Taxation (UK) · Income from employment

Income Tax Computation: Rates, Bands and Allowances

Updated 11 October 2026 · Fact-checked

An income tax computation adds up non-savings, savings and dividend income, deducts reliefs, subtracts the personal allowance (reduced if income is high), then taxes each slice in order using the bands, nil rate bands and rates ACCA gives you. Non-savings income is taxed first, then savings, then dividends.

Understand Income Tax Computation: Rates, Bands and Allowances

Income tax is charged on your taxable income for a tax year. You do not tax everything at one rate. You split income into three types: non-savings income (employment, trading, property), savings income (interest) and dividend income. Each type has its own rates.

You first add up total income, then deduct reliefs to reach net income. Next you deduct the personal allowance (£12,570). That gives taxable income. The allowance is set against non-savings income first, then savings, then dividends. This order is the most favourable to the taxpayer.

The personal allowance is lost gradually once adjusted net income is over £100,000. It falls by £1 for every £2 over the limit. It is nil at £125,140 or more. Adjusted net income is net income less the gross amount of Gift Aid donations and gross personal pension contributions.

Taxable income is then charged in order: non-savings, savings, dividends. The basic rate band is £37,700 and the higher rate band runs up to £125,140 of taxable income. Savings income has a 0% starting rate if it falls in the first £5,000 of taxable income, and a savings nil rate band of £1,000 (basic rate taxpayer) or £500 (higher rate taxpayer). Dividends have a £500 nil rate band. Additional rate taxpayers get no savings nil rate band.

Finally, some income tax reliefs are capped. Unless otherwise restricted, they cannot exceed the higher of £50,000 or 25% of income. Remember that nil rate bands still use up part of the band they fall in.

Key rules to remember

Personal allowance: £12,570; Reduced if adjusted net income is over £100,000. Nil when adjusted net income is £125,140 or more.
Personal allowance abatement: PA = £12,570 − [(adjusted net income − £100,000) ÷ 2]; Only when adjusted net income is above £100,000. Cannot go below nil. Round the reduction as exam instructions suggest, usually whole pounds.
Normal rates: Basic £1–£37,700: 20%. Higher £37,701–£125,140: 40%. Additional over £125,140: 45%; Apply to non-savings income and savings income. Bands are on taxable income.
Dividend rates: Basic 8·75%. Higher 33·75%. Additional 39·35%; Dividends are taxed last. The first £500 is at 0% (dividend nil rate band).
Savings nil rate band and starting rate: Basic rate taxpayer £1,000. Higher rate taxpayer £500. Additional rate nil. Starting rate 0% on savings within the first £5,000 of taxable income; The starting rate is only available if non-savings taxable income is below £5,000. Savings taxed at 0% still use up band.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of adjusted total income; Applies unless the relief is otherwise restricted. Use the cap figure given in the question.

How to solve Income Tax Computation: Rates, Bands and Allowances questions

Use the same layout every time. Columns for non-savings, savings and dividends keep the order of taxation clear.

1Set up three columns: non-savings, savings and dividends. List each source of income in the right column, using gross figures for savings and dividends.
2Total the income and deduct reliefs (for example trading losses, qualifying interest) to reach net income. Check whether the cap on reliefs applies.
3Calculate adjusted net income if Gift Aid or personal pension contributions are present. If it is above £100,000, abate the personal allowance.
4Deduct the personal allowance from non-savings income first, then savings, then dividends, to reach taxable income.
5Extend the basic rate band by the gross Gift Aid donations and gross personal pension contributions, if any.
6Tax non-savings income at 20%, 40% and 45% using the bands. Then tax savings income, using the starting rate and savings nil rate band where available. Then tax dividends, using the £500 nil rate band.
7Add the tax on each slice to find the income tax liability. Deduct any tax already paid, such as PAYE, if asked for tax payable.

Quickest way: Band-slice shortcut

When to use it: Use this when time is short and income is straightforward, with no Gift Aid or pension contributions.

Work out taxable income by type after the personal allowance and mark where each type sits in the £37,700 band.
Tax non-savings income first, then savings, then dividends. Taking each slice separately reduces errors.
Identify the nil rate band that applies: £1,000 or £500 for savings, depending on whether the person is a basic or higher rate taxpayer, and £500 for dividends.
Remember the nil rate bands count towards the basic rate band. So only the excess over the nil band is taxed, at the rate for the band it falls in.
Total the slices and check that the sum of the taxed income equals taxable income.

