Advanced Taxation (UK) · Income tax: the comprehensive computation of taxable income and the income tax liability

Income Tax Computation Format and Types of Income in ATX-UK

Updated 11 October 2026 · Fact-checked

An income tax computation lists all income, split into non-savings, savings and dividend income, deducts reliefs to reach net income, deducts the personal allowance to reach taxable income, then taxes the slices in a fixed order: non-savings first, savings second, dividends last, using the right rates and nil rate bands for each.

Understand Income Tax Computation Format and Types of Income

UK income tax is not charged on one pot of income. Your income is split into three types, and each type has its own rates. The three types are non-savings income (employment, trading profits, pensions, property income), savings income (bank and building society interest, most interest) and dividend income (dividends from companies).

The split matters because the types are taxed in a fixed order. Non-savings income sits at the bottom, savings income sits in the middle and dividends sit on top. The personal allowance is set against non-savings income first, then savings, then dividends. The basic rate band is also filled in that order. This is why a pound of dividend can be taxed at a different rate from a pound of salary, even if both fall in the same band.

Non-savings and savings income are taxed at the normal rates of 20%, 40% and 45%. Dividends have their own rates of 8.75%, 33.75% and 39.35%. The basic rate band is £37,700 and the higher rate band runs up to £125,140 of taxable income. There are also nil rate slices: a savings nil rate band, a dividend nil rate band and a 0% starting rate for savings. These nil rate slices still use up part of the band they fall in.

The layout is always the same: income by type, total income, reliefs, net income, personal allowance, taxable income by type, tax by type. If you follow the layout, the marks follow. Examiners award marks for each line, so a tidy layout protects you even if one figure is wrong.

Key rules to remember

Computation layout: Income by type (non-savings, savings, dividend) → total income − reliefs = net income − personal allowance = taxable income; Show the three columns separately. Set the personal allowance against non-savings first, then savings, then dividends.
Order of taxation: Non-savings first → savings second → dividends last; Applies to filling the personal allowance and the bands.
Income tax rates and bands: Basic rate band £37,700; higher rate £37,701 to £125,140; additional rate above £125,140. Normal rates 20% / 40% / 45%. Dividend rates 8.75% / 33.75% / 39.35%; Non-savings and savings income use the normal rates. Take the figures from the tax tables.
Nil rate slices: Savings nil rate band: £1,000 (basic rate taxpayer), £500 (higher rate taxpayer). Dividend nil rate band: £500. Starting rate for savings: 0% on savings within the first £5,000 of taxable income; Your status (basic or higher rate taxpayer) is decided by taxable income. The starting rate is cut by non-savings taxable income, so it is only available if non-savings taxable income is below £5,000. The nil rate slices are taxed at 0% but use up the band.
Personal allowance: £12,570, reduced by £1 for every £2 of adjusted net income over £100,000; nil when adjusted net income is £125,140 or more; Adjusted net income is net income less certain items such as gross Gift Aid and gross personal pension contributions.

How to solve Income Tax Computation Format and Types of Income questions

Use this method for any question that asks you to compute an individual's income tax liability.

1Set up three columns: non-savings, savings and dividend. Add a total column.
2List every source of income in the right column. Use the amount taxable for the year, not the amount received.
3Add up total income, deduct any reliefs to reach net income, and note whether adjusted net income is above £100,000.
4Deduct the personal allowance. Work out the reduced allowance if adjusted net income is above £100,000. Set it against non-savings, then savings, then dividends.
5Add up taxable income by type and in total. Use total taxable income to decide whether the person is a basic or higher rate taxpayer for the savings nil rate band.
6Calculate tax in order. Fill the basic rate band with non-savings, then savings, then dividends. Show the nil rate slices at 0% and say which band they sit in.
7Add up the tax by type to get the income tax liability. Deduct any tax already paid, such as PAYE, only if the question asks for tax payable.

Quickest way: Band-by-band running total

When to use it: Use this when time is short and the question gives clear figures for each income type.

Write down taxable non-savings, taxable savings and taxable dividends in one line.
Work out how much of the £37,700 basic rate band is left after each type.
Tax non-savings at 20% and 40% (and 45% above £125,140 of taxable income).
Take the savings nil rate band (£1,000 or £500) off the savings, then tax the rest at the band rate.
Take the £500 dividend nil rate band off the dividends, then tax the rest at 8.75%, 33.75% or 39.35% depending on where it falls.
Check that the sum of your slices equals total taxable income.

