdrawing the claim and carrying the loss forward against future profits of the same trade.
Limit on personal contribution relief: Maximum relievable gross contribution = higher of (relevant earnings, £3,600); Employer contributions are not limited by this test. They are checked against the annual allowance instead.
Relief at source: amount paid: Net payment = gross contribution × 80%; Basic rate relief is given at source. Extend the basic rate band by the gross amount (£37,700 + gross) for higher rate relief.
Net pay arrangement: Taxable employment income = gross pay − gross contribution; Do not extend the bands. The relief is already in taxable income.
Annual allowance: £60,000 for 2023/24 to 2025/26; £40,000 for 2022/23; minimum (tapered) allowance £10,000; Use the tax tables given in the exam.
Threshold income and adjusted income: Taper applies only if threshold income > £200,000 AND adjusted income > £260,000; Threshold income is net income less gross personal contributions paid under relief at source. Adjusted income is net income plus employer contributions and net pay employee contributions.
Tapered annual allowance: Allowance = £60,000 − ((adjusted income − £260,000) ÷ 2), but not below £10,000; Reduce by £1 for every £2 of adjusted income over £260,000.
Carry forward: Available = unused allowance of the previous 3 tax years, earliest year first; You must have been a member of a registered scheme in each year. Use the current year's allowance first.
Annual allowance charge: Charge = (pension input − allowance − carry forward used) × your marginal rate; The excess is taxed as the top slice of your income.
Payment on account: Each POA = 50% × [(prior year income tax liability − tax deducted at source) + prior year Class 4 NIC]; Due 31 January in the tax year and 31 July after it. CGT and Class 2 or Class 1 NIC are excluded.
No POAs needed: Relevant amount < £1,000, or tax deducted at source > 80% of prior year income tax liability; If either test is met, the whole liability is paid on the next 31 January.
Balancing payment: Actual relevant amount for the year − POAs paid; Due 31 January after the tax year. A negative result is a repayment.
Filing deadlines: Paper return: 31 October after the tax year. Online return: 31 January after the tax year; The payment date for the balancing payment is the same as the online filing date.
Interest on underpaid tax: Tax unpaid × 8.50% × months late ÷ 12; Rate of 8.50% is given in the tax tables as the assumed rate. Runs from the due date to payment.
Interest on overpaid tax: Tax overpaid × 3.50% × months ÷ 12; Rate of 3.50% is given in the tax tables as the assumed rate. Runs from the payment date to repayment.
Late payment penalties on income tax: 5% of unpaid tax at 30 days late, a further 5% at 6 months and a further 5% at 12 months; These are not in the tax tables, so learn them. They are separate from interest.
Late filing penalties: £100 once late. Then £10 a day for up to 90 days. Then the greater of 5% of tax due or £300 at 6 months and again at 12 months; Not in the tax tables, so learn them. The £100 can apply even if no tax is due.
Personal allowance taper: PA = £12,570 − ½ × (adjusted net income − £100,000), minimum nil; PA is nil when adjusted net income reaches £125,140. Use adjusted net income, not taxable income.
Marginal rate in the taper band (non-savings income): 40% × 1.5 = 60%; Applies to income between £100,000 and £125,140 for someone taxed at higher rate. It is 45% above £125,140.
Marginal rate on dividends in the taper band: 33.75% × 1.5 = 50.625%; Applies where the dividend is taxed at 33.75% and PA is still being lost.
Income tax rate bands 2025/26: Basic £1–£37,700 at 20% (dividends 8.75%); higher to £125,140 at 40% (33.75%); additional above that at 45% (39.35%); Given in the tax tables. The dividend nil rate band is £500.
Effect of a gross pension contribution or Gift Aid: Basic rate band extended by the gross payment; adjusted net income reduced by the gross payment; Relief at source: the net payment is 80% of the gross. The extra relief is claimed through the return.
CGT rates: 18% in unused basic rate band, 24% above; BADR 14%; annual exempt amount £3,000; Taxable income is used first. Gains fill the basic rate band left over.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Check this when advising on reliefs other than pension contributions and Gift Aid.

Quick revision

Layout: non-savings, then savings, then dividend income, taxed in that order.
Personal allowance is £12,570, reduced where adjusted net income is above £100,000, and nil at £125,140 or more.
The transferable amount for the marriage allowance is £1,260.
Basic rate band is £37,700, higher rate runs up to £125,140, and additional rate is above that.
Dividend rates are 8.75%, 33.75% and 39.35%; the dividend nil rate band is £500.
Savings nil rate band is £1,000 for basic rate and £500 for higher rate taxpayers; the starting rate is 0% within the first £5,000 of taxable income.
Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
Pension annual allowance is £60,000, with a minimum allowance of £10,000; contributions without earnings qualify up to £3,600.
Interest on underpaid tax is 8.50% and on overpaid tax is 3.50%.
Careless errors carry a maximum penalty of 30%; deliberate but not concealed 70%; deliberate and concealed 100%.
Always finish with advice that uses the client's facts and states the effect on the tax.

Common mistakes

Taxing dividends before savings or non-savings income. Fix: Always go non-savings, then savings, then dividends. Write the order at the top of your answer.
Using the £1,000 savings nil rate band for a higher rate taxpayer. Fix: Decide status from total taxable income. If it is above £37,700 the person is a higher rate taxpayer and the band is £500. If taxable income is over £125,140, there is no savings nil rate band.
Testing the £100,000 limit against taxable income. Fix: Always compute adjusted net income separately, using net income less gross gift aid and gross pension payments.
Using the net gift aid payment to reduce adjusted net income or extend the band. Fix: Gross up by 100 ÷ 80 first, then use the gross figure for both purposes.
Giving a starting rate band when non-savings taxable income is £5,000 or more. Fix: Always calculate £5,000 minus non-savings taxable income. If it is zero or negative, there is no starting rate band.
Using the £1,000 savings nil rate band for a higher rate taxpayer. Fix: Add savings and dividends to find total taxable income. If it is over £37,700 the taxpayer is a higher rate taxpayer and gets £500. Above £125,140 the taxpayer gets nothing.
Using £50,000 only and ignoring the 25% limb. Fix: Always write the test: higher of £50,000 and 25% of income. Check whether income exceeds £200,000.
Applying the cap to every relief. Fix: Apply it to the relevant uncapped reliefs, mainly trading loss relief against general income. Reliefs with their own limits follow their own rules.
Extending the basic rate band by the net payment instead of the gross payment. Fix: Always gross up by ÷ 0.8 first. Extend the band by the gross figure.
Treating employer contributions as a taxable benefit or limiting them to the £3,600 or earnings limit. Fix: Employer contributions are a deduction for the employer and not taxable for the employee. They only count towards the annual allowance.

Exam tips

Always draw the three-column layout, even for a short part of a Section A question. It shows the examiner your method and earns marks even if a figure is wrong.
Take every rate, band and nil rate from the tax tables ACCA provides. Do not rely on memory for the bands and rates.
Check adjusted net income against £100,000 in every computation. It is a common trap in ATX questions, and tax planning questions often build on it.
State your assumptions and label each slice of tax (for example, savings nil rate band £500). Clear labelling makes it easy for the marker to award marks.
Use the professional skills marks: if a client needs advice, explain the effect of the order of taxation in plain words after the numbers.
Write adjusted net income as its own line in every high-income computation. Marks are given for it.
Always gross up gift aid and net pension payments before using them. Show the 100 ÷ 80 working.
If income is close to £100,000 or £125,140, look for a planning point: a gift aid payment or pension contribution can restore the allowance. Mention the 60% effective rate.