Advanced Taxation (UK) · Income tax: the scope of income tax, residence and overseas aspects

Scope of UK Income Tax and the Income Tax Computation

Updated 11 October 2026 · Fact-checked

An income tax computation sorts a person's income into non-savings, savings and dividend income, deducts reliefs and the personal allowance, then taxes each slice using set rates and bands. Non-savings income is taxed first, then savings, then dividends. The personal allowance falls away between £100,000 and £125,140 of adjusted net income.

Understand Scope of UK Income Tax and Income Tax Computation

UK income tax is charged on individuals. A UK resident is taxed on worldwide income. A non-resident is generally taxed only on UK source income. Residence rules are covered in other topics. Here you learn how to compute the tax once you know what is taxable.

The computation splits income into three types because each type has its own rates and order of taxation. Non-savings income is employment, trading, property and pension income. Savings income is mainly interest. Dividend income is dividends from companies. You always tax them in that order, with non-savings first and dividends last.

The layout runs from total income, less reliefs, to net income. You then deduct the personal allowance to reach taxable income. The allowance comes off non-savings income first, then savings, then dividends. This is the best use of the allowance, because it shelters the income taxed at the highest rates.

The rates and bands are in the tax tables ACCA gives you. Non-savings and savings income are taxed at 20%, 40% and 45%. Dividends are taxed at 8.75%, 33.75% and 39.35%. Nil rate bands sit on top for savings and dividends. Income in a nil rate band is taxed at 0%, but it still uses up part of the band it falls in. This matters when income crosses into the higher rate.

Two features trip students up. First, the personal allowance is lost gradually once adjusted net income passes £100,000, which creates an effective 60% rate on part of that slice. Second, some income tax reliefs are capped at the higher of £50,000 or 25% of income. In the exam, assume 2025/26 rates continue to apply unless told otherwise. This is true even if the question is for a later year.

Key rules to remember

Computation flow: Total income − reliefs = net income; net income − personal allowance = taxable income; Show non-savings, savings and dividend columns separately.
Order of taxation: Non-savings first, then savings, then dividends; The personal allowance is also set against income in this order.
Normal rates (non-savings and savings): Basic £1–£37,700: 20%. Higher £37,701–£125,140: 40%. Additional over £125,140: 45%; Bands apply to taxable income, after the personal allowance.
Dividend rates: Basic 8.75%. Higher 33.75%. Additional 39.35%; Use the band in which each slice of dividend falls.
Savings nil rate band: Basic rate taxpayer £1,000. Higher rate taxpayer £500; Based on the rate band the taxpayer's taxable income reaches. An additional rate taxpayer gets no savings nil rate band.
Dividend nil rate band: £500; Available to all taxpayers. The £500 is taxed at 0% but uses up band.
Starting rate for savings: 0% on savings income falling within the first £5,000 of taxable income; Non-savings taxable income uses up the £5,000 first. The starting rate is lost once non-savings taxable income reaches £5,000.
Personal allowance: £12,570; Transferable amount £1,260 where the marriage allowance rules apply.
Personal allowance restriction: Reduction = (adjusted net income − £100,000) ÷ 2; The allowance is nil when adjusted net income is £125,140 or more. Adjusted net income is net income less the gross amount of gift aid donations and personal pension contributions.
Cap on income tax reliefs: Reliefs capped at the higher of £50,000 or 25% of income; Applies to specified reliefs only, such as certain trading loss reliefs against general income. Charitable giving and pension relief are not within the cap.
Extending the basic rate band: Basic rate band = £37,700 + gross gift aid donations + gross personal pension contributions; Gross means the net payment × 100/80. Only the bands move, not the taxable income.

How to solve Scope of UK Income Tax and Income Tax Computation questions

Use this method for any income tax computation question, whether it asks for the full tax liability or for the effect of one change.

1List each income source and label it non-savings, savings or dividend. Use three columns.
2Add up total income. Deduct any reliefs that apply. Check whether any relief is within the cap on income tax reliefs.
3Find net income. Work out adjusted net income by deducting gross gift aid and gross personal pension contributions. Use this to test whether the personal allowance is restricted.
4Deduct the personal allowance against non-savings income first, then savings, then dividends. Do not let any column go below zero.
5Adjust the basic rate band for gross gift aid and gross personal pension contributions. Then tax non-savings income using the 20%, 40% and 45% rates.
6Tax savings income. Apply the starting rate if it is available, then the savings nil rate band for the taxpayer's band, then the normal rates for the rest. Keep track of the band each slice sits in.
7Tax dividends. Apply the £500 dividend nil rate band, then the dividend rates for the band each slice sits in. Add up the tax and deduct any tax already paid, such as PAYE or tax deducted at source.
8State the answer clearly and note any assumption. Show all workings.

Quickest way: Band-stacking shortcut

When to use it: Use when you must produce a full liability quickly and the numbers are straightforward.

Write total income in three columns. Take off the personal allowance from the left. This gives taxable non-savings, savings and dividends.
Draw a stacking line: non-savings first, then savings on top, then dividends on top of that. Mark where £37,700 (plus any extension) and £125,140 fall.
Read off each slice that sits below or above the band limits. Multiply each by its own rate.
Place the nil rate band at the bottom of each savings or dividend slice that you tax. Apply the savings nil rate band first for the correct band: £1,000 or £500.
Check the total against the order. Dividends must never be taxed before savings or non-savings.

