ACCA Applied Skills · Taxation (UK)
Exemptions and Reliefs for Deferring and Minimising Income Tax
This chapter shows how a person can lawfully reduce or delay income tax. You use allowances, tax bands, pension contributions, ISAs, approved investments and loss relief. Then you compare the options and recommend the one that saves most tax, while checking limits such as the cap on income tax reliefs.
What this chapter covers
This chapter is about tax planning for individuals and owner-managed businesses. You start with the line between legal avoidance and illegal evasion. Then you learn the tools: the personal allowance, income tax bands, pension contributions, tax-efficient investments, loss relief and reliefs that help with inheritance tax.
The chapter sits on top of earlier work. You need confident income tax computations, the rates and bands from the tax tables ACCA provides, and a working knowledge of capital gains tax and inheritance tax. Here you stop just computing tax and start advising. A typical task is to compare two courses of action and say which one leaves the client better off.
In the exam, this chapter appears in Section A and B objective questions, where one rule is tested with a calculation. It also appears in Section C, where you may write a short advice note. Examiners reward correct figures, clear reasoning and awareness of limits. Learn the tax tables you are given, but be sure you know how and when each relief applies.
Planning questions pull together much of the paper, so one solid chapter helps you in several questions. Many of the calculations are short and reward a clear method: find the income, apply the relief, check the limit, compare. Objective test questions are marked all or nothing, so you need accurate rules and thresholds, not a rough idea. In constructed response questions, advice that is specific to the client's facts earns marks that general comments do not.
The use of exemptions and reliefs in deferring and minimising income tax liabilities: topics in the order to study them
- 1Tax Planning Principles: Avoidance vs EvasionStart here because it sets the ethical frame: you may advise lawful planning, never concealment or false information.
- 2Making Full Use of Personal Allowance and Income Tax BandsThis is the base of every plan: you need to know who wastes allowances and bands, and how the allowance is lost between £100,000 and £125,140 of income.
- 3Child Benefit Income Tax ChargeIt is a short, rule-based topic that builds on the income thresholds you have just met and is easy to score on.
- 4Pension Contributions and Annual AllowancePensions extend the band-extension idea and bring in the annual allowance, which you must handle carefully.
- 5Tax-Efficient Investments: ISAs, EIS, SEIS and VCTOnce you know pensions, you can compare other ways to shelter or relieve tax on savings and investments.
- 6Cap on Income Tax ReliefsLearn the cap after you know the reliefs it limits, so you can spot when a plan is restricted.
- 7Trading Loss Relief and Choosing the Best ReliefLoss relief needs the earlier ideas of allowances, bands and the cap to choose the relief that saves most tax.
- 8Tax Planning for Business Owners and Inheritance Tax ReliefsFinish with the wider case studies, which combine income tax, capital gains tax and inheritance tax, and need everything above.
How to prepare The use of exemptions and reliefs in deferring and minimising income tax liabilities
Treat this chapter as a set of small rules plus a method for comparing options. Practise in that order.
- Read the tax tables ACCA provides and mark the figures used in this chapter: bands, the personal allowance limits, the child benefit rule, the cap, ISA and pension figures, and the inheritance tax rates and taper relief.
- Learn each rule in one sentence with its condition, for example that the child benefit charge is 1% of the benefit for every £200 of income over £60,000.
- Do a short calculation for each topic until you can finish it without notes. Show every step, as method marks matter in Section C.
- Practise comparison questions: work out the tax under each option, then state the saving and the better choice.
- Always check for limits after choosing a relief. Ask whether the cap on income tax reliefs, the annual allowance or an investment limit restricts the plan.
- Write two or three sentences of advice for each topic, naming the client's facts. Keep to lawful planning.
- Finish with mixed objective test cases under time pressure, then review every wrong answer for the rule you missed.
Common mistakes in The use of exemptions and reliefs in deferring and minimising income tax liabilities
Treating a lawful plan as evasion, or the reverse, in written advice.
