INCOME TAX

COMPUTATIONS
June 2025 – March 2026
BY SABI AKTHER 1
 What to focus on?
• Income Tax Computation
• Introduction
• Pro-Forma Income Tax Computation
• Income
• Non-Savings Income
• Savings & Dividend Income
• Exempt Income
• Income of Married Couples & Persons in a Civil Partnership
• Personal Allowance
• Basic Rules
• Reduction of the Personal Allowance 2
 What to focus on?
• Calculation of Income Tax Payable
• Tax Rates & the Composition of Taxable Income
• Taxation of Savings Income
• Special Case – 0% Rate on Savings Income
• Taxation of Dividend Income
• Deductions From Total Income
• Summary
• Qualifying Loan Interest
• Donations to Charities
• Payroll Giving
• Donations Under the Gift Aid Scheme
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• Extended Basic & Higher Rate Relief
 What to focus on?
• Pensions
• Types of Pension
• Relief for Contributions Paid Into Occupational Pension Schemes
• Relief for Contributions Paid Into Personal Pension Schemes
• People With Relevant Earnings Not Exceeding £3,600
• Annual Allowance
• Tapered Annual Allowance
• Annual Allowance Charge
• Lifetime Allowance
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 What to focus on?
• Married Couples & Family
• Utilisation of Personal Allowances & Basic Rate Bands
• Transferable Amount of Personal Allowance
• Gifts to Charity
• The High Income Child Benefit Charge
• Basic Income Tax Planning
• Tax-Free Investments
• Conclusion
• Summary
• Technical Articles
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Objective: To prepare in a
Income Tax Computation
suitable format the income tax • Introduction
computation for an individual, • Pro Forma
taking into account the different
sources of income and the
availability of relevant
Income Tax Payable Personal Allowance
deductible allowances and • Tax Rates & Taxable Income (PA)
reliefs. • Savings Income • Basic Rules
Income • Special Case – 0% Rate
• Earned • Dividend Income
• Unearned
• Exempt
• Married Couples & Civil Partners Married Couples & Family
• Utilising PA & Basic Rate Band
• Marriage Allowance
Deductions From Total Income • Tax-Free Investments
• Summary • Gifts to Charity
• Qualifying Loan Interest • High Income Child Benefit Charge

Pensions
Donations to Charities • Types
• Payroll Gifts • Personal Schemes
• Gift Aid • Personal Schemes & PA
• Extended Basic & Higher • Occupational Schemes 6
Rate Relief • Additional Matters
• Gift Aid & PA
 Income Tax Computation
1.1 Introduction

Income tax is a tax levied on individuals by reference to their taxable income for a tax
year.

Taxable income is an individual's total income liable to income tax (i.e. not specifically
exempt) less certain deductible amounts.

In order to calculate a tax liability, tables of tax rates and allowances and other
information must be used. The tables will be provided in the exam, and they should be
referred to when undertaking a tax computation.

The key to a successful tax computation is a standardised computational approach

which must be learned and applied. 7
1.2 Pro-Forma Income Tax Computation

Non-savings Savings Dividend Total

Non-savings income income income income
Profits of an unincorporated trade X X
Employment income X X
Pension income X X
Property income X X
Savings income X X
Dividend income X X
Total income X X X X
Less: Reliefs (note) (X) (X)
Net income X X X X
Less: Personal allowance (note) (X) (X)
Taxable income X X X X
Tax thereon at appropriate rates X
Income tax liability X
Less: Tax collected at source on income (X)
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Income tax payable X
 Income Tax Computation

1.2 Pro-Forma Income Tax Computation

Note: reliefs and the personal allowance should be set off against non-savings income
first, then savings income, and against dividend income last.

