Advanced Taxation (UK) · Investment and other expenditure that reduces tax liabilities

Tax Rates, Bands and Allowances for Planning in ATX-UK

Updated 11 October 2026 · Fact-checked

Planning questions in ATX-UK ask you to compare options using the tax tables ACCA gives you. You apply income tax bands, savings and dividend nil rate bands, corporation tax rates with marginal relief, and CGT rates with the annual exempt amount. Compute the tax under each option, then compare the totals.

Understand Tax Rates, Bands and Allowances for Planning

Almost every ATX planning question comes down to one thing: which option leaves the client with less tax? To answer, you must apply the right rate to the right slice of income or gain. The tax tables are given in the exam. Your skill is knowing which rate applies where, and in what order.

Income tax has three bands for 2025/26: basic rate on the first £37,700 of taxable income, higher rate up to £125,140, and additional rate above that. Normal rates are 20%, 40% and 45%. Dividends use their own rates: 8.75%, 33.75% and 39.35%. Income is stacked in order: non-savings first, then savings, then dividends. The dividend nil rate band is £500 and the savings nil rate band is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. A 0% starting rate applies to savings income that falls within the first £5,000 of taxable income. Nil rate band income still uses up the band it sits in.

The personal allowance is £12,570. It is reduced where adjusted net income exceeds £100,000 and is nil where adjusted net income is £125,140 or more. This creates an effective rate of 60% on income in that range, which is a classic planning point. Note that the savings nil rate band depends on your tax band. This is different from the starting rate, which depends on how much non-savings income you have.

Corporation tax has a small profits rate of 19% and a main rate of 25%. The lower limit is £50,000 and the upper limit is £250,000. Between the limits, the company pays the main rate less marginal relief. Both limits are divided by the number of associated companies plus one, and are scaled down for short accounting periods. Large companies, those with profits above the £1,500,000 threshold, pay by quarterly instalments. The threshold is also divided by associated companies.

Capital gains tax for individuals applies after the £3,000 annual exempt amount. Gains are taxed at 18% to the extent they fall within any unused basic rate band, and at 24% above that. Business asset disposal relief and investors' relief gains are taxed at 14% within the lifetime limit of £1,000,000. Use the annual exempt amount against the gains taxed at the highest rate first, to save the most tax.

Key rules to remember

Income tax bands (normal rates): Basic 20% on £1 – £37,700; higher 40% on £37,701 – £125,140; additional 45% above £125,140; Bands apply to taxable income, after the personal allowance of £12,570.
Dividend rates: 8.75% basic; 33.75% higher; 39.35% additional. Dividend nil rate band £500; Dividends are taxed last. The nil rate band income still uses up the band.
Savings nil rate band: £1,000 basic rate taxpayer; £500 higher rate taxpayer; nil for additional rate taxpayer; The starting rate of 0% is separate. It applies to savings income within the first £5,000 of taxable income.
Personal allowance restriction: Allowance reduced where adjusted net income > £100,000; nil where ≥ £125,140; Reduction is £1 for every £2 of excess over £100,000.
Corporation tax marginal relief: (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits; Deduct from tax at 25% on taxable total profits. Limits are £50,000 and £250,000, divided by (1 + associated companies).
Large company instalments: Profit threshold £1,500,000; Threshold is divided by (1 + associated companies) and time-apportioned for short periods.
CGT rates and exemption: 18% lower rate; 24% higher rate; annual exempt amount £3,000; BADR and investors' relief 14% (lifetime limit £1,000,000); Rate depends on the unused basic rate band after taxable income.

How to solve Tax Rates, Bands and Allowances for Planning questions

Use this method for any planning comparison. Do the same layout for each option so the comparison is fair.

1Read the requirement. Note the taxpayer (individual or company), the tax year, and the options to compare.
2List all income or profits under each option. Separate non-savings, savings and dividend income for individuals.
3Deduct the personal allowance, checking whether adjusted net income is above £100,000 so it is restricted.
4Slice income into bands in order: non-savings, savings, then dividends. Apply the nil rate bands and starting rate where relevant.
5For a company, work out taxable total profits and augmented profits, adjust limits for associated companies and short periods, then apply 19%, 25% or marginal relief.
6For gains, deduct the annual exempt amount, then check how much basic rate band is unused to split 18% and 24%. Apply BADR at 14% if available.
7Total the tax under each option, compare, and state the saving.
8Add a short comment on non-tax factors, risks or timing, to earn professional skills marks.

Quickest way: Marginal rate comparison

When to use it: Use this when the question asks about the effect of a change, such as extra salary, a dividend, or a pension contribution, rather than a full computation.

Find where the client's income sits in the bands before and after the change.
Use the marginal rate for that slice, for example 20%, 40%, 45%, 60% in the £100,000 to £125,140 range, or 33.75% for dividends.
Multiply the change in income by the marginal rate.
For companies, use 26.5% as the effective marginal rate between the £50,000 and £250,000 limits. This is the 25% main rate plus the loss of relief of 3/200 (1.5%), because each extra £1 of profit reduces the marginal relief.
Check the nil rate bands do not change the answer, then compare the options.

