ACCA Strategic Professional · Advanced Taxation (UK)

Income tax: 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 (annual); Paid by the employee through PAYE. Rates are from the tax tables given in the exam.
Class 1 employer NIC: Nil on £1 – £5,000; 15% above £5,000 (annual); Paid by the employer on earnings. Employment allowance of £10,500 may reduce the bill if the employer is eligible.
Class 4 NIC (self-employed): Nil on £1 – £12,570; 6% on £12,571 – £50,270; 2% above £50,270; Charged on trading profits, not on fees received. No employer NIC arises on payments to a self-employed person.
Class 1A NIC: 15% of taxable benefits in kind; Employer only. Arises only if the worker is an employee.
Status test approach: Control + personal service + mutuality of obligation + substitution + equipment + financial risk + integration; No single factor is decisive. Weigh the whole relationship and conclude.
Taxable earnings: Taxable earnings = Salary + bonuses + commission + other cash + money's worth + taxable benefits; Gross amounts, before PAYE deducted. Tax deducted at source is a credit, not a deduction.
Net taxable earnings: Net taxable earnings = Taxable earnings − allowable deductions; Deductions include employee pension contributions only where the scheme operates a net pay arrangement (not relief-at-source schemes), payroll giving, and qualifying expenses.
General expenses test: Wholly + Exclusively + Necessarily, incurred in the performance of the duties; All three must be met. A mixed-purpose cost fails the exclusivity limb.
Receipts basis date (non-director): Earlier of: date of payment; date entitlement arises; Taxed in the tax year (6 April to 5 April) containing that date.
Receipts basis date (director): Earliest of: payment; entitlement; credited in the accounts; amount determined (if determined during the period); end of the period (if the amount was determined before the period end); Extra dates apply to directors generally, including directors of small or private companies.
Employee NIC bands: Class 1 employee: £12,570 nil; £12,571 to £50,270 at 8%; above £50,270 at 2%; From the tax tables. NIC is separate from income tax.
Income tax normal rates: 20% to £37,700; 40% to £125,140; 45% above; Applies to employment income as non-savings income.
Car benefit: (List price + accessories − capital contributions up to £5,000) × car benefit percentage × months available ÷ 12 − employee payments for private use; Capital contributions by the employee are capped at £5,000. Use the percentage from the tax tables. Employee payments for private use reduce the benefit. Apportion to the nearest month.
Car benefit percentage (from the tables): Electric (0g CO2) 3%; hybrid 1–50g by electric range: 130+ miles 3%, 70–129 miles 6%, 40–69 miles 9%, 30–39 miles 13%, under 30 miles 15%; 51–54g 16%; 55g 17%; The tables show the full scale. Above 55g the rate rises with emissions, up to a maximum. Check the table in the exam for the exact figure. A car with exactly 55g is 17%.
Car fuel benefit: £28,200 × car benefit percentage × months ÷ 12; Applies only if the employer pays for fuel used privately. It is nil if the employee reimburses all private fuel. Partial reimbursement gives no reduction.
Van benefit: £4,020 scale charge (plus £769 van fuel benefit if the employer pays private fuel), × months ÷ 12; Zero-emission vans have a 0% benefit. Taxable only if private use is more than home-to-work travel.
Beneficial loan, average method: (Opening balance + closing balance) ÷ 2 × 3.75% × months ÷ 12 − interest paid by employee; Exempt if the total of all loans from the employer is £10,000 or less at all times in the tax year. The strict (daily) method can be used if HMRC requires it or the taxpayer elects.
Living accommodation, basic charge: Annual value (or rent paid by the employer, if higher) − rent paid by employee; Apportion if provided for part of the year. No benefit arises where the accommodation is job-related, such as when it is necessary for the proper performance of the duties.
Living accommodation, additional charge: (Cost of providing the property − £75,000) × 3.75%; Applies where cost is over £75,000. Cost includes the purchase price plus improvements made before the start of the tax year. Not charged on job-related accommodation.
Class 1 primary (employee): Nil on £1 to £12,570; 8% on £12,571 to £50,270; 2% above £50,270 (per year); Charged on the employee's earnings. The employee bears this cost.
Class 1 secondary (employer): Nil on first £5,000; 15% on earnings above £5,000 (per year); Paid by the employer on the same earnings. It is not deducted from the employee's pay.
Class 1A: 15% × cash equivalent of taxable benefits subject to Class 1A; Employer only, with no thresholds. It applies to most benefits taxable as employment income that are not subject to Class 1, including cars and fuel. It is not charged on exempt benefits or on benefits already within Class 1.
Employment allowance: Maximum £10,500 per year, set against employer Class 1 secondary and Class 1A; Only eligible employers can claim it. For example, a company whose only employee is a director is not eligible. The reduction cannot exceed the employer's NIC liability. Check the eligibility facts given in the question.
Cost of an employee to the employer: Gross salary + employer Class 1 NIC + Class 1A on benefits + cost of providing benefits; Use this when comparing remuneration alternatives.
