Taxation effects of the financial decisions made by businesses and individuals: formula sheet

Key formulas

Tax saving on interest

Tax saving = Deductible interest × effective corporation tax rate

Use 25% above the upper limit and 19% at or below the lower limit. Between £50,000 and £250,000 of profits the effective marginal rate is 26.5%.

Corporation tax rates (financial year 2025)

Small profits rate 19% | Main rate 25% | Lower limit £50,000 | Upper limit £250,000

Limits are divided by the number of associated companies plus one, and time-apportioned for short accounting periods.

Marginal relief

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

Deduct from tax at the main rate. Augmented profits are taxable total profits plus exempt distributions from non-group companies.

Loan relationship rule

Trade loan: interest is a trading deduction. Non-trade loan: non-trading debit set against total profits. Both on an accruals basis.

Arrangement and other incidental loan costs are generally deductible. Share issue costs are not.

Dividends

Dividends paid = no corporation tax deduction

Paid out of profits after tax. The shareholder is taxed separately.

Corporate interest restriction (fixed ratio)

Interest allowance = higher of £2,000,000 and 30% × group tax-EBITDA (capped by the group's net interest expense)

Applies to groups with net interest expense above £2 million a year. Disallowed amounts can be carried forward and reactivated later. A group ratio election may give a higher allowance.

Individual investor rates

Dividend rates 8.75% / 33.75% / 39.35%; dividend nil rate band £500; savings nil rate band £1,000 (basic) or £500 (higher)

Use the tax tables given in the exam. Interest is taxed at normal rates.

Employer Class 1 NIC

15% × (salary − £5,000)

Applies to pay above £5,000 a year. Deductible for corporation tax. The £10,500 employment allowance may reduce it, but not where the director is the only employee.

Employee Class 1 NIC

8% on £12,571 to £50,270; 2% above £50,270

Nil up to £12,570. Applies to salary and bonus, not to dividends.

Dividend tax rates

8.75% basic; 33.75% higher; 39.35% additional

The £500 dividend nil rate band is used first, and it still counts towards the band limits. Dividends sit on top of other income.

Net cash from salary

Salary − income tax − employee NIC, where total cost = salary + employer NIC

The whole cost, including employer NIC, is deductible for corporation tax.

Net cash from dividend

Profit × (1 − CT rate) × (1 − dividend tax rate)

Use the company's marginal CT rate: 19%, 25%, or 26.5% in the marginal relief band.

Corporation tax marginal relief

(£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits

Deducted from tax at the main rate of 25%. Limits are reduced for associated companies.

Class 1A on benefits

15% × cash equivalent of benefits

Paid by the employer only. Deductible for the company. The director pays income tax on the benefit.

Pension annual allowance

£60,000; reduced by £1 for every £2 of adjusted income over £260,000 (if threshold income exceeds £200,000), minimum £10,000

Unused allowance from earlier years may be carried forward. Employer contributions use up the allowance.

Incorporation relief conditions

Business transferred as a going concern + all assets (other than cash) + wholly or partly for shares

If all three are met, relief is automatic. You do not claim it. You must elect if you do not want it.

Gain deferred when part of the consideration is not shares

Gain deferred = Total gain × Value of shares ÷ Total consideration

The remaining gain is chargeable now. It is the cash, loan account or other non-share part.

Base cost of the shares

Base cost = Market value of the shares − Gain deferred

The deferred gain comes back when the shares are sold.

CGT rates and annual exempt amount

18% lower rate; 24% higher rate; AEA £3,000

From the tax tables for 2025/26.

BADR

Rate 14%; lifetime limit £1,000,000

The qualifying conditions must also be met. Remember this when you advise on disapplying incorporation relief.

Corporation tax marginal relief

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

Applies where augmented profits are between £50,000 and £250,000. The small profits rate is 19% and the main rate is 25%.

SDLT on non-residential property

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

A transfer of non-residential property to the company may bring a charge based on market value.

Annual investment allowance

AIA = 100% of qualifying expenditure, up to £1,000,000 a year

Use it first against special rate pool expenditure, because those assets only get 6% writing down allowance otherwise (or a 50% first year allowance for companies). Cars do not qualify for AIA, although a new zero-emission car can get a 100% first year allowance.

Writing down allowance

WDA = tax written down value × 18% (main pool) or × 6% (special rate pool)

Reduce or increase for short or long periods of account. Do not forget the 18% and 6% are from the tax tables.

Company first year allowances

Main pool: 100% FYA. Special rate pool: 50% FYA.

