Mitigation of tax by numerical analysis and reasoned argument: formula sheet

Key formulas

Tax saving

Saving = tax before the measure − tax after the measure

Use the same facts, tax year and tables in both computations.

Net saving

Net saving = tax saving − extra taxes − extra costs

Include any new NIC, other taxes triggered or fees. Say so if cash is lost, for example a pension contribution paid.

Corporation tax marginal relief

(Upper limit − Augmented profits) × Standard fraction × Taxable total profits ÷ Augmented profits

From the tax tables: lower limit £50,000, upper limit £250,000, standard fraction 3/200, main rate 25%, small profits rate 19%. Limits are reduced for associated companies and for short periods. Apply it when profits are between the limits.

Effective marginal rate of corporation tax

25% + (3/200 × 100%) = 26.5%

Applies only where augmented profits equal taxable total profits and fall between £50,000 and £250,000, with no associated companies and a 12-month period.

Income tax rates (non-savings, non-dividend)

20% on £1 − £37,700; 40% on £37,701 − £125,140; 45% above £125,140

The bands apply to taxable income, after the personal allowance. Dividend rates are 8.75%, 33.75% and 39.35%, with a £500 dividend nil rate band.

CGT

Gain less annual exempt amount (£3,000), taxed at 18% within unused basic rate band and 24% above it

Business asset disposal relief and investors' relief give a 14% rate on qualifying gains up to the £1,000,000 lifetime limit.

IHT

Lifetime rate 20% and death rate 40% on the excess over the nil rate band of £325,000

Residence nil rate band £175,000. Taper relief reduces tax on gifts made more than three but less than seven years before death, in steps from 20% to 80%.

Normal rates

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

Apply to non-savings and savings income. The bands are on taxable income, after the personal allowance.

Dividend rates

Basic 8.75% | Higher 33.75% | Additional 39.35%

Dividends are taxed last, so they fall in the highest band reached.

Dividend nil rate band

£500 at 0%

Available to all taxpayers. Dividends in it still use up band capacity.

Savings income nil rate band

Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate £0

The level depends on which band your total taxable income reaches.

Starting rate for savings

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

Reduced pound for pound by non-savings taxable income. Nil if that income is £5,000 or more.

Order of income

Non-savings, then savings, then dividends

Personal allowance is set against non-savings income first.

Cap on income tax reliefs

Higher of £50,000 or 25% of income

Applies unless otherwise restricted. It does not apply to pension contributions or Gift Aid.

Tax saved by a planning step

Tax before − tax after

Always show both computations, then the saving.

Augmented profits

Augmented profits = Taxable total profits + exempt distributions from non-group companies

Use this figure, not taxable total profits alone, to compare with the limits.

Rates and limits (FY2023, 2024, 2025)

Augmented profits ≤ £50,000: 19%. Augmented profits ≥ £250,000: 25%. In between: 25% less marginal relief

These are the limits for a single company with no associated companies and a 12-month period. They are given in the exam tax tables.

Marginal relief

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

The standard fraction is 3/200. Deduct the relief from tax at 25% on taxable total profits. If there are no distributions, the last fraction is 1.

Adjusting the limits

Limit ÷ (number of associated companies + 1), then × months in period ÷ 12

Adjust the lower limit, the upper limit and the £1,500,000 instalment threshold in the same way.

Large company test

Taxable total profits > £1,500,000 (adjusted)

Instalments are normally due in months 7, 10, 13 and 16 from the start of a 12-month period, on the 14th day. Each is 25% of the estimated liability. Very large companies (profits over £20 million, also adjusted) pay earlier, in months 3, 6, 9 and 12. Check the question for what you need.

Interest on tax

Underpaid tax 8.50%, overpaid tax 3.50%

Assumed rates from the tax tables. Use them to cost late payment or to value early payment.

CGT rates

Lower rate 18%; higher rate 24%; BADR and investors' relief 14%

Lower rate applies only to the extent the basic rate band (£37,700) is unused after taxable income. Gains qualifying for the 14% rate use the basic rate band first, so the remaining band for other gains is smaller.