Unapproved option: taxable amount on exercise: Employment income = (market value at exercise − price paid) × number of shares; Taxed at the employee's marginal income tax rates. Employee NIC is 8% (to £50,270) or 2% above, and employer NIC is 15%, only if shares are readily convertible assets.
Base cost after a taxed exercise: Base cost = price paid + amount charged to income tax (= market value at exercise); Use this to avoid double taxation when the shares are later sold.
EMI: charge on a discounted option: Income tax charge on exercise = (market value at grant − exercise price) × shares; Arises only if the exercise price was below market value at grant. Any growth after grant is free of income tax. NIC applies too if shares are readily convertible.
EMI limits: £250,000 per employee; £3 million per company; gross assets ≤ £30 million; fewer than 250 employees; exercise within 10 years; Values are measured at market value at grant, ignoring any restrictions on the shares.
CSOP conditions: Limit £60,000 at exercise price; exercise between 3 and 10 years after grant; Exercise in under 3 years normally brings an income tax charge unless a leaver reason applies.
SAYE conditions: Saving £5 to £500 a month; 3 or 5 year contract; option price ≥ 80% of market value at grant; Must be open to all eligible employees on similar terms.
SIP limits: Free shares £3,600 a year; partnership shares lower of £1,800 or 10% of salary; matching up to 2:1; Removal from the plan before 5 years gives an income tax charge, and the charge is higher if removed before 3 years.
CGT on disposal of scheme shares: Gain = proceeds − base cost − allowable costs; less annual exempt amount £3,000; taxed at 18% or 24%; If BADR applies (EMI), the rate is 14% up to the £1,000,000 lifetime limit.
Taxable earnings layer: Final salary + accrued holiday pay + contractual payments (including contractual PILON) + PENP; Taxable as employment income. Class 1 NIC applies to the employee and the employer.
PENP: PENP = basic pay for the unworked part of the notice period; Taxable as earnings with Class 1 NIC. Any basic pay already paid for the notice period is not counted twice. Only basic pay is included.
Remaining termination award: Taxable amount = remaining award − £30,000 (minimum nil); Statutory redundancy pay is part of the award and uses up the £30,000. The excess is taxable employment income.
Employer Class 1A on the excess: Class 1A = 15% × (termination award in excess of £30,000); The rate is in the NIC table. No employee NIC arises on this excess.
Employer Class 1 on earnings layer: 15% × earnings above £5,000 a year; Employee Class 1: 8% on £12,571 to £50,270 and 2% above. Take care with how much of the thresholds earlier pay has used.
Annual allowance: 2023/24 to 2025/26: £60,000; 2022/23: £40,000; minimum allowance £10,000; Check the tax year in the question. Carry forward often uses 2022/23, which is £40,000.
Pension input (money purchase): Employer contributions + gross personal contributions paid in the tax year; Gross up relief-at-source contributions: net ÷ 0.80. Net pay contributions are already gross.
Taper conditions: Threshold income > £200,000 AND adjusted income > £260,000; If threshold income is £200,000 or less, there is no taper, however high adjusted income is.
Tapered annual allowance: £60,000 − (Adjusted income − £260,000) ÷ 2, minimum £10,000; The minimum is reached when adjusted income is £360,000 or more.
Adjusted income (approach): Net income before personal pension relief at source + employer contributions (and net pay contributions if deducted); It captures all pension input, so employer contributions raise adjusted income. Threshold income leaves out employer contributions.
Carry forward: Unused allowance of the previous 3 tax years, earliest first, after the current year's allowance; You must have been a scheme member in the year the allowance arose.
Annual allowance charge: (Pension input − allowance − carry forward used) × marginal rate; The excess is added to income and taxed at the rates that apply on top of your other income.
Personal contribution relief limit: Higher of relevant earnings and £3,600 (gross); Employer contributions are not restricted by the personal earnings limit.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Does not apply to pension contributions.
Employee Class 1 NIC (2025/26): £12,571 to £50,270: 8%. Above £50,270: 2%; Applies to cash earnings. Not charged on most benefits in kind. Rates are given in the tax tables.
Employer Class 1 NIC: 15% on earnings above £5,000 per year; Extra cash salary costs the employer this on top. If the employee's earnings are already above £5,000, the full 15% applies to the extra pay.
Class 1A NIC: 15% × taxable benefit; Paid by the employer only. No employee NIC arises on the benefit.
Employment allowance: Up to £10,500 reduction in employer NIC; Subject to eligibility conditions given in the question. Check whether it is already used before treating NIC as a real extra cost.
Car benefit: List price × appropriate percentage; Zero-emission electric car 3%. Petrol car at 55 g/km 17%. Hybrids with 1 to 50 g/km depend on electric range, from 3% (130 miles or more) to 15% (under 30 miles).
Van benefit: Scale charge £4,020; van fuel £769; Zero-emission vans have a 0% benefit.
Pension annual allowance: £60,000 for 2025/26 (minimum £10,000); Threshold income limit £200,000 and income limit £260,000 apply to the tapered allowance. Contributions above the allowance may produce a tax charge.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Relevant if the employee also has other capped reliefs.
Official rate of interest: 3.75%; Used for the taxable benefit on beneficial loans.