Common mistakes in Tax Rates, Bands and Allowances for Planning

Taxing dividends at normal rates or in the wrong order
Students stack income in the order it appears in the question.
Fix: Always stack non-savings first, then savings, then dividends. Use the dividend rates.
Thinking the nil rate band means the income is ignored for band purposes
The word nil suggests the income disappears.
Fix: Nil rate band income is taxed at 0% but still fills the basic rate band, which can push other income into the higher rate.
Confusing the starting rate with the savings nil rate band
Both give 0% on savings income and both appear in the tables.
Fix: The starting rate depends on non-savings income being low. The savings nil rate band depends on whether you are a basic, higher or additional rate taxpayer. Apply the starting rate first.
Forgetting to divide the corporation tax limits for associated companies
Students focus on the profit figure and skip the facts about related companies.
Fix: Divide both limits by 1 plus the number of associated companies. Check for short periods too.
Using taxable total profits instead of augmented profits to test the limits
Augmented profits are not on the tax computation.
Fix: Add dividends received from non-group companies to taxable total profits to get augmented profits. Use this figure for the limit test and the formula.
Applying the annual exempt amount against gains taxed at 18% first
Students apply it in the order the gains are listed.
Fix: Set it against gains taxed at the highest rate first, since this saves the most tax.

Worked examples

Example 1

Sanjay has non-savings income of £120,000 in 2025/26, all after deductions, and no other income. Using the tables, he can take an extra £10,000 as salary or as a dividend. Compare the extra income tax on each choice. Ignore NIC.

Show the solution

Adjusted net income is £120,000, so the personal allowance is reduced by (£120,000 – £100,000) ÷ 2 = £10,000 and the allowance is £2,570.
Taxable income is £120,000 – £2,570 = £117,430. This is within the higher rate band (up to £125,140).
Extra salary £10,000: income becomes £130,000, so the personal allowance falls to nil, a further loss of £2,570.
Taxable income rises from £117,430 to £130,000, an increase of £12,570. Tax on £7,710 (to £125,140) at 40% = £3,084. Tax on £4,860 (above £125,140) at 45% = £2,187. Total extra tax = £5,271.
Extra dividend £10,000: adjusted net income becomes £130,000 and the allowance is nil. Taxable income is £130,000, made up of £120,000 non-savings income and the £10,000 dividend.
The allowance loss costs £2,570 × 40% = £1,028, because the non-savings income of £120,000 is taxed in the higher band either way. The £10,000 dividend is stacked on top of the £120,000 of non-savings income: £500 at 0% (nil rate band), £4,640 at 33.75% up to the £125,140 point, and £4,860 at 39.35%.
Dividend tax: £4,640 × 33.75% = £1,566 and £4,860 × 39.35% = £1,912. Total dividend tax is £3,478.
Total extra tax on the dividend option = £1,028 + £3,478 = £4,506.

Answer: Extra salary costs £5,271 of income tax. An extra dividend costs £4,506. The dividend is £765 cheaper for income tax only. In practice, you would also compare the NIC and the company's corporation tax deduction.

Example 2

Q Ltd has taxable total profits of £180,000 for the year to 31 March 2026. It has no associated companies and no dividend income. Compute the corporation tax liability and state whether it must pay by quarterly instalments.

Show the solution

The accounting period is 12 months, and there are no associated companies, so the limits are £50,000 and £250,000.
Augmented profits equal taxable total profits of £180,000, as there is no dividend income. This is between the limits, so marginal relief applies.
Tax at main rate: £180,000 × 25% = £45,000.
Marginal relief = (£250,000 – £180,000) × 3/200 × £180,000 ÷ £180,000 = £70,000 × 3/200 = £1,050.
Corporation tax liability = £45,000 – £1,050 = £43,950.
The instalment threshold is £1,500,000. Profits of £180,000 are below it, so Q Ltd is not large for instalments. Payment is due nine months and one day after the period end.

Answer: Corporation tax is £43,950. Q Ltd is not required to pay by quarterly instalments. It pays nine months and one day after the end of the period, which is 1 January 2027.

Exam tips

Write out the band layout for each option in the same format. The marker can then follow your numbers and award method marks even if you slip.
Look for the £100,000 to £125,140 range. When income sits there, the effective rate is 60%, and a pension contribution or charitable gift is often the planning answer.
Always check for associated companies and short accounting periods before you touch marginal relief.
Do not use a rate you cannot find in the tables. If the table gives a rate, use it. Do not rely on memory.
After the numbers, add one or two sentences of advice, such as cash flow, risk or HMRC attitude. This earns professional skills marks.

Practice questions from Investment and other expenditure that reduces tax liabilities

Tax Rates, Bands and Allowances for Planning in other exams

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

ACCA Applied SkillsIncome Tax Rates, Bands and Nil Rate Bands

Tax Rates, Bands and Allowances for Planning: frequently asked questions

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

The starting rate is 0% on savings income that falls within the first £5,000 of taxable income, and it is available only if non-savings income is low. The savings nil rate band is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Use the starting rate first, then the nil rate band.

How do I calculate corporation tax marginal relief?

Use (upper limit – augmented profits) × 3/200 × taxable total profits ÷ augmented profits. Deduct the result from tax at 25% on taxable total profits. The limits are £50,000 and £250,000, adjusted for associated companies and short periods.

When does a company pay corporation tax by quarterly instalments?

A company pays by instalments if its profits exceed the £1,500,000 threshold, adjusted for associated companies and the length of the period. The tables give the threshold. Your question will normally give enough facts to test this.

What CGT rates and annual exempt amount apply in ATX-UK?

The annual exempt amount is £3,000. Gains are taxed at 18% within any unused basic rate band and 24% above it. Business asset disposal relief and investors' relief gains are taxed at 14% up to a £1,000,000 lifetime limit.