Annual exempt amount

£3,000 per individual, per tax year

Set it against the gains taxed at the highest rate first. It cannot be carried forward.

BADR and investors' relief limits

Lifetime limit £1,000,000 for each relief; rate 14%

Gains above the limit are taxed at 18% or 24%. Earlier qualifying gains count towards the limit.

BADR share conditions

At least 2 years' holding; officer or employee; at least 5% ordinary shares and votes; trading company

State the conditions in plain words and test each one against the scenario.

Investors' relief conditions

New ordinary shares subscribed for in an unlisted trading company; held at least 3 years; not an officer or employee

Used where BADR is not available, for example a small outside investor.

IHT nil rate bands and rates

NRB £325,000; RNRB £175,000; lifetime rate 20%; death rate 40%

The nil rate band is used against transfers in the previous 7 years, oldest first.

Lifetime tax on a CLT

Tax = 20% × (cumulative chargeable transfers − available NRB). If the donor pays, gross up: tax = 20 ÷ 80 × excess net of NRB

The donee-pays case is 20% of the excess. If the donor pays, the tax paid is part of the transfer.

Taper relief

3–4 years 20%; 4–5 years 40%; 5–6 years 60%; 6–7 years 80% reduction in the death tax

Applies to the tax, not to the gift. No relief if death is within 3 years.

Death tax on a gift

40% × (gift − remaining NRB) × (1 − taper %) − lifetime tax paid

Lifetime tax paid is credited but never refunded, so the extra tax cannot be below nil.

SDLT non-residential property

0% × first £150,000 + 2% × (£150,001 to £250,000) + 5% × excess over £250,000

Sliced rates. Maximum tax on the 2% band is £2,000 (£100,000 × 2%).

Stamp duty on shares

0.5% × consideration

Paid by the buyer of shares. Use the rate given in the tables.

VAT registration and deregistration limits

Register above £90,000; deregistration below £88,000 (taxable turnover)

Standard rate of VAT is 20%.

VAT late payment penalty

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

Check days late carefully before choosing the band.

Net-of-VAT price

VAT-inclusive price × 100 ÷ 120

Use when a trader who registers must absorb VAT in an existing price.

Interest on underpaid tax

Tax unpaid × 8.50% × months late ÷ 12

Runs from the due date to the date of payment. Use the tax table rate. The rate is assumed in the exam.

Interest on overpaid tax

Tax overpaid × 3.50% × months ÷ 12

Paid by HMRC on repayments. Lower than the underpaid rate.

Official rate of interest (beneficial loans)

Taxable benefit = (average or exact method loan balance × 3.75% × months ÷ 12) − interest paid by the employee

Used for employment-related loans. The average method uses the mean of the opening and closing balances. The exact (daily) method applies the rate to the actual balance each day. Use the method the question requires. The benefit is taxed as employment income.

Net benefit of deferral

Return on cash retained − (interest charged + any penalties that apply)

A positive figure means deferral pays. A negative figure means it does not. Include a penalty only where the tax carries a late payment penalty, such as VAT. For many deferral questions, interest is the only cost.

Late VAT payment penalty

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

The percentages apply to the VAT outstanding. Where the question needs the daily penalty, work it as VAT outstanding × 10% × days ÷ 365. Check the exact days late in the question.

Standard penalties for errors

Careless: max 30%, min 0% unprompted, 15% prompted. Deliberate but not concealed: max 70%, min 20% unprompted, 35% prompted. Deliberate and concealed: max 100%, min 30% unprompted, 50% prompted

Percentages apply to the extra tax due because of the error.

Corporation tax instalments

Quarterly instalments: profit threshold £1,500,000 (from the tax tables)

The tax tables give a £1,500,000 profit threshold for quarterly instalments. Associated companies must be considered when you apply it, so check the question for the number of associated companies and the company's profits. The tables do not set out any other detail, so use the facts in the question.

Tax saving

Tax saving = Tax under current position − Tax under proposed position

Include all taxes affected (income tax, NIC, CGT, IHT, corporation tax, SDLT, VAT), not just the one in the headline.

