Skip to content

ACCA Applied Skills · Taxation (UK)

Income from Employment for ACCA TX (UK)

Income from employment covers how an employee's pay and benefits are taxed. You decide whether the person is employed, work out taxable earnings and benefits, deduct reliefs such as pension contributions, compute income tax using the rates and bands provided, then add the child benefit charge and national insurance where relevant.

What this chapter covers

This chapter is the base of the Taxation (UK) paper. It starts with the question of whether someone is an employee or self-employed, because the answer decides which rules apply. It then builds taxable employment income: salary, bonuses, expenses, and benefits in kind such as cars, fuel and vans. Next come PAYE, payroll giving and pension relief, and finally the full income tax computation.

The chapter ends with two add-ons that catch many students: the high income child benefit charge and national insurance contributions (NIC). Employees pay Class 1 NIC. Employers pay Class 1 on pay and Class 1A on most benefits. The self-employed pay Class 4. You should be able to calculate each from the tax rates and allowances ACCA provides in the exam.

The income tax computation you learn here is used in almost every later chapter. Self-employment, property income, investment income, capital gains tax and inheritance tax all depend on it. Treat this chapter as the foundation. Weakness here will cost you marks across Section B and Section C.

Employment income appears in objective test questions and in constructed response questions, often combined with pensions, benefits and NIC in one scenario. Objective test questions are marked all or nothing, so a small slip, such as using the wrong band or the wrong NIC class, loses the whole question. The skills are also very reusable. Once you can compute income tax, benefits and NIC accurately, you have the base for most other income tax questions on the paper, and a well-laid-out computation earns method marks in Section C.

Income from employment: topics in the order to study them

  1. 1Employment vs Self-Employment StatusStart here because status decides whether you apply employment income rules, Class 1 NIC and PAYE, or the self-employment rules.
  2. 2Employment Income and Taxable EarningsYou need to know what counts as taxable pay, and when it is taxed, before you can add benefits or reliefs.
  3. 3Taxable and Exempt BenefitsBenefits in kind are added to earnings, so learn them straight after earnings. They also feed Class 1A NIC later.
  4. 4Income Tax Computation: Rates, Bands and AllowancesOnce you know what is taxable, learn to compute the tax. The personal allowance, bands and the order of income types are needed for pensions, child benefit and every later chapter.
  5. 5Pay As You Earn and Payroll GivingPAYE and payroll giving are shorter topics. They are easier once you understand the tax computation they relate to.
  6. 6Pension Contributions and Annual AllowancePension relief changes bands and adjusted net income, so it needs the computation first. The annual allowance rules come after that.
  7. 7Child Benefit High Income Tax ChargeThe charge depends on income over a threshold, so you need to be able to compute income, including the effect of pension contributions, before you can apply it.
  8. 8National Insurance ContributionsFinish with NIC. It is a separate calculation, and it uses status, earnings and benefits from the earlier topics.

How to prepare Income from employment

Build this chapter in layers. Learn each rule, practise the calculation, then practise mixed scenarios the way the exam sets them.

  1. Read the tax rates and allowances ACCA provides for TX-UK and learn where each item sits: income tax bands, personal allowance, NIC, pension limits, car benefit percentages. You do not need to memorise every figure, but you must know which table to use and what each line means.
  2. Learn the status tests and the earnings rules in your own words. Practise short objective questions that ask whether a payment or an item is taxable, exempt or neither.
  3. Practise the benefit calculations separately: cars, fuel, vans and other benefits. Write each formula in the same order every time, so you do not miss a step such as a reduction for the employee's own contribution.
  4. Do full income tax computations from scratch. Lay out non-savings income, savings income and dividends in the right order, apply the personal allowance, then use the bands in order. Check the final tax figure for sense.
  5. Add pensions, payroll giving, child benefit charge and NIC one at a time. After each addition, redo a complete computation so you see how it changes the numbers.
  6. Finish with timed mixed questions: a 2-mark objective question under a minute and a half, then a scenario with five questions, then a written computation. For written answers, show every working so you can earn method marks.
  7. In the last week, redo the questions you got wrong and write a one-page list of the traps that caught you.