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 Non-Savings Income

Earned Income Unearned Income

Employment Income Pensions Trading Profits Property Property income

(Note 1) income from furnished &
from unfurnished
Adjusted trading profits furnished (excluding furnished
Earnings from Pensions
arising from self- holiday holiday lettings)
employment principally (both
employment lettings in
1. Pay received (e.g. state &
conducted by the UK
salaries) private)
unincorporated
2. Cash equivalent
businesses (i.e. sole
values of taxable
traders & partnerships) Property Property income =
benefits (e.g. use of
company car) income = gross rent less
gross rent allowable expenses
Adjusted profits = less
Taxable earnings = accounting net allowable
gross amounts less profit on an expenses
allowable expenses of accruals basis (or a
employment cash basis for small
businesses) as
adjusted for tax
Tax generally collected at source under purposes (Note 3)
PAYE, otherwise by self-assessment 10
(Note 2)
Tax collected by self-assessment
 Income
2.1 Non-Savings Income

Notes:

1. See Lecture 4 for details of employment income.

2. See Lecture 5 for details of the PAYE system and Lecture 11 for details of self-
assessment.

3. See Lecture 6 for details of the process of adjustment of trading profits and the cash
basis for small businesses.

Non-savings income comprises earned income (employment income, trading income

and pension income) and property income. 11
 Income
2.2 Savings and Dividend Income

Savings &
Dividend Income

Interest Dividend Income

Tax at all rates above Nil collected by self-assessment

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 Income
2.3 Exempt Income

Some (but not many) types of income are exempt from income tax.

The main examples of exempt income are:

• Income from letting a room in the taxpayer's own home up to a certain level (see
Lecture 3);

• Certain investment incomes (see Lecture 3);

• Certain employment incomes and benefits (see Lectures 4 and 5);

• Interest on tax repayments made to individuals; and

• Betting and gaming winnings (including the National Lottery and Premium Bonds). 13
 Income

2.4 Income of Married Couples and Persons in a Civil Partnership

Each spouse or civil partner is separately assessed for income tax purposes on their own
taxable income including appropriate shares of income from jointly-owned assets. (That
is, a separate income tax computation is prepared for each spouse or civil partner for
each tax year.)

Income arising from jointly-owned assets will be split equally (i.e. 50:50) between the
spouses or civil partners unless the taxpayers make a joint declaration to split the income
according to their actual interests in the assets. (Ways in which a married couple can
reduce their exposure to income tax are discussed later in this lecture.)
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 Personal Allowance

3.1 Basic Rules

Personal allowance is the amount which a taxpayer does not pay tax on. It is a specific
tax amount given to each taxpayer for each tax year with the effect of raising the starting
point of income tax.

Personal allowance is deducted from net income. If personal allowance exceeds net
income, the unused amount cannot be carried forward to the following tax year.

The standard personal allowance is £12,570 for the tax year 2024-25.

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 Personal Allowance
3.2 Reduction of the Personal Allowance

If the taxpayer's adjusted net income exceeds £100,000, the personal allowance is
reduced to nil at the rate of £1 for every £2 that net income exceeds £100,000.

Adjusted net income is net income less gross pension contributions less gross gift aid
donations.

As a result, taxpayers with net income in excess of £125,140 will have no personal
allowance. The effect of this progressive reduction of the personal allowance is that net
incomes between £100,000 and £125,140 actually suffer an effective marginal tax rate of
60%. With such a high marginal tax rate, a taxpayer may well wish to consider making
additional pension contributions or charitable donations. 16
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 Calculation of Income Tax Payable
4.1 Tax Rates and the Composition of Taxable Income

The rates of income tax not only change with the level of taxable income (i.e. basic and
higher rates) but also according to its composition (i.e. dividend income, savings income
and non-savings income) as follows:

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 Calculation of Income Tax Payable
4.1 Tax Rates and the Composition of Taxable Income

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 Calculation of Income Tax Payable

4.1 Tax Rates and the Composition of Taxable Income

Savings income is all forms of interest received (i.e. from banks and building societies and
interest on corporate loan stocks and government bonds), and also interest deemed
received under the accrued income scheme.