Available to companies only, and claimed in addition to the AIA. Special rate expenditure not covered by AIA gets 50% FYA, and the balance goes into the pool for the 6% writing down allowance.

Structures and buildings allowance

SBA = 3% × qualifying cost, straight line

Applies only to non-residential structures and buildings. It relates to construction cost, not land. It is not a pool, so there are no balancing adjustments. On a sale, the buyer continues to claim the allowance. In the seller's chargeable gains computation, the SBA claimed is added to the sale proceeds, which has the same effect as deducting it from cost.

CGT on individuals

Tax = (gain − losses − £3,000 annual exempt amount) × 18% or 24%

The part of the gain that falls within the unused basic rate band is taxed at 18%. The excess over that band is taxed at 24%. BADR gains are at 14%.

BADR

Qualifying gain × 14%, lifetime limit £1,000,000

Conditions for a company's shares: personal trading company, at least 5% of ordinary share capital and voting rights, officer or employee, for the required period before disposal. For a sole trader, disposal of all or part of a business. Check the ownership period carefully.

Rollover relief (full reinvestment)

Gain deferred = gain; new asset base cost = cost of new asset − gain deferred

Both old and new assets must be qualifying business assets used in the trade. The new asset must be bought in the period from one year before to three years after the disposal.

Rollover relief (partial reinvestment)

Gain taxed now = lower of gain and proceeds not reinvested

The rest of the gain is deferred and deducted from the new asset's cost.

Substantial shareholding exemption

Gain on shares exempt if the investing company held at least 10% of the ordinary shares for a continuous 12 months in the previous 6 years, and the investee is a trading company or the holding company of a trading group or subgroup, both throughout the 12-month period and immediately after the disposal

The investing company does not need to be a trading company or a member of a trading group. If the exemption applies, losses are not allowable either.

EMI company and employee conditions

Gross assets ≤ £30m; fewer than 250 employees; independent trading company; employee works at least 25 hours a week or, if less, at least 75% of working time

The unexercised option limit is £250,000 per employee, measured at market value at grant. The company limit is £3m. Options normally must be exercised within 10 years of grant. These are scheme rules to learn, as the tax tables do not list them.

EMI tax treatment

Option price ≥ market value at grant → no income tax or NIC on grant or exercise; CGT on sale = proceeds − exercise price paid

If the option was granted at a discount, the discount is taxed as employment income on exercise. BADR at 14% can apply if the BADR conditions are met, with the two-year period running from grant of the option.

CSOP

Options up to £60,000 per employee at grant; exercise price ≥ market value at grant; exercise 3 to 10 years after grant → no income tax or NIC

Exercise earlier than three years normally gives an income tax charge unless a special reason applies. The gain on sale is taxed under CGT. The limit and periods are scheme rules to learn.

SAYE

Monthly saving £5 to £500 over 3 or 5 years; option price may be up to 20% below market value at grant (price at least 80% of market value)

It must be open to all employees. There is no income tax on grant. There is no income tax on exercise using the savings plus bonus, but only if the savings contract runs to completion and the option is exercised in the permitted window. The saving range and contract periods are scheme rules to learn, as the tax tables do not list them.

SIP

Free shares up to £3,600 a year; partnership shares up to £1,800 a year or 10% of salary, whichever is lower; matching up to 2 shares per partnership share

Free, partnership and matching shares need five years in the plan for full relief from income tax and NIC. Dividend shares need a three-year period. Shares taken out earlier create a charge. Open to all employees on the same terms. The limits are scheme rules to learn, as the tax tables do not list them.

Unapproved option

Employment income on exercise = market value at exercise − price paid

No charge on grant. NIC applies if the shares are readily convertible assets. Employer NIC: 15% on earnings above £5,000 a year. Employee Class 1 NIC: 8% to £50,270, 2% above. Base cost for CGT = market value at exercise.

CGT rates and relief

18% basic rate; 24% higher rate; annual exempt amount £3,000; BADR 14% on up to £1,000,000 lifetime

Use the tax tables given in the exam. Do not rely on memory for rates.

CGT on a share disposal

(Gain − reliefs − losses − AEA) × 18% or 24%

AEA is £3,000. Gains use any unused basic rate band at 18%, the rest at 24%. Use the AEA in the most favourable way.

EIS income tax relief

Relief = 30% × EIS subscription (up to the annual limit)

Learn the limits: £1,000,000 a year, or £2,000,000 if the excess is in knowledge-intensive companies. Relief cannot exceed the income tax liability. Shares must be held for three years or relief is withdrawn.

