Investment and other expenditure that reduces tax liabilities: formula sheet

Key formulas

Main pool WDA

WDA = 18% × (TWDV b/f + additions not relieved by AIA or FYA − disposal proceeds)

Given in the ACCA tax tables. Reduce or increase for a short or long period (months ÷ 12).

Special rate pool WDA

WDA = 6% × (TWDV b/f + additions not relieved by AIA or FYA − disposal proceeds)

Covers long-life assets, integral features and cars with CO2 emissions over 50 g/km.

Annual investment allowance

AIA = 100% × qualifying spending, up to £1,000,000 per year

Limit is reduced or increased for a short or long period. Not available on cars. Shared between connected businesses or groups.

First-year allowances (companies)

Main pool: 100% (commonly called full expensing). Special rate pool: 50%

Companies only. The tax tables give these as the main pool and special rate pool first year allowances. Not available for cars (apart from the zero-emission car FYA). Use AIA on special rate spending first, because it earns the higher 100% relief there.

Zero-emission and car rules

New zero-emission car: 100% FYA. Second-hand zero-emission car: 18%. CO2 1–50 g/km: 18%. CO2 over 50 g/km: 6%

Cars never qualify for AIA.

Disposals

Deduct the lower of sale proceeds and original cost from the pool

A balancing charge arises when disposal proceeds exceed the pool balance (TWDV b/f plus additions not relieved by AIA or FYA). No WDA is given in that period. If the business ceases, a balancing allowance or charge arises and no WDA or AIA is given in that final period.

Structures and buildings allowance

SBA = 3% × qualifying cost per year (straight line)

Excludes land. Starts when the structure is first brought into use. A buyer continues with the remaining allowances.

ISA overall investment limit

Total ISA subscriptions in a tax year ≤ £20,000

The limit is shared across ISA types. Income and gains inside the ISA are exempt from income tax and CGT.

Rent-a-room limit

Gross receipts ≤ £7,500 → rent fully exempt

Applies to furnished accommodation in your own home. The exemption is automatic where receipts are within the limit.

Rent-a-room alternative method

Taxable amount = gross receipts − £7,500 (no expenses)

Applies if receipts exceed £7,500 and you elect for it. Compare with the normal method.

Rent-a-room normal method

Taxable amount = gross receipts − actual allowable expenses

Choose this if expenses exceed £7,500. A loss from this method cannot arise under the alternative method.

Savings and dividend bands

Savings nil rate band: £1,000 (basic), £500 (higher). Dividend nil rate band: £500.

ISA income uses none of these bands, so they remain available for other income.

Cap on income tax reliefs

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

Taken from the ATX-UK tax tables. Applies 'unless otherwise restricted'.

Restriction

Relief restricted = capped reliefs claimed − cap (if positive)

Only the excess over the cap is denied. Relief up to the cap is still given. The excess is unrelieved under that claim. For a trade loss, carrying the loss forward against future profits of the same trade is an alternative to claiming against general income. The restricted excess of a claim does not automatically carry forward.

Relief allowed

Relief allowed = lower of capped reliefs claimed and cap

Reliefs outside the cap are deducted in full and are not part of this test.

Income level at which 25% beats £50,000

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

Useful shortcut. Below £200,000 of income the cap is £50,000.

Income tax bands (normal rates)

Basic 20% on £1 – £37,700; higher 40% on £37,701 – £125,140; additional 45% above £125,140

Bands apply to taxable income, after the personal allowance of £12,570.

Dividend rates

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

Dividends are taxed last. The nil rate band income still uses up the band.

Savings nil rate band

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

The starting rate of 0% is separate. It applies to savings income within the first £5,000 of taxable income.

Personal allowance restriction

Allowance reduced where adjusted net income > £100,000; nil where ≥ £125,140

Reduction is £1 for every £2 of excess over £100,000.

Corporation tax marginal relief

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

Deduct from tax at 25% on taxable total profits. Limits are £50,000 and £250,000, divided by (1 + associated companies).

Large company instalments

Profit threshold £1,500,000

Threshold is divided by (1 + associated companies) and time-apportioned for short periods.

CGT rates and exemption

18% lower rate; 24% higher rate; annual exempt amount £3,000; BADR and investors' relief 14% (lifetime limit £1,000,000)

Rate depends on the unused basic rate band after taxable income.

Reduced CGT rate

BADR / investors' relief gains taxed at 14%

This is the rate given in the ATX-UK tax tables for the year examined. Read the rate from the tables in the exam.

Lifetime limit

Relief available = £1,000,000 − qualifying gains already relieved

BADR and investors' relief each have their own £1,000,000 limit. Gains over the remaining limit are taxed at 18% or 24%.

Normal CGT rates

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

Used for gains that do not qualify or exceed the limit.

BADR shareholding test

≥ 5% ordinary share capital and ≥ 5% voting rights, plus officer or employee, for 2 years

Both the holding and the office or employment must be met for the whole period ending on disposal or cessation.

Investors' relief holding test

New ordinary shares, unlisted trading company, cash subscription, held 3 years (period starting on or after 6 April 2016)

No 5% test. You must not be an employee or officer (limited exceptions).

Annual exempt amount use

Set the £3,000 against gains taxed at the highest rate first

This gives the lowest total tax. Use 24% gains first, then 18%, then 14%.