Common mistakes in Scope of UK Income Tax and Income Tax Computation

Setting the personal allowance against dividends or savings first.
Students follow the order of the question, not the order of the rules.
Fix: Always deduct the allowance from non-savings income first, then savings, then dividends.
Using net income instead of adjusted net income to test the personal allowance restriction.
The two figures are close, so the difference is easy to miss.
Fix: Deduct gross gift aid and gross personal pension contributions from net income before you test against £100,000.
Using the wrong savings nil rate band.
Students pick £1,000 or £500 without checking which band the taxpayer reaches.
Fix: Check taxable income first. Basic rate taxpayers get £1,000. Higher rate taxpayers get £500. Additional rate taxpayers get none.
Treating nil rate band income as if it did not use up a band.
It is taxed at 0%, so it feels as though it is outside the bands.
Fix: Keep the savings and dividend nil rate band income in the stack. It still fills the basic rate band and pushes later income into the higher rate.
Applying the cap on income tax reliefs to gift aid or pension contributions.
The cap is described as covering income tax reliefs in general.
Fix: Apply the cap only to the reliefs it covers, such as certain trading loss reliefs against general income. Check the type of relief before capping.
Forgetting to extend the basic rate band for gift aid or pension contributions, or extending it by the net amount.
Students deduct the payment from income instead of widening the bands.
Fix: Gross up the net payment by 100/80, then add the gross amount to £37,700. Deduct gross gift aid and pensions only for adjusted net income.

Worked examples

Example 1

Anna is a UK resident. In 2025/26 she has employment income of £80,000, bank interest received of £3,000 and dividends of £10,000. Assume interest and dividends are received gross. Calculate her income tax liability before any PAYE.

Show the solution

Net income is £80,000 + £3,000 + £10,000 = £93,000. This is below £100,000, so she gets the full personal allowance of £12,570.
Deduct the allowance from non-savings income: £80,000 − £12,570 = £67,430 taxable non-savings income. Savings £3,000 and dividends £10,000 are untouched.
Non-savings tax: £37,700 × 20% = £7,540. The rest is £67,430 − £37,700 = £29,730 × 40% = £11,892. Total £19,432.
Savings income sits above £67,430, so Anna is a higher rate taxpayer. Her savings nil rate band is £500. Tax: £500 × 0% = £0 and £2,500 × 40% = £1,000.
Dividends are also in the higher band. The first £500 is in the dividend nil rate band at 0%. The remaining £9,500 × 33.75% = £3,206.25.
Total tax = £19,432 + £1,000 + £3,206.25 = £23,638.25, which is £23,638 to the nearest £.

Answer: Anna's income tax liability is £23,638 before any PAYE.

Example 2

Ben has employment income of £110,000 in 2025/26 and no other income. He pays a gift aid donation of £8,000 net. Calculate his income tax liability and show how much the gift aid donation saves him.

Show the solution

Gross donation = £8,000 × 100/80 = £10,000.
Adjusted net income = £110,000 − £10,000 = £100,000. This is not above £100,000, so Ben keeps the full personal allowance of £12,570.
Taxable income = £110,000 − £12,570 = £97,430.
The basic rate band is extended by the gross donation: £37,700 + £10,000 = £47,700.
Tax: £47,700 × 20% = £9,540. The balance is £97,430 − £47,700 = £49,730 × 40% = £19,892. Total £29,432.
Without the donation, adjusted net income is £110,000. The allowance is reduced by (£110,000 − £100,000) ÷ 2 = £5,000, so it is £7,570.
Taxable income is £110,000 − £7,570 = £102,430. Tax: £37,700 × 20% = £7,540 and £64,730 × 40% = £25,892, a total of £33,432.
The saving is £33,432 − £29,432 = £4,000.

Answer: Ben's income tax liability is £29,432. The gift aid donation saves him £4,000 of tax.

Exam tips

Set out the computation with three columns for non-savings, savings and dividends. Markers give marks for a clear layout even when a figure is wrong.
Read every question for gift aid, pension contributions and loss reliefs. They change adjusted net income and the basic rate band, and they are a common source of marks.
Use the tax tables ACCA provides. Do not rely on memory for rates and bands. Assume 2025/26 rates apply unless the question says otherwise.
Calculations only need to be to the nearest £. Show all workings, because follow-through marks are given for correct methods.
When asked to advise, comment on the effective 60% rate between £100,000 and £125,140. Show how a pension or gift aid payment can cut tax in that range.

Practice questions from Income tax: the scope of income tax, residence and overseas aspects

Scope of UK Income Tax and Income Tax Computation in other exams

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

Scope of UK Income Tax and Income Tax Computation: frequently asked questions

What is the order of taxation in the ATX-UK income tax computation?

Tax non-savings income first, then savings income, then dividend income. The personal allowance is set against income in the same order. This order gives the highest overall tax on the income taxed last, so always follow it.

How does the personal allowance restriction work above £100,000?

The allowance is reduced by £1 for every £2 of adjusted net income above £100,000. It is nil when adjusted net income is £125,140 or more. Pension contributions and gift aid reduce adjusted net income, so they can restore some or all of the allowance.

How does the cap on income tax reliefs work in ATX-UK?

Certain reliefs that are deducted from total income are limited to the higher of £50,000 or 25% of income. It applies to specified reliefs only, such as some trading loss reliefs against general income. Check each relief before applying the cap.

Do I use 2026/27 rates in the exam?

The ATX-UK supplementary instructions say to assume the tax rates and allowances for 2025/26 continue to apply unless you are told otherwise. The exams from June 2026 to June 2027 examine Finance Act 2025. Use the rates in the tax tables provided.