Non-savings income (or other income) is all income except dividend income and savings
income.

Most interest is now paid gross, without any tax deduction at source. Those types of
savings income which are still paid net of tax are not examinable.
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 Calculation of Income Tax Payable
4.1 Tax Rates and the Composition of Taxable Income

In order to correctly tax these different components of income, taxable income must be
analysed between:

• "non-savings income" (deemed to be the “first slice” of taxable income);

• "savings income" (deemed to be next slice of taxable income); and

• "dividend income" (deemed to be the "top slice" of taxable income).

The personal allowance, as well as deductible interest and trade losses, is deemed to
relieve non-savings income first, then savings income and then dividend income (i.e. it is
used in what is normally the most beneficial way).
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More complicated situations where this is not the most beneficial will not be examined.
 Calculation of Income Tax Payable
4.2 Taxation of Savings Income

Taxpayers benefit from a "personal savings allowance" within which savings income is
taxed at 0%. Although called an allowance, this is not actually a deduction from taxable
income; it is a nil rate band applicable to taxable income.

The extent of the savings income nil rate band depends upon which top rate of tax
applies to the taxpayer. This can be established by looking at the individual’s total
taxable income to see whether it exceeds the basic rate or higher rate limit. For the tax
year 2024-25 the savings allowance is £1,000 for a basic rate taxpayer, but only £500 for
a higher rate taxpayer. For additional rate taxpayers no savings nil rate band is available.

Savings income in excess of the applicable nil rate band is then taxable at the relevant
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normal rates of 20%, 40% or 45% (unless the special case starting rate applies).
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 Calculation of Income Tax Payable

4.3 Special Case – 0% Rate on Savings Income

Where non-savings income does not exceed £5,000 for the tax year 2024-25, savings
income is taxed at the "starting rate" of 0% until total taxable income reaches £5,000.

This starting rate is available in addition to the savings income nil rate band, so if an
individual's total income does not exceed £18,570 they will not pay any tax on their
savings income (as covered by £12,570 personal allowance, £5,000 starting rate, £1,000
savings income nil rate band). Thereafter, savings income is taxed at 20%, 40% and
45% in accordance with the table of rates given previously.

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 Calculation of Income Tax Payable

4.3 Special Case – 0% Rate on Savings Income

In practice, the 0% starting rate on savings income will typically apply to the following
taxpayers:

• Children with substantial savings income but no employment income (not

examinable);

• Spouses with substantial savings income but insignificant income from employment,
self-employment or property rental;

• Pensioners whose earned income is largely covered by their personal allowance.

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Calculation of Income Tax Payable

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 Calculation of Income Tax Payable

4.4 Taxation of Dividend Income

Dividend income is received gross.

Taxpayers benefit from a “dividend allowance” of £500. As with the personal savings
allowance, the dividend allowance is not a deduction from taxable income, but instead
operates as a nil rate band.

Unlike the personal savings allowance, the full £500 dividend nil rate band is available to
all taxpayers, irrespective of their income level. Dividends received in excess of this
£500 are taxable at rates of 8.75%, 33.75% and 39.35%, depending on whether the
recipient is a basic rate, higher rate or additional rate taxpayer.
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 Deductions From Total Income

5.1 Summary

Deductions from total income are deducted in arriving at net income.

They are deducted before the personal allowance

Those relevant to the exam are:

• relief for interest on qualifying loans; and

• relief for trading losses relievable against total income.

Relief for qualifying loan interest is taken before loss relief because an unrelieved trading
loss may be carried forward for relief in future tax years but unrelieved interest cannot.
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 Deductions From Total Income
5.2 Qualifying Loan Interest

Qualifying loan interest is interest on a fixed loan (not a bank overdraft) taken out for a
qualifying purpose.

Qualifying purposes include:

• The purchase of an interest in a partnership by a full equity partner (or prospective

partner). This relief is particularly useful to a new partner borrowing money to finance their
investment in the firm's capital.

