Tax advantages and disadvantages of alternative courses of action: formula sheet

Key formulas

Normal rates (non-savings income and savings income)

Basic £1 – £37,700 at 20%; Higher £37,701 – £125,140 at 40%; Additional over £125,140 at 45%

Bands apply to taxable income, after the personal allowance. Savings income uses the same rates.

Dividend rates

Basic 8.75%; Higher 33.75%; Additional 39.35%

Dividends are taxed last, on top of non-savings and savings income.

Savings income nil rate band

Basic rate taxpayer £1,000; higher rate taxpayer (taxable income £37,701 – £125,140) £500; additional rate taxpayer (taxable income over £125,140) nil

Your band depends on which rate band your total taxable income reaches. An additional rate taxpayer has no savings nil rate band. Where a band applies, savings income in it is at 0% but still uses up the band.

Dividend nil rate band

£500 for all taxpayers

Taxed at 0%. It uses up basic or higher rate band, so it does not move dividends into a lower band.

Starting rate for savings

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

It is only available if non-savings taxable income is below £5,000. It is reduced by the amount of non-savings taxable income.

Cap on income tax reliefs

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

Applies unless the relief is otherwise restricted. Excess relief is not deducted in that year. Check the rules for each relief for whether it can be carried forward.

Rates

Small profits rate 19%; main rate 25%

Financial years 2023, 2024 and 2025 per the tax tables.

Limits

Lower limit £50,000; upper limit £250,000

Divide by (1 + number of associated companies). Time-apportion for a short accounting period.

Marginal relief

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

Deduct from corporation tax at the main rate on TTP. Applies only between the limits.

Effective marginal rate

25% + (3/200 × 100%... see note) = 26.5%

Each extra £1 of profit between the limits costs 26.5p when TTP equals augmented profits. Marginal relief reduces by 1.5p per £1.

Large company threshold

Profit threshold £1,500,000

Divide by associated companies plus one; time-apportion for short periods. Quarterly instalments apply above it.

Taxable gain

Taxable gain = Chargeable gains − current-year losses − brought-forward losses (only as needed to reduce gains to the AEA) − annual exempt amount (£3,000)

Set current-year losses first. Brought-forward losses are used only as needed to bring gains down to the annual exempt amount.

CGT rates

Lower rate 18%; higher rate 24%

The lower rate applies only to the extent the basic rate band of £37,700 is unused by taxable income.

Unused basic rate band

Unused band = £37,700 − taxable income (not below nil)

Taxable income is after the personal allowance and reliefs. Gains are treated as the top slice.

BADR and investors' relief rate

Qualifying gains taxed at 14%

Each relief has a separate lifetime limit of £1,000,000. Gains above the limit fall into 18% or 24%.

Annual exempt amount

£3,000 per individual per tax year

It is lost if unused. It cannot be carried forward.

Nil rate band

NRB = £325,000

Tax is charged only on value above the available NRB. Earlier chargeable transfers in the previous 7 years use it up first.

Residence nil rate band

RNRB = £175,000

Death estate only. Use it only if the question's facts support it. It is not used against lifetime transfers.

Rates of tax

Lifetime rate = 20%; Death rate = 40%

Both apply to the excess over the nil rate band. Lifetime tax on a CLT is 20% of the excess. Death tax on a PET or CLT uses 40%.

Taper relief

Death tax × (1 − relief %). Relief: over 3 to 4 years 20%; over 4 to 5 years 40%; over 5 to 6 years 60%; over 6 to 7 years 80%

Applies to the tax, not the gift. No relief if death is within 3 years. Gifts that fall inside the NRB have no tax to reduce.

Additional tax on a CLT at death

Additional tax = death tax after taper relief − lifetime tax paid (not below nil)

Compare after applying taper relief. Nothing is refunded if the lifetime tax was higher.

Standard rate of VAT

VAT = net amount × 20%; gross = net × 1.20

To get VAT from a VAT-inclusive price, use gross × 20/120 (1/6).

Registration limit

Taxable turnover above £90,000 → registration required

The figure is given in the tax tables. Know the time tests from TX-UK.

Deregistration limit

Expected taxable turnover not above £88,000 → may deregister

Given in the tax tables. Consider the cost of leaving, such as VAT on assets held.

Late payment penalty: up to 15 days

No penalty

Applies to VAT paid up to 15 days late.

Late payment penalty: 16 to 30 days

3% of the VAT unpaid

Applies to VAT 16 to 30 days late.

Late payment penalty: over 30 days

6% plus a daily penalty at an annual rate of 10%

Both parts are charged on the unpaid VAT.

SDLT on non-residential property (bands)

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

Banded, so only the slice in each band is taxed at that rate. Use the figures in the tax tables provided.

SDLT where price is £250,000 or less

SDLT = 2% × (price − £150,000)

Applies when the price is above £150,000 and no more than £250,000. Maximum SDLT in this range is £2,000.