EIS CGT deferral

Chargeable gain reduced by the amount reinvested in EIS shares

The amount of gain deferred is the lower of the gain and the amount subscribed. There is no upper limit on the deferral, and income tax relief is not needed. The investment can be made from one year before to three years after the disposal. The deferred gain is taxed when the EIS shares are sold or a withdrawal event occurs.

EIS disposal exemption

Gain on EIS shares exempt if income tax relief was given and shares held for three years

Losses on EIS shares can be set against income or gains, after deducting the income tax relief given.

SEIS relief

Income tax relief 50% of investment, up to £200,000 a year; 50% of a gain is exempt where it is reinvested in SEIS shares in the same year the SEIS income tax relief is claimed, limited to the amount invested

For very small early-stage companies. Hold for three years. Learn that the CGT relief is an exemption for 50% of the gain reinvested, not a deferral. It applies only to a gain arising in the year the SEIS shares are subscribed, and only up to the amount invested in SEIS.

VCT relief

Income tax relief 30% of subscription, up to £200,000 a year; hold for five years

Dividends are tax-free and gains on VCT shares are exempt. There is no CGT deferral on a VCT subscription.

ISA

Overall investment limit £20,000 a year

Interest, dividends and gains inside an ISA are tax-free. Unused allowance cannot be carried forward.

Pension annual allowance

AA £60,000 (2023/24 to 2025/26); tapered if threshold income > £200,000 and adjusted income > £260,000; minimum allowance £10,000

Taper: the allowance falls by £1 for every £2 of adjusted income over £260,000, down to the minimum. Excess is taxed at the individual's marginal rates.

Carry forward of unused allowance

Current year AA used first, then unused AA from the previous three tax years, earliest first

You must have been a member of a registered pension scheme in the year you carry forward from. For 2022/23 the AA was £40,000.

Limit on pension tax relief

Personal contributions qualify up to 100% of relevant earnings, or £3,600 gross if lower or no earnings

Employer contributions are not limited by the individual's earnings but count towards the annual allowance.

Cap on income tax reliefs

Higher of £50,000 or 25% of income

The cap applies to certain income tax reliefs deducted from income, for example trading loss relief against general income. The tax tables say reliefs are capped at this amount unless otherwise restricted.

BADR

14% on qualifying gains up to a £1,000,000 lifetime limit

Investors' relief also has a £1,000,000 limit and a 14% rate. Qualifying conditions apply, and these are covered in the BADR topic.

Group relief group

Parent holds ≥ 75% of ordinary share capital of subsidiary (directly or indirectly)

Plus entitlement to at least 75% of profits available for distribution and of assets on a winding up. Test the position through each link for indirect holdings.

Group relief limit

Amount claimed ≤ lower of (surrendering company's available loss) and (claimant's taxable total profits for the matching period)

Match the accounting periods. If they differ, time-apportion both profits and losses and use only the overlap.

Marginal relief

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

Limits are £50,000 and £250,000 for a 12-month period. Divide them by the number of associated companies. Group relief is deducted from taxable total profits, not augmented profits, so it can reduce the corporation tax rate paid.

Corporation tax rates

Small profits rate 19%; main rate 25%

Rates in the supplied tax tables for financial year 2025. Use the tables in the exam.

Chargeable gains group

Transfer between group members = no gain/no loss

The transferee takes the transferor's cost and date of acquisition. Tax is only triggered when the asset leaves the group.

Degrouping charge

Company leaves group within 6 years holding asset acquired no gain/no loss → gain/loss as if sold at market value when acquired

Added to the sale proceeds of the shares in the company leaving. Check whether the substantial shareholding exemption applies on that sale.

CGT on shares sold by individuals

Gain – annual exempt amount £3,000 → tax at 18% / 24%; BADR 14% on first £1,000,000 lifetime

Rates from the supplied tables. The higher rate applies once gains fall in the band above the basic rate band.

Stamp duty on shares

0.5% of consideration

Paid by the purchaser on a share purchase. Asset sales of non-residential land attract SDLT at 0%, 2% and 5% in slices: up to £150,000, £150,001–£250,000 and above £250,000.

Purchase of own shares: income treatment

Distribution = Payment – capital originally subscribed

Taxed as dividend income. The company does not deduct tax and the amount is not a deduction for the company.

Quarterly instalment profit threshold

Large company: profits > £1,500,000 (threshold shared by the number of associated companies + 1)

The tax table gives £1,500,000. Divide it by the number of associated companies plus one, and reduce it for short accounting periods. Learn the further rules on instalments from your TX-UK knowledge.