• Purchase of plant and machinery by a partner on behalf of their firm, or shareholder on

behalf of their company, or by an employee for use in their employment. Interest relief is
only available for the first four tax years. After this point, no deduction is allowed.
37
• The purchase of shares in an employee-owned company.
 Deductions From Total Income

5.2 Qualifying Loan Interest

Tax relief as a deduction from total income is capped at a maximum of the greatest of
£50,000 or 25% of the individual's adjusted total income.

This cap on income tax reliefs will only be examined where trading loss relief is
claimed against total income.

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Deductions From Total Income

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 Donations to Charities
6.1 Payroll Giving

Where an employer sets up an approved payroll giving scheme, employees may treat
gifts to charity that are made out of their salaries as allowable expenses of employment
for income tax purposes.

Although the relief is strictly given as a deduction from employment income in the
income tax computation, relief is actually given at source under PAYE (i.e. the employer
deducts the gift(s) from the employee's salary before the salary is taxed at source).

The payroll gifts deducted must be authorised by the employee and paid to the
designated charity (or charities) through an HMRC-approved agent.

There is no limit to the amount an employee can give in each tax year. 41
 Donations to Charities

6.2 Donations Under the Gift Aid Scheme

Any taxpayer, irrespective of the composition of their total income, can make donations
to charity under the gift aid scheme. The donations can be one-off single payments or a
series of payments over time.

Any amount can be donated in a tax year and attract tax relief.

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 Donations to Charities
6.2 Donations Under the Gift Aid Scheme

Strictly speaking, gift aid donations to charity rank as deductions from total income like
qualifying loan interest. However, the UK tax system deals with the relief in different
ways as follows:

• Basic rate taxpayers – 20% relief is given at source when the payment is made (i.e.
taxpayer only pays the net amount (80%) to the charity and the payment is ignored in
the income tax computation as complete relief has been given at source).

• Higher and additional rate taxpayers – 20% relief given at source (as above), but
higher and additional rate relief is given in the income tax computation by "extension"
of the higher and additional rate bands. 43
 Donations to Charities

6.2 Donations Under the Gift Aid Scheme

Charities, as non-taxpayers, are entitled to the gross amount of the donations. They
reclaim direct from HMRC the basic rate tax relief given at source to the donors. So if a
taxpayer wanted to gift £100 to charity, the individual would pay £80 to the charity, and
the charity would claim £20 from HMRC.

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 Donations to Charities

6.3 Extended Basic and Higher Rate Relief

Where the donor taxpayer's taxable income before considering higher rate relief for gift
aid is more than £37,700 (the normal higher rate threshold for the tax year 2024-25) the
gift aid donations attract higher rate relief by extending the basic rate band.

Similarly, if the donor taxpayer's taxable income before considering additional rate relief
for gift aid is more than £125,140 (the normal additional rate threshold for the tax year
2024-25), the gift aid donations attract additional rate relief through extending the higher
rate band.

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 Donations to Charities
6.3 Extended Basic and Higher Rate Relief

Extension of the basic and higher rate bands is applied by adding the gross amount of
the gift aid payment (the actual amount paid × 100⁄80) to £37,700 and £125,140, thereby
raising the starting point for higher and additional rate tax. Thus, higher rate relief for the
payment is given by taxing an equivalent amount of income at 20% instead of 40%, and
additional rate relief is given by taxing an equivalent amount of income at 40% instead of
45%.

If the raised thresholds affect dividend income (as opposed to savings or non-savings
income), the adjusted rates will be 8.75% instead of 33.75%, or 33.75% instead of
39.35%. 46
Donations to Charities

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48
 Pensions
7.1 Types of Pension

7.1.1 State Pension (the National Insurance Retirement Pension)

A person's state pension is funded from national insurance contributions payable by

employees, their employers and the self-employed.