Common mistakes in Income Tax Computation Format and Types of Income

Taxing dividends before savings or non-savings income.
Students tax the largest or the first-listed item first.
Fix: Always go non-savings, then savings, then dividends. Write the order at the top of your answer.
Using the £1,000 savings nil rate band for a higher rate taxpayer.
Students look at the band the savings fall in, not the person's overall status.
Fix: Decide status from total taxable income. If it is above £37,700 the person is a higher rate taxpayer and the band is £500. If taxable income is over £125,140, there is no savings nil rate band.
Forgetting that nil rate slices use up the basic rate band.
Students treat 0% income as if it does not exist.
Fix: Include the £500 dividend nil rate and the savings nil rate in the band running total, so that the later income is taxed at the right rate.
Not reducing the personal allowance when income is above £100,000.
Students copy £12,570 straight from the tax tables.
Fix: Check adjusted net income first. Reduce the allowance by £1 for every £2 over £100,000, and use nil if it is £125,140 or more.
Applying the personal allowance against dividends first.
Students want to save the highest rate income.
Fix: The allowance is set against non-savings first. Doing it any other way is not permitted and loses marks.
Using the starting rate for savings when non-savings income is high.
Students read the £5,000 band and forget that non-savings taxable income fills it.
Fix: Only the part of the £5,000 band not used by non-savings taxable income is available. If non-savings taxable income is £5,000 or more, there is no starting rate.

Worked examples

Example 1

Priya has employment income of £48,000, bank interest received of £2,000 and dividends received of £6,000 in the tax year. Assume the interest and dividends are the amounts taxable and there are no reliefs. Compute her income tax liability before any tax already paid.

Show the solution

Net income = £48,000 + £2,000 + £6,000 = £56,000. This is below £100,000, so the full personal allowance of £12,570 applies.
Taxable non-savings = £48,000 − £12,570 = £35,430. Taxable savings = £2,000. Taxable dividends = £6,000. Total taxable income = £43,430.
Total taxable income is above £37,700, so Priya is a higher rate taxpayer. Her savings nil rate band is £500. The starting rate is not available because taxable non-savings income is above £5,000.
Non-savings: £35,430 × 20% = £7,086. This leaves £2,270 of the basic rate band.
Savings: £2,000 sits in the remaining basic rate band. £500 at 0%, £1,500 × 20% = £300.
Dividends start at £37,430 of taxable income. The £500 nil rate band is at 0%. Of this, £270 fills the rest of the basic rate band and £230 is above it. The remaining £5,500 is all above £37,700, so it is taxed at 33.75%: £5,500 × 33.75% = £1,856.25.
Total income tax = £7,086 + £300 + £1,856.25 = £9,242.25.

Answer: Income tax liability = £9,242.25.

Example 2

Tom has employment income of £110,000, building society interest of £3,000 and dividends of £5,000. He makes no Gift Aid or pension contributions. Compute his income tax liability.

Show the solution

Net income = £110,000 + £3,000 + £5,000 = £118,000. Adjusted net income is the same, as there are no deductions.
Excess over £100,000 = £18,000. The personal allowance is reduced by £18,000 ÷ 2 = £9,000, so it is £12,570 − £9,000 = £3,570.
Taxable non-savings = £110,000 − £3,570 = £106,430. Taxable savings = £3,000. Taxable dividends = £5,000. Total taxable income = £114,430.
Total taxable income is above £37,700 and below £125,140, so Tom is a higher rate taxpayer. Savings nil rate band is £500.
Non-savings: first £37,700 × 20% = £7,540. The remaining £68,730 × 40% = £27,492.
Savings: all above the basic rate band. £500 at 0%, £2,500 × 40% = £1,000.
Dividends: all above the basic rate band and below £125,140. £500 at 0%, £4,500 × 33.75% = £1,518.75.
Total = £7,540 + £27,492 + £1,000 + £1,518.75 = £37,550.75.

Answer: Income tax liability = £37,550.75.

Exam tips

Always draw the three-column layout, even for a short part of a Section A question. It shows the examiner your method and earns marks even if a figure is wrong.
Take every rate, band and nil rate from the tax tables ACCA provides. Do not rely on memory for the bands and rates.
Check adjusted net income against £100,000 in every computation. It is a common trap in ATX questions, and tax planning questions often build on it.
State your assumptions and label each slice of tax (for example, savings nil rate band £500). Clear labelling makes it easy for the marker to award marks.
Use the professional skills marks: if a client needs advice, explain the effect of the order of taxation in plain words after the numbers.

Practice questions from Income tax: the comprehensive computation of taxable income and the income tax liability

Income Tax Computation Format and Types of Income in other exams

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

Income Tax Computation Format and Types of Income: frequently asked questions

What is the difference between non-savings, savings and dividend income?

Non-savings income is mainly employment, trading, pension and property income. Savings income is mainly interest. Dividend income is dividends from companies. Each type is taxed in a set order and dividends have their own lower rates.

In what order is income taxed?

Non-savings income is taxed first, then savings income, then dividend income. The personal allowance and the basic rate band are also used in this order. This means dividends are taxed on top of the other income.

Do nil rate bands use up the basic rate band?

Yes. Income covered by the savings nil rate band or the dividend nil rate band is taxed at 0%, but it still counts towards the band it falls in. This can push later income into the higher rate band.

How do I decide whether the savings nil rate band is £1,000 or £500?

Look at the person's total taxable income. A basic rate taxpayer gets £1,000. A higher rate taxpayer gets £500. The tax tables give the amounts.