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

Key formulas

Annual allowance 2025/26

£60,000 (minimum allowance £10,000)

2023/24 and 2024/25 were also £60,000. 2022/23 was £40,000. These figures are in the tax tables.

Limit on tax-relievable personal contributions

Higher of £3,600 gross and 100% × relevant earnings

Applies to relief on personal contributions. It does not apply to employer contributions.

Relief at source: net payment

Net payment = Gross contribution × 80%; Gross = Net × 100 ÷ 80

The scheme claims 20% basic rate relief. Extend the basic rate band by the gross contribution for higher and additional rate relief.

Net pay arrangement

Contribution deducted from taxable pay before tax

Full relief at marginal rate. No band extension. NIC is still charged on the pay, as the deduction does not reduce earnings for NIC.

Threshold income test for tapering

Threshold income > £200,000

Broadly net income less gross relief-at-source personal contributions. Both the threshold income and adjusted income tests must be met.

Adjusted income

Net income + employer pension contributions (+ personal contributions given relief via net pay)

Taper applies only if adjusted income > £260,000.

Tapered annual allowance

£60,000 − [(Adjusted income − £260,000) ÷ 2], minimum £10,000

Fully tapered to £10,000 once adjusted income reaches £360,000.

Carry forward

Available allowance = Current year AA + unused AA of previous three years (earliest first)

Use the current year's allowance first, then the earliest of the three years. Must have been a member of a registered scheme in each year used.

Annual allowance charge

(Pension input − available allowance) × marginal rate

The excess is treated as income and taxed at your marginal rates on top of your other income.

Cap on income tax reliefs

Cap = higher of £50,000 and 25% × adjusted total income

From the ACCA tax tables. It applies unless a relief is otherwise restricted.

Break-even income

25% × income = £50,000 when income = £200,000

Below £200,000 the cap is £50,000. Above it, the cap is 25% of income.

Relief allowed

Relief allowed = lower of (capped reliefs claimed) and (cap)

Excess over the cap is disallowed in the year. Check whether it can be carried forward.

EIS income tax relief

Relief = 30% × amount subscribed (up to the annual limit)

The annual limit is £1,000,000, or £2,000,000 if at least £1,000,000 goes into knowledge-intensive companies. You can elect to carry back to the prior tax year. Relief is limited to your income tax liability. Minimum holding period is 3 years.

SEIS income tax relief

Relief = 50% × amount subscribed (up to £200,000 a year)

You can elect to carry back to the prior tax year. Relief is limited to your income tax liability. Minimum holding period is 3 years.

VCT income tax relief

Relief = 30% × amount subscribed (up to £200,000 a year), for 2025/26

The ACCA tax tables do not list the VCT rate or limit. 30% applies for 2025/26, but the rate may differ for later tax years, so use the rate the question gives you. You must subscribe for new ordinary shares and hold them for 5 years. There is no carry back. Relief is limited to your income tax liability. VCT dividends are exempt from income tax.

Withdrawal on disposal within the holding period

Relief withdrawn = relief rate × sale proceeds, capped at the income tax relief originally given

This applies to an arm's length sale. If the shares are gifted, all the relief is withdrawn. The rate is 30% for EIS, 50% for SEIS, and the rate at which relief was given for VCT (30% for 2025/26).

EIS CGT deferral

Gain deferred = amount reinvested in EIS shares (up to the gain)

The gain must arise in the period from 1 year before to 3 years after the EIS shares are issued. There is no upper limit on the deferral. The deferred gain comes back into charge when the EIS shares are disposed of or the investor ceases to qualify, for example by becoming non-UK resident. It is chargeable at the time of that event, whenever it happens. Income tax relief is not needed for the deferral.

SEIS CGT reinvestment relief

Gain exempt = 50% × gain reinvested in SEIS shares

SEIS income tax relief must be given on the shares, or the exemption is not available. The gain must arise in the tax year in which the SEIS shares are issued. If you elect to carry back the SEIS investment, the shares are treated as issued in the prior year, so the gain of that prior year qualifies instead. The reinvested amount is limited to the SEIS investment limit. The gain is exempt, not deferred.