The annual pension received is treated as taxable earned income of the retired person.

7.1.2 Private Pensions

There are two types of private pension schemes; occupational pensions and personal
pensions:

• Occupational pension is a pension scheme run for the employer's own staff and
partly or wholly funded by the employer.
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• Personal pension is a pension scheme funded by an individual for their own benefit.
 Pensions
7.1 Types of Pension

Occupational pensions (i.e. a pension Personal pensions (i.e. a pension scheme

scheme run for the employer’s own staff & funded by an individual for their own benefit)
partly or wholly funded by the employer)

Usually available to all staff, but membership Available to any person even if already a
not obligatory member of an occupational pension scheme

Tax relief for contributions into a registered pension scheme

(i.e. a scheme approved by HMRC)

Pension received can be taken partly as a lump sum (tax exempt). The tax-free lump sum cannot
exceed 25% of the individual’s total pension fund available at the relevant date. The remainder
can be flexibly taken as withdrawals (treated as income) and/or used to purchase an annuity.
Income from withdrawals or purchased annuities are taxable at the normal rates.
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 Pensions
7.2 Relief for Contributions Paid Into Occupational Pension Schemes

An employee who is a member of their employer's occupational pension scheme (OPS)

can claim income tax relief on the same basis as an individual claiming relief for
personal pension contributions (i.e. relief given for contributions up to 100% of relevant
earnings for the particular tax year).

However, unlike personal pension scheme relief:

• Contributions are paid gross into the scheme (i.e. no basic rate relief is given at
source); and

• Tax relief at all rates is given by deducting the contributions from the employee's
employment income.
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 Pensions

7.2 Relief for Contributions Paid Into Occupational Pension Schemes

Additionally, employers make contributions into occupational pension schemes. Their

contributions are:

• A tax deductible trading expense for determining the income or corporation tax on
trading profits;

• Treated as tax-free income of the employee (i.e. an exempt benefit for income tax
purposes).

Employers can also make contributions into personal pension schemes. In this case the
tax arrangements are identical to those for contributions into occupational schemes.
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Pensions

53
 Pensions
Activity 7 Occupational Pension Contributions Solution

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 Pensions

7.3 Relief for Contributions Paid Into Personal Pension Schemes

An individual policyholder can claim income tax relief for the contributions they make
into a personal pension scheme (PPS) up to 100% of the amount of their relevant
earnings for the tax year in which the contributions are paid.

Relevant earnings of the tax year are those liable to UK tax and include:

• employment incomes – pay and benefits;

• trading profit arising from a self-employment; and

• property income from the letting of furnished holiday accommodation.

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 Pensions

7.3 Relief for Contributions Paid Into Personal Pension Schemes

Contributions are paid net of 20% tax relief at source, even if the policyholder is a non-
taxpayer.

If the taxpayer is not entitled to higher or additional rate relief, the contributions are
ignored in the personal tax computation.

If higher or additional rate relief is appropriate, this relief is given by extending the basic
and higher rate bands in the tax computation (as for gift aid).

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Pensions

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Activity 8 Relief for Pension Contributions Solution

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59
 Pensions

7.4 People With Relevant Earnings Not Exceeding £3,600

Individuals who contribute to a personal or occupational pension scheme can obtain tax
relief (limited to the basic rate of 20%) at source on contributions up to £3,600 (gross)
per tax year if:

• they do not have any relevant earnings (e.g. a person who is working abroad and
whose earnings are not taxable in the UK); or

• relevant earnings do not exceed £3,600.

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 Pensions
7.5 Annual Allowance

The annual allowance is the most an individual can save into their pension schemes
before having to pay tax. Total pension input is the sum of all gross contributions paid
by an individual and their employer into personal and occupational schemes. If an
annual allowance is not fully used in any tax year, it is possible to carry forward the
unused allowance for up to three years.