Common mistakes in Income Tax Computation: Rates, Bands and Allowances

Taxing dividends or savings before non-savings income.
Students tax income in the order it appears in the question.
Fix: Always tax non-savings, then savings, then dividends. Use the columns layout.
Forgetting the nil rate band uses up part of the basic rate band.
Students think the 0% slice sits outside the band.
Fix: Include the nil rate slice in the band limit. Show it on a separate line at 0%.
Using the wrong savings nil rate band.
Students do not check whether the person is a basic, higher or additional rate taxpayer.
Fix: Look at which band the taxable income falls in. £1,000 for basic, £500 for higher, nil for additional rate.
Abating the personal allowance using net income instead of adjusted net income.
Gift Aid and pension contributions are overlooked.
Fix: Deduct gross Gift Aid donations and gross personal pension contributions from net income before testing against £100,000.
Applying the starting rate for savings when non-savings taxable income is £5,000 or more.
Students forget the starting rate is only for savings within the first £5,000 of taxable income.
Fix: Check non-savings taxable income. The 0% band is £5,000 less that amount, and nil if negative.
Applying the cap on reliefs to every deduction.
Students over-apply the rule.
Fix: Use the cap only for the reliefs it covers, and only when the question gives reliefs large enough to reach £50,000 or 25% of income.

Worked examples

Example 1

Priya has employment income of £48,000, bank interest received of £1,800 and dividends received of £4,000 in 2025/26. Compute her income tax liability, ignoring PAYE.

Show the solution

Total income is £48,000 + £1,800 + £4,000 = £53,800. There are no reliefs. Net income is £53,800.
Personal allowance is £12,570 because income is below £100,000. Deduct it from non-savings income: £48,000 − £12,570 = £35,430 taxable non-savings.
Taxable income: non-savings £35,430, savings £1,800, dividends £4,000. Total £41,230.
Basic rate band is £37,700. Non-savings uses £35,430, leaving £2,270. Savings £1,800 falls in the basic band. Dividends: £2,270 − £1,800 = £470 of band remains, so £470 of dividends are in the basic band and £3,530 in the higher band.
Non-savings tax: £35,430 × 20% = £7,086.
Savings: Priya is a basic rate taxpayer, so the savings nil rate band is £1,000. The starting rate is not available as non-savings taxable income exceeds £5,000. Tax on £1,000 at 0% = nil. Tax on £800 at 20% = £160. (Her taxable income reaches the higher rate band through dividends, but the savings themselves are in the basic band, so basic rate nil band applies.)
Dividends: the first £500 is at 0%. This £500 falls within the £470 basic band and £30 in the higher band, so £470 of band at 0% and £30 at 0%. Remaining basic band dividends: none. Higher rate dividends: £3,530 − £30 = £3,500 at 33·75% = £1,181.25.
Total income tax = £7,086 + £160 + £0 + £1,181.25 = £8,427.25.

Answer: Income tax liability = £8,427.25.

Example 2

Marcus has employment income of £110,000 and makes a personal pension contribution of £8,000 net, paid under relief at source, in 2025/26. He has no other income. Compute his income tax liability.

Show the solution

Gross pension contribution = £8,000 × 100/80 = £10,000. The basic rate band is extended by £10,000, to £47,700.
Net income = £110,000. Adjusted net income = £110,000 − £10,000 = £100,000.
Adjusted net income is not above £100,000, so no abatement. The personal allowance is £12,570.
Taxable income = £110,000 − £12,570 = £97,430.
Tax: £47,700 × 20% = £9,540. £97,430 − £47,700 = £49,730 × 40% = £19,892.
Total income tax = £9,540 + £19,892 = £29,432.

Answer: Income tax liability = £29,432. The pension contribution restores the full personal allowance and extends the basic rate band.

Exam tips

Show every slice on its own line with its rate. Marks are given for method even if one figure is wrong.
Use the rates and bands in the tax tables ACCA gives you. Do not rely on memory for the numbers.
Look for Gift Aid and pension contributions. They extend the basic rate band and reduce adjusted net income.
In objective test questions, check which band the income falls in before choosing the savings nil rate band.
Write the order of taxation at the top of your answer plan: non-savings, savings, dividends.

Practice questions from Income from employment

Income Tax Computation: Rates, Bands and Allowances in other exams

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

ACCA Strategic ProfessionalIncome Tax Rates, Bands and Allowances

Income Tax Computation: Rates, Bands and Allowances: frequently asked questions

How is the personal allowance reduced over £100,000?

It falls by £1 for every £2 that adjusted net income exceeds £100,000. It is nil when adjusted net income is £125,140 or more.

What is the difference between the starting rate and the savings nil rate band?

The starting rate is a 0% rate for savings income that falls within the first £5,000 of taxable income. The savings nil rate band is a further £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. Additional rate taxpayers get none.

Does the dividend nil rate band depend on the taxpayer's band?

No. The dividend nil rate band is £500 for everyone. The dividends it covers still use up part of the basic or higher rate band.

What is the cap on income tax reliefs?

Unless otherwise restricted, certain reliefs are capped at the higher of £50,000 or 25% of income. It limits how much of those reliefs you can deduct in one tax year.