Common mistakes in Income from employment

  • Using the wrong NIC class or the wrong person

    Fix: Ask two questions every time: who pays, and on what? Employee Class 1 is on earnings. Employer Class 1 is on earnings. Class 1A is the employer's charge on benefits. Class 4 is on self-employed profits.

  • Forgetting to reduce or remove the personal allowance for high earners

    Fix: Check income before you apply the allowance. Remember that the allowance is zero where adjusted net income is £125,140 or more, and reduced between £100,000 and that point.

  • Treating all benefits as taxable at cost or at the same rate

    Fix: For each benefit, first ask if it is exempt. If not, use the specific rule for cars, fuel, vans, loans or other benefits. Use the figures in the provided tables.

  • Mishandling pension contributions

    Fix: Identify the type of contribution first. Then check the earnings limit and the annual allowance. Remember that the relief affects the tax computation, and may affect the child benefit charge through adjusted net income.

  • Getting the child benefit charge wrong

    Fix: Take income above £60,000, then count each full £200. Each full £200 gives 1% of the child benefit received. Cap the working at the range given in the tax tables.

  • Putting income in the wrong order in the computation

    Fix: Always use the same layout: non-savings income first, then savings, then dividends. Use the bands in that order, and show each band's tax on a separate line.

Last-day revision: Income from employment

  • An employee is taxed on employment income. A self-employed person is taxed on trading profits. Status affects both the tax rules and the NIC class.
  • The personal allowance is £12,570. Where adjusted net income is £125,140 or more, it is reduced to zero. It is also reduced for income above £100,000.
  • Income tax bands: basic rate £1 to £37,700 at 20%, higher rate to £125,140 at 40%, and additional rate above that at 45%. Dividend rates are 8·75%, 33·75% and 39·35%.
  • Savings nil rate band: £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. The dividend nil rate band is £500.
  • Class 1 employee NIC: nil to £12,570, then 8% up to £50,270 and 2% above. Employer Class 1 is 15% above £5,000. The employment allowance is £10,500.
  • Class 1A NIC is 15% and is paid by the employer on most taxable benefits. Class 4 for the self-employed is 6% from £12,571 to £50,270 and 2% above.
  • Electric cars with zero CO2 emissions have a 3% car benefit percentage. For hybrids with 1 to 50 g/km, the electric range decides the percentage.
  • The car fuel benefit uses a base figure of £28,200. The van benefit scale charge is £4,020 and the van fuel benefit is £769.
  • The pension annual allowance is £60,000 for 2023–24 to 2025–26. The minimum allowance is £10,000 and the income limit is £260,000. Without earnings, the maximum that qualifies for relief is £3,600.
  • Child benefit charge: for income between £60,000 and £80,000, 1% of the child benefit received for every £200 of income over £60,000.
  • Objective test questions are all or nothing. Read the question, check which tax year and rates apply, then compute.

Income from employment practice questions

Income from employment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income from employment: frequently asked questions

Is income from employment examined in Section A, B or C?

It can appear in all three. Objective test questions in Section A and Section B can test any part of it, including benefits, NIC and the child benefit charge. It also forms part of larger income tax computations in Section C, where you must show your workings.

Do I need to memorise the tax rates for TX-UK?

ACCA provides tax rates and allowances for the exam, so you do not need to memorise every figure. You must know what each table contains, which figure applies and how to use it. Practising with the provided tables will make this fast.

Why does employment status matter?

Status decides how someone is taxed. An employee has employment income and PAYE and pays Class 1 NIC. A self-employed person is taxed on trading profits and pays Class 4 NIC. A scenario may ask you to decide this before you do any calculation.

Which topic in this chapter should I practise most?

Practise the full income tax computation most, because it is used in almost every later chapter. Then practise benefits and NIC, which are the areas where small mistakes are common and where objective questions give no partial marks.