The annual allowance for the tax year 2023-24 & 2024-25 has been increased from
£40,000 to £60,000. The annual allowance was £40,000 for the tax years 2021-22 and
2022-23.

Unused allowances can only be carried forward for any tax year if the taxpayer is a
member of a registered pension scheme. If, for any year, a taxpayer is not a member of
61
a pension scheme, the annual allowance for that year is lost.
 Pensions

7.5 Annual Allowance

If the annual allowance includes unused allowance from earlier tax years, pension
contributions must be matched with the current year's allowance and then with the
unused amounts on a first in first out (FIFO) basis (i.e. earliest year first).

A taxpayer with an unused allowance must make pension contributions in the current
tax year of at least £60,000 plus the unused allowance of the earliest tax year if
potential tax relief is to be maximised.

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 Pensions

7.6 Tapered Annual Allowance

For the tax year 2024-25 and subsequent years, the initial annual allowance (i.e. before
any brought forward unused amounts) is subject to a restriction if the taxpayers
adjusted income exceeds £260,000.

For exam purposes, "adjusted income" for the tapered annual allowance can be
regarded as net income plus employee contributions to occupational pension
schemes plus contributions made by the employer to any pension scheme. For self-
employed people, adjusted income is just their net income for the tax year. Other
complications to this rule and the lower £200,000 threshold income level are not
examinable.
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 Pensions

7.6 Tapered Annual Allowance

The annual allowance is reduced by £1 for every £2 of income above £260,000, but will
only reduce to a minimum of £10,000. Thus a taxpayer with adjusted income of
£330,000 would have an annual allowance of £25,000 (i.e. 60,000 − ½ (330,000 −
260,000)), and taxpayers with income of £360,000 or more would have an allowance of
£10,000.

Any unused annual allowances from earlier periods can be carried forward and utilised
if pension payments in the current period exceed the tapered allowance. Similarly, if
pension payments do not reach the tapered allowance, it is only the excess of the
tapered allowance which may be carried forward.
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 Pensions
7.6 Tapered Annual Allowance

A tapered allowance from an earlier tax year can also be carried forward and utilised in
the current period. In this case the tapered allowance carried forward would be provided
within the question.

Tapering applies on a tax year basis, so a taxpayer with variable income might find
themselves entitled to the full annual allowance in some years, and a tapered annual
allowance in other years.

A question will not be set involving the tapering of the annual allowance for earlier
tax years, although a prior year tapered allowance might be provided within a
question.
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 Pensions

7.7 Annual Allowance Charge

If the total pension input in a tax year exceeds the annual allowance (including any
unused amounts) available for that tax year, the excess does not attract tax relief. This
excess pension input problem is addressed by:

• initially giving relief for all contributions paid by the individual and their employer; and

• treating the excess as additional taxable income chargeable to income tax at the
taxpayer's marginal rate of tax (i.e. 20%, 40% or 45%).

The £10,000 annual allowance limit on reinvested withdrawals from pension savings
is not examinable
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Pensions

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 Pensions

7.8 Lifetime Allowance Charge

Until the tax year 2023-24 there was a lifetime allowance, but it has been abolished for
the tax year 2024-25.

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 Married Couples & Family

8.1 Utilisation of Personal Allowances and Basic Rate Bands

As separate tax payers, each spouse is entitled to a full or partial personal allowance
(unless adjusted net income exceeds £125,140) and the use of the basic rate tax band
of £37,700 each.

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 Married Couples & Family
8.1 Utilisation of Personal Allowances and Basic Rate Bands

Full utilisation of these reliefs is achieved by:

1. Both spouses working. For example, if one spouse is running their own business
and the other spouse does not have much taxable income and can work part-time
in the business, their employment can produce a double tax saving – once for the
self- employed spouse as an allowable trading expense of the business (provided
that remuneration is reasonable for the duties undertaken) and again for the other
spouse because their salary is wholly or partly sheltered from tax by their personal
allowance. Alternatively, where participation of both spouses in the