CGT on disposal of qualifying shares

EIS, SEIS: gain exempt if income tax relief obtained and shares held 3 years. VCT: gain exempt on disposal.

Exemption applies only to the extent income tax relief has not been withdrawn. Losses are not allowable on VCT shares.

Loss relief on EIS and SEIS shares

Allowable loss = (cost − income tax relief not withdrawn) − proceeds

The loss can be set against income of the year of disposal or the previous year, or against chargeable gains. The claim against income is subject to the cap on income tax reliefs.

Income tax bands

Basic £1 – £37,700; Higher £37,701 – £125,140; Additional over £125,140

Applied to taxable income, after the personal allowance. Gross Gift Aid and personal pension payments extend the basic and higher rate bands.

Rates

Non-savings 20% / 40% / 45%; Dividends 8.75% / 33.75% / 39.35%

Savings income uses the non-savings rates (20%, 40%, 45%) after any 0% slices.

Order of taxation

Non-savings, then savings, then dividends

Personal allowance is set against the same order. Tax each slice in its own band position.

Personal allowance

£12,570, reduced by ½ × (adjusted net income – £100,000), minimum nil

Nil when adjusted net income is £125,140 or more. Use adjusted net income, not taxable income.

Starting rate for savings

0% on savings within the first £5,000 of taxable income

Available band = £5,000 – non-savings taxable income. Nil if that is £5,000 or more.

Savings nil rate band

£1,000 basic rate; £500 higher rate; nil additional rate

Set by the taxpayer's band, which depends on total taxable income.

Dividend nil rate band

£500 for all taxpayers

Taxed at 0% but still uses up the band it falls in.

Marriage allowance

Transfer £1,260; recipient's tax reduced by 20% × £1,260 = £252

Recipient must not be a higher or additional rate taxpayer. Transferor must not pay tax above their reduced allowance.

Income tax bands (normal rates)

Basic £1 − £37,700 at 20%; higher £37,701 − £125,140 at 40%; additional over £125,140 at 45%

The bands apply to taxable income after the personal allowance. Use the tax tables given in the exam.

Dividend rates

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

The £500 nil rate band uses up part of a band. It does not extend the band. Dividends are taxed as the top slice.

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), £500 (higher rate taxpayer)

The starting rate is lost where other income already fills the first £5,000.

Cap on income tax reliefs

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

Applies unless the relief is otherwise restricted.

Beneficial loan benefit (average method)

Benefit = official rate × average loan balance × months ÷ 12, less interest paid by the employee

Official rate is 3.75%. Loans of £10,000 or less in total are exempt. Employer also pays Class 1A NIC at 15%.

Interest on underpaid tax

Tax underpaid × 8.50% × months late ÷ 12

Use the rate given in the tax tables. Apportion to the nearest month per the supplementary instructions.

Interest on overpaid tax

Tax overpaid × 3.50% × months ÷ 12

Lower than the underpaid rate. Late payment is always costly relative to early payment.

NIC rates for remuneration choices

Employee Class 1: 8% on £12,571 − £50,270, 2% above. Employer Class 1: 15% above £5,000. Class 1A: 15%

Dividends have no NIC. Employment allowance is £10,500.

Annual allowance (pensions)

£60,000 for 2023/24 to 2025/26

Tapering applies at high income (threshold income £200,000, income limit £260,000, minimum allowance £10,000). Without earnings, relievable contribution is limited to £3,600.

CGT rates

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

Use the lower rate only on the part of the taxable gain that fits within the unused basic rate band (£37,700 less taxable income).

BADR and investors' relief

Qualifying gains taxed at 14%; lifetime limit £1,000,000 for each relief

Gains above the limit are taxed at 18% or 24%. The limits are separate for each relief.

IHT rates

Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%

Tax is charged on the excess over the nil rate band. The residence nil rate band depends on the facts, such as a home passing to direct descendants.

IHT taper relief

3-4 years 20%; 4-5 years 40%; 5-6 years 60%; 6-7 years 80% reduction in tax

Reduces the tax, not the gift value. It only helps if the gift is not fully covered by the available nil rate band, so that tax is actually payable.

SDLT non-residential

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

Slice rates, applied to each band of the price.

Stamp duty on shares

0.5% of the consideration

Paid by the buyer.

VAT limits

Registration £90,000; deregistration £88,000; standard rate 20%

Taxable turnover is tested against these limits.

Income tax bands

Basic £1 to £37,700; higher £37,701 to £125,140; additional over £125,140. Normal rates 20%, 40%, 45%. Dividend rates 8.75%, 33.75%, 39.35%

Dividend nil rate band £500.

Quick revision

• Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
• Always check whether a relief falls within the cap before adding it up.
• Pension annual allowance is £60,000 for 2023/24 to 2025/26, with a minimum allowance of £10,000.
• Tapering applies where threshold income exceeds £200,000 and adjusted income exceeds £260,000.
• Relief without any earnings is limited to £3,600 gross.
• Unused annual allowance from earlier years can be carried forward, subject to the conditions.
• Basic rate band is £37,700 at 20%, higher rate to £125,140 at 40%, and 45% above that.
• Personal allowance is £12,570 and is reduced to zero when adjusted net income reaches £125,140 or more.
• Dividend rates are 8.75%, 33.75% and 39.35%, with a £500 dividend nil rate band.
• EIS, SEIS and VCT reliefs depend on conditions and holding periods, so state them and the withdrawal risk.
• Show the tax saving in pounds, not just the rule.
• Round to the nearest £, apportion to the nearest month and show all workings.

Common mistakes

• Treating the net payment under relief at source as the amount that counts towards the annual allowance. Fix: Always gross up the net payment by 100 ÷ 80. The gross figure counts for the annual allowance and for the relief limit.
• Forgetting to include employer contributions in pension input and adjusted income. Fix: Add employer contributions to personal gross contributions for the annual allowance test. Add them to net income for adjusted income.
• Applying the cap to every relief. Fix: List the reliefs claimed and apply the cap only to those the question or your syllabus knowledge treats as reliefs deducted from income that are subject to the cap, such as loss relief against general income and qualifying loan interest. Do not assume every relief is capped.
• Using £50,000 when 25% of income is higher. Fix: Always calculate 25% of income and take the higher figure. It matters once income exceeds £200,000.
• Treating income tax relief as a deduction from income Fix: Compute the relief as a percentage of the amount invested and deduct it from the income tax liability. It cannot reduce the liability below nil.
• Applying CGT deferral to a VCT Fix: CGT deferral is an EIS relief only. A VCT gives income tax relief and exempt dividends, and a disposal is exempt from CGT.
• Tapering the personal allowance using taxable income or total income instead of adjusted net income. Fix: Take total income, deduct gross Gift Aid and gross personal pension payments, then compare with £100,000.
• Using the £1,000 savings nil rate band for a higher rate taxpayer. Fix: Decide the band from total taxable income. Above £37,700 it is £500. Above £125,140 it is nil.
• Ignoring NIC when comparing salary with dividends or benefits Fix: Include employee and employer NIC and Class 1A NIC in every remuneration comparison. Dividends carry no NIC but are not deductible for the company.
• Treating the dividend nil rate band as an extra slice of the basic rate band Fix: The £500 nil rate dividends still use up part of the band. They are taxed at 0% but can push other income into a higher band.

Exam tips

• Write out the allowance working in a small table: current year, then each of the three prior years, with input, allowance and unused amount. It earns marks even if one figure is wrong.
• Always state the type of scheme in your answer. The marks for the relief method depend on it.
• Give the tax saving, not just the contribution. Higher and additional rate relief is the usual reason a client is advised to contribute.
• If a question mentions income near £100,000 or over £200,000, check the personal allowance restriction and the taper before anything else.
• Use the figures in the tax tables provided. Where a figure such as the lump sum allowance is not given in the table, follow the question's information and state your assumption.
• Write the cap formula at the top of your working. Show both £50,000 and 25% of income so the marker sees the comparison.
• Name the reliefs that are inside the cap before you apply it. This earns marks for knowing the scope.
• Always say what happens to any excess. A carry forward point is a common mark.