Marginal relief for corporation tax

(£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits

Applies where augmented profits are between £50,000 and £250,000. Small profits rate 19%, main rate 25%. Limits are also divided by associated companies and time-apportioned.

Cap on income tax reliefs

Higher of £50,000 or 25% of income

Applies to certain reliefs, including loss relief against general income for early trading years and some other losses. Check which losses are restricted.

VAT late payment penalty

Up to 15 days: none; 16 to 30 days: 3%; over 30 days: 6% plus daily penalty at an annual rate of 10%

From the tax tables. Use it when a recommendation involves delayed VAT payment.

Personal tax payment on account rule

Two payments on account, each 50% of prior year income tax and Class 4 NIC not collected at source, due 31 January in the tax year and 31 July after it; balance due 31 January after the tax year

Standard TX-UK rule, not in the tax tables. A reduction claim is possible if the current year liability is expected to be lower.

Quick revision

• Small profits rate is 19% and main rate is 25%, with marginal relief between £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%, and the annual exempt amount is £3,000.
• Business asset disposal relief has a £1,000,000 lifetime limit and a 14% rate.
• Employer Class 1 national insurance is 15% above £5,000 per year, and Class 1A is 15%.
• Employee Class 1 is 8% from £12,571 to £50,270 and 2% above that.
• The main pool allowance is 18%, the special rate pool is 6%, and the annual investment allowance is £1,000,000.
• Inheritance tax nil rate band is £325,000, with lifetime rate 20% and death rate 40%.
• Income tax reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
• Always compare options on an after-tax basis and state your assumptions.
• Add timing and cash flow: tax due dates, interest on underpaid tax at 8.50% and quarterly instalments for companies above the profit threshold.
• Finish every advice answer with a clear recommendation and the risks.

Common mistakes

• Treating dividends or preference share dividends as deductible. Fix: Dividends are distributions from post-tax profits. Only interest on debt gets relief. Say this explicitly in your answer.
• Deducting the costs of issuing shares. Fix: Share issue costs are capital and not deductible. Incidental costs of loan finance are generally deductible.
• Treating dividends as a deductible cost for the company. Fix: Dividends are paid from post-tax profit. Apply corporation tax first, then dividend tax on the director.
• Forgetting that employer NIC is also deductible, or leaving it out of the cost of salary. Fix: Total cost = salary + employer NIC. Compare routes on the same total cost, and give corporation tax relief on the whole amount.
• Saying that incorporation relief must be claimed Fix: State that incorporation relief is automatic when the conditions are met. The taxpayer must elect to disapply it.
• Deferring the whole gain when cash or a loan account is part of the price Fix: Always check the consideration. Deferred gain = total gain × shares ÷ total consideration. Tax the rest now.
• Claiming AIA on a car or on more than £1,000,000 of expenditure. Fix: Cars do not qualify for AIA. A new zero-emission car gets a 100% first year allowance instead. Cap the AIA at £1,000,000 and send the rest to the pool for writing down allowance.
• Allocating AIA to the main pool before the special rate pool. Fix: Use AIA against special rate pool expenditure first. Leftover special rate expenditure only gets 6% (or a 50% FYA for a company), whereas a company's main pool expenditure can get a 100% FYA anyway. Then claim the company FYAs and writing down allowances on the balance.
• Charging income tax on exercise of a qualifying EMI option granted at market value. Fix: Check the EMI conditions first. If met and the option price was at least market value at grant, there is no income tax or NIC on exercise. Tax the gain under CGT.
• Using the market value at grant as the CGT base cost for an unapproved option. Fix: For unapproved options the base cost is the market value at exercise, because that value was taxed as income. For EMI the base cost is the price paid.

Exam tips

• Always compare the company's saving with the investor's tax cost. Examiners reward a two-sided answer.
• Show the marginal relief working when profits are between £50,000 and £250,000. Check for associated companies to adjust the limits.
• State rules in words first (for example, dividends are not deductible), then compute. Marks are often for the reason, not only the figure.
• For CIR questions, use the information given on tax-EBITDA and net interest. Show the 30% calculation, the £2 million comparison and the disallowed amount.
• Finish with a clear recommendation and one or two non-tax factors such as gearing or cash flow. This supports your professional skills marks.
• Always state your assumptions about the director's other income, tax band and the company's corporation tax rate. Markers give credit for sensible, clearly stated assumptions.
• Compare routes on the same cost to the company. Show employer NIC, corporation tax saved, income tax, employee NIC and the net amount in a tidy layout.
• Add a short recommendation with non-tax points: distributable profits, cash flow, state pension record, pension access and the director's objectives. These earn professional skills marks.