Quick revision

Status turns on the facts as a whole: control, substitution, mutuality of obligation, equipment and financial risk.
Employee Class 1 NIC is nil up to £12,570, 8% to £50,270 and 2% above.
Employer Class 1 NIC is 15% on earnings above £5,000 per year.
Employment allowance is £10,500 and can reduce the employer's NIC bill.
Class 1A NIC is 15% and is paid by the employer on most taxable benefits.
The official rate of interest is 3.75%, used for beneficial loan benefits.
Approved mileage rate for cars is 45p up to 10,000 miles and 25p above.
Pension annual allowance is £60,000, with a minimum tapered allowance of £10,000.
Tax relief on pension contributions without earnings is limited to £3,600.
Tapering applies where threshold income exceeds £200,000 and adjusted income exceeds £260,000.
Income tax relief caps apply at the higher of £50,000 or 25% of income, unless otherwise restricted.
Always show the effect on both the employer and the employee when advising on pay.

Common mistakes

Relying on the contract label alone Fix: Say that the label is not decisive and test the actual working practice against the badges.
Listing badges without applying them to facts Fix: Tie each badge to a fact in the scenario and say which way it points. Marks go for application.
Taxing pay in the year it was earned Fix: Always find the receipt date. The earliest of payment and entitlement fixes the year.
Deducting commuting or home-to-office travel Fix: Travel to a permanent workplace is ordinary commuting and is not deductible. Only travel in the performance of duties or to a temporary workplace qualifies.
Deducting the full capital contribution when calculating the car benefit. Fix: Cap the capital contribution at £5,000. Any private use payments are deducted separately from the final benefit.
Reducing the fuel benefit because the employee paid for some private fuel. Fix: The fuel benefit is removed only if the employee reimburses all private fuel. Part payment gives no reduction.
Charging employee NIC on benefits in kind Fix: Remember that most benefits attract Class 1A, paid by the employer only. The employee pays no NIC on them.
Using the income tax personal allowance as the NIC threshold for the employer Fix: The employer's secondary threshold is £5,000 a year. Check which party you are calculating for.
Taxing the EMI option on the full gain at exercise. Fix: For an EMI option granted at or above market value, there is no income tax or NIC on exercise. The whole gain goes to CGT. Only a discount at grant is taxed.
Using the exercise price as base cost after an unapproved option was taxed. Fix: Base cost is the price paid plus the amount taxed as employment income, which equals market value at exercise.

Exam tips

Always reach a clear conclusion on status. State the key factors and which ones tip the balance.
Quote facts from the scenario next to each badge. A bare list of tests earns little.
Use the NIC rates from the tax tables in the exam and show workings to the nearest £.
Cover both parties. Advise the client on PAYE and NIC risk and the worker on how their tax position changes.
Mention the intermediary (IR35) issue when a worker supplies services through their own company, and apply the same status factors.
Write the receipt date for each payment beside it. Many marks hang on putting items in the right year.
When rejecting an expense, name the failing limb of the test: not wholly, not exclusively or not necessarily. One short phrase is enough.
Use the tax tables given in the exam for rates and bands. Do not rely on memory for figures.