Net benefit

Net benefit = Tax saving − costs of implementing − any extra tax or cash cost elsewhere

Use this to test whether a plan is worth doing. Costs include professional fees and lost income.

Answer structure

Recommendation → Calculation → Reasoning for and against → Non-tax factors → Assumptions → Conclusion

A reliable order for a client-facing answer. Keep each part short.

Avoidance vs evasion

Avoidance = legal planning within the law's intent; Evasion = illegal, deliberate concealment or misstatement

Artificial arrangements against the intent of the law risk challenge. Evasion must never be assisted.

Official rounding rules

Work to the nearest £; apportion to the nearest month; show all workings

These supplementary instructions are reproduced in the exam.

Quick revision

• Mitigation means lawful planning. Evasion is illegal and never advised.
• Compare options on the same basis and show the saving as a figure.
• Income tax bands: basic rate to £37,700, higher rate to £125,140, additional rate above that.
• Dividend rates are 8.75%, 33.75% and 39.35%. The dividend nil rate band is £500.
• Corporation tax: small profits rate 19%, main rate 25%, with limits of £50,000 and £250,000.
• Marginal relief = (upper limit − augmented profits) × 3/200 × taxable total profits ÷ augmented profits.
• Capital gains tax rates are 18% and 24%. The annual exempt amount is £3,000.
• Business asset disposal relief has a £1,000,000 lifetime limit and a 14% rate.
• Inheritance tax: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20%, death rate 40%.
• Taper relief applies only to tax on gifts that become chargeable on death within seven years, and only where the gift exceeds the nil rate band.
• Interest on underpaid tax is 8.50% and on overpaid tax 3.50% in the tables, so deferral has a cost or benefit.
• Finish every planning answer with a clear recommendation, a key assumption and a risk.

Common mistakes

• Changing more than one thing between the before and after computations. Fix: Write down what changes. Copy everything else unchanged from the before computation.
• Forgetting the knock-on effect on bands, such as unused basic rate band for gains or marginal relief for companies. Fix: Work out the taxable income or profit first, then see how much band is left before applying 18% or 24%.
• Taxing dividends at 20%, 40% and 45%. Fix: Use 8.75%, 33.75% and 39.35% for dividends. Label each income type before applying rates.
• Ignoring that nil rate band income still uses up the basic rate band. Fix: Include the £500 dividend nil rate band and the savings nil rate band in the band calculation. They push later income into higher bands.
• Using the £50,000 and £250,000 limits for a company that has associated companies. Fix: Always read the question for associated companies. Divide both limits by associated companies plus one.
• Ignoring a short accounting period. Fix: Multiply the adjusted limits by months ÷ 12. Do the same for the £1,500,000 threshold.
• Applying BADR without checking the conditions. Fix: Write each condition and tick it against the facts: holding period, trading company, 5% of shares and votes, officer or employee.
• Applying the AEA to the lowest-rate gain. Fix: Use the AEA against the gain taxed at the highest rate first, because that saves the most tax.
• Applying one SDLT rate to the whole price. Fix: Slice the price into 0%, 2% and 5% parts and add them.
• Charging stamp duty to the seller of shares. Fix: State that the buyer pays, and include it in the buyer's cost.

Exam tips

• Open the tax tables at the start and underline the rates you will need. Use them as written, not from memory.
• Always label the two computations clearly as before and after. Then draw a separate line for the saving.
• Round to the nearest £ and show every working, as the supplementary instructions require.
• After the numbers, write the advice. The professional skills marks reward a clear conclusion, a comment on risks, and a recommendation the client can follow.
• Check for hidden thresholds in the question, such as the upper limit for corporation tax, the basic rate band or the pension cap on reliefs, before you apply the rate.
• Write out each person's income under three headings: non-savings, savings and dividends. This avoids rate errors and shows structure to the marker.
• Always show both computations and the saving. A recommendation without numbers loses technical marks.
• Learn the nil rate band amounts and the three dividend rates from the tax tables, but know where to find them quickly. You have them in the exam.