SDLT where price is above £250,000

SDLT = £2,000 + 5% × (price − £250,000)

£2,000 is 2% of the £100,000 band. Add 5% of the excess.

Stamp duty on shares

Stamp duty = 0.5% × consideration

Paid by the buyer. Use the price actually paid for the shares.

Effect on later gain

Buyer's CGT acquisition cost = price + stamp taxes paid

Stamp taxes paid on acquisition are an incidental cost of acquiring the asset.

Beneficial loan benefit (average method)

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

Average loan = (opening balance + closing balance) ÷ 2. The official rate in the tables is 3.75%.

Beneficial loan benefit (strict method)

Benefit = Σ (balance × 3.75% × months at that balance ÷ 12), less interest paid

Used if HMRC requires it or the question asks for it. Use it when the balance changes during the year.

Interest on underpaid tax

Interest = tax paid late × 8.50% × months late ÷ 12

Runs from the due date to the date of payment. Use the rate given in the tables.

Interest on overpaid tax

Interest = tax overpaid × 3.50% × months ÷ 12

Paid by HMRC on tax that was overpaid and is repaid. The rate is lower than the underpaid rate.

Small loan exemption (the rule)

No benefit if total loans to the employee do not exceed £10,000 at any time in the tax year

The £10,000 threshold is not in the rates tables, so it is a rule you must recall. Check that the total of all loans is within the limit.

Quick revision

• 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.
• Income tax reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
• Personal allowance is £12,570 and falls to zero when adjusted net income is £125,140 or more.
• Corporation tax: small profits rate 19%, main rate 25%, limits £50,000 and £250,000, standard fraction 3/200.
• Marginal relief = (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
• CGT rates are 18% and 24%, annual exempt amount £3,000; BADR and investors' relief are taxed at 14% up to a £1,000,000 lifetime limit each.
• IHT: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20%, death rate 40%.
• Taper relief starts for gifts more than 3 years before death: 20%, 40%, 60%, 80% over years 3 to 7.
• VAT: standard rate 20%, registration limit £90,000, deregistration limit £88,000.
• SDLT non-residential: 0% to £150,000, 2% to £250,000, 5% above; stamp duty on shares is 0.5%.
• Interest: official rate 3.75%, underpaid tax 8.50%, overpaid tax 3.50%.

Common mistakes

• Using the wrong savings nil rate band, for example £1,000 for a higher rate taxpayer, or £500 for an additional rate taxpayer. Fix: Work out total taxable income including savings and dividends first. If it is within £37,700, the band is £1,000. If it is £37,701 to £125,140, the band is £500. If it is above £125,140, there is no savings nil rate band.
• Treating nil rate band income as if it does not use up the basic rate band. Fix: Nil rate band income still counts towards the band limits. Include it when you track how much of £37,700 is used.
• Forgetting to divide the limits for associated companies Fix: Count every associated company and divide first, before you compare profits with the limits.
• Using TTP instead of augmented profits to test the limits Fix: Use augmented profits for the band test, but TTP in the marginal relief fraction and for the tax.
• Applying 18% or 24% by looking only at total income, not the unused basic rate band. Fix: Always compute £37,700 less taxable income. Only the unused part gives the 18% rate.
• Deducting the personal allowance twice or forgetting it when finding taxable income. Fix: Use taxable income after the personal allowance. Write the figure clearly before computing the band.
• Applying taper relief to the value of the gift Fix: Work out the tax first, then reduce the tax by the percentage. Gifts within the NRB have no tax to reduce.
• Giving the estate a fresh NRB Fix: Keep a running NRB balance. Chargeable gifts in the 7 years before death reduce the NRB available to the estate.
• Adding 20% to a VAT-inclusive figure Fix: If the price includes VAT, VAT is price × 20/120. Underline 'inclusive' or 'exclusive' in the question.
• Treating exempt and zero-rated supplies as the same Fix: Zero-rated supplies are taxable at 0%, so input VAT is recoverable. Exempt supplies are not taxable, so related input VAT is generally not recoverable.

Exam tips

• Write out the bands (£37,700 and £125,140) next to your computation and tick off each slice as you use it. It shows method even if you slip on arithmetic.
• In salary versus dividend questions, tax each option fully. Then add other effects that the question points to, such as National Insurance and the company's deduction.
• State the cap calculation every time: higher of £50,000 or 25% of income. Show both figures and say which applies.
• Use the tax tables provided in the exam for rates and nil rate bands. Do not rely on memory. Check which rate set (normal, savings or dividend) you are applying.
• End with a clear recommendation and a number, such as the saving from one option. These are professional skills marks.
• Write the adjusted limits at the top of your answer. Marks are often given for dividing by associated companies.
• Show the marginal relief formula with figures. A small slip then still earns method marks.
• In a planning question, say that profit in the marginal band is effectively taxed at 26.5%. Use this to compare options.