Fix: Define both terms in one line, then say which applies to the facts. Advise only lawful steps.
Ignoring the cap or an allowance limit after choosing a relief.
Fix: Add a final step to every plan: check the cap, annual allowance and any investment limit.
Getting the child benefit charge wrong, for example charging it on the wrong amount.
Fix: Count the number of £200 steps over £60,000, take 1% of the benefit for each step, and cap the result at the full benefit.
Working out the saving at the wrong rate.
Fix: Lay out income against the bands first, then apply each relief at the rate where the income is taxed.
Writing general advice without the client's figures.
Fix: Quote the numbers from the question, show the tax saved, and make a clear recommendation.
Choosing a loss relief without comparing the options.
Fix: Compute the tax under each available relief, compare the savings, and consider how much personal allowance is wasted.
Last-day revision: The use of exemptions and reliefs in deferring and minimising income tax liabilities
- Avoidance is lawful planning within the rules; evasion is illegal and involves concealing or misstating facts.
- Personal allowance is £12,570 and is reduced where adjusted net income is above £100,000; it is zero at £125,140 or more.
- Basic rate band is £37,700 at 20%; the higher rate applies to £37,701 to £125,140 at 40%; the additional rate is 45%.
- Savings nil rate band is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers; the dividend nil rate band is £500.
- Child benefit charge: 1% of the benefit received for every £200 of income over £60,000, for income between £60,000 and £80,000.
- Pension annual allowance is £60,000 for 2023-24 to 2025-26, with a minimum allowance of £10,000.
- Contributions without earnings can qualify for relief only up to £3,600.
- The ISA overall investment limit is £20,000.
- Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
- Inheritance tax: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20%, death rate 40%.
- Taper relief reduces death tax on lifetime gifts: 20% for more than 3 but less than 4 years, rising to 80% for more than 6 but less than 7 years.
- In every planning answer, state the saving and check for limits.
The use of exemptions and reliefs in deferring and minimising income tax liabilities practice questions
- Marta has total income of £320,000 for 2025/26. She has reliefs that are subject to the cap, and no other restriction applies to them. What …
- Tara has adjusted net income of £78,000 before any gift aid donation. Her child benefit received is £2,500. She pays a net gift aid donation…
- Lena, a UK resident, is married to Omar. Omar has no income tax liability to use his allowance fully, and neither is a higher or additional …
- Under the Finance Act 2025 tax tables used in TX-UK, the cap on certain income tax reliefs is set at which of the following?
- Priya, a higher rate taxpayer, has taxable non-savings income of £70,000 in 2025–26 and makes a personal pension contribution of £16,000 net…
- Dev has total income of £150,000. He has reliefs of £45,000 that are subject to the cap. Which statement is correct?
- Raj has adjusted net income of £64,000 and receives child benefit of £1,800 for the year. He makes no pension or gift aid payments. What is …
- Mia has adjusted net income of £70,000 in the tax year and her partner receives child benefit of £2,000 for the year. Under the child benefi…
The use of exemptions and reliefs in deferring and minimising income tax liabilities in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
The use of exemptions and reliefs in deferring and minimising income tax liabilities: frequently asked questions
Is this chapter more about calculations or written advice?
Both. Objective test questions mostly test a single rule with a calculation. Constructed response questions can ask you to compare options and explain your recommendation, so you need a clear method and short, specific sentences.
Do I need to memorise the rates and limits?
ACCA provides tax rates and allowances in the exam, so you do not need to memorise every figure. You do need to know where each one applies and the conditions that go with it, because the table will not tell you that.
What is the difference between tax avoidance and tax evasion?
Avoidance means arranging your affairs lawfully to reduce tax within the rules. Evasion means illegally reducing tax, for example by hiding income or giving false information. In the exam, you only recommend lawful planning.
How do I decide which relief is best?
Work out the client's total tax under each option and compare the results. Look at which rate of tax the relief saves and whether any allowance is lost or wasted. Then check any cap or limit before you recommend one.