Nil rate band

NRB = £325,000

Applies to the cumulative chargeable transfers in the seven years before each transfer. Tax is only on the excess.

Residence nil rate band

RNRB = £175,000

Death only. Needs a home passing to direct descendants. Reduced by £1 for every £2 of estate above £2,000,000 (learn this, not in tables). Unused amounts can pass to a surviving spouse.

IHT rates

Lifetime 20%; Death 40%

Charged on the excess over the available NRB. A 36% death rate applies if at least 10% of the net estate goes to charity.

Taper relief

Tax on gift × (1 − reduction %)

Years between gift and death: more than 3 but less than 4 = 20%; more than 4 but less than 5 = 40%; more than 5 but less than 6 = 60%; more than 6 but less than 7 = 80%. Under 3 years: no relief.

Additional tax on a CLT at death

Death tax (after taper) − lifetime tax paid, minimum nil

Compute death tax at 40% on the excess over the NRB, apply taper, then deduct lifetime tax paid. Never refund.

SDLT on non-residential property

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

Slice rates. Tax each band separately and add.

Stamp duty on shares

Stamp duty = 0.5% × consideration

Paid by the buyer. Do not use for land.

VAT standard rate

VAT = 20% × net value; VAT-inclusive price ÷ 1.2 = net value

Use ÷ 1.2 to strip VAT from a gross figure.

VAT registration and deregistration limits

Register above £90,000; deregistration limit £88,000

Read the scenario for the turnover test and dates.

Late VAT payment penalty

Up to 15 days: nil; 16 to 30 days: 3%; over 30 days: 6% plus daily penalty at 10% a year

Apply to the unpaid VAT.

Interest on tax

Underpaid: 8.50%; overpaid: 3.50%

Interest = tax × rate × days ÷ 365, or months ÷ 12.

Official rate of interest

3.75%

Used for beneficial loans, not for late tax.

Quick revision

• Capital gains tax rates are 18% and 24%, with an annual exempt amount of £3,000.
• BADR and investors' relief each have a £1,000,000 lifetime limit and a 14% rate.
• Main pool allowance is 18% and special rate pool is 6%.
• The annual investment allowance is 100% up to £1,000,000 of expenditure.
• The structures and buildings allowance is a 3% straight line allowance.
• The ISA overall investment limit is £20,000 and the rent-a-room limit is £7,500.
• Income tax reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
• Nil rate band is £325,000 and residence nil rate band is £175,000.
• Inheritance tax is 20% on lifetime excess and 40% on death.
• Taper relief applies only to gifts made more than three years before death.
• The VAT registration limit is £90,000 and deregistration limit is £88,000.
• Interest on underpaid tax is 8.50% and on overpaid tax is 3.50%.

Common mistakes

• Claiming AIA or full expensing on cars. Fix: Cars never get AIA. Only a new zero-emission car gets a 100% FYA. Other cars go into a pool by CO2 emissions.
• Giving full expensing to a sole trader or partnership. Fix: State the taxpayer first. Full expensing and the 50% FYA are for companies only. Unincorporated businesses use the AIA, with the balance in the pools.
• Applying a £20,000 limit to each type of ISA. Fix: State that £20,000 is the overall limit for the year across all ISAs.
• Deducting expenses as well as the £7,500 under the alternative method. Fix: Under the alternative method, tax receipts less £7,500 only. Expenses are ignored.
• Applying the cap to every relief claimed. Fix: Identify the reliefs that are capped. Reliefs outside the cap are deducted in full and left out of the test.
• Using only £50,000 and forgetting the 25% alternative. Fix: Always compute both and take the higher. The 25% figure only wins when income is above £200,000.
• Taxing dividends at normal rates or in the wrong order Fix: Always stack non-savings first, then savings, then dividends. Use the dividend rates.
• Thinking the nil rate band means the income is ignored for band purposes Fix: Nil rate band income is taxed at 0% but still fills the basic rate band, which can push other income into the higher rate.
• Treating the two reliefs as sharing one £1,000,000 limit. Fix: Remember they are separate lifetime limits. Track BADR and investors' relief gains separately.
• Applying BADR to an investor with 2% of the shares who is not an employee or officer. Fix: Check the 5% holding, the voting rights, the office or employment and the full two-year period before applying BADR. An outside investor should be tested for investors' relief instead.

Exam tips

• State the taxpayer type and the period length in the first line. Many marks depend on whether full expensing applies and on whether the AIA needs apportioning.
• Show the pool layout in full, even for simple pools. The examining team awards marks for each correct figure and for the method.
• In planning questions, give a number, such as the tax saved by buying before the year end, and then state the advice in a sentence. Mention cash flow and the effect on a group or connected business that shares the AIA.
• The tax tables supplied in the exam give the WDA rates, the AIA limit, the FYA percentages (100% main pool, 50% special rate pool) and the SBA rate. Know where to find them and take the figures from the tables.
• For the SBA, give only qualifying construction cost, exclude land, and apportion the 3% for the months in use in the period.
• Quote the £20,000 and £7,500 limits from the tax tables and state them clearly in the answer.
• State the conditions for rent-a-room relief: furnished and in the client's only or main home.
• Always compute both methods when rent exceeds £7,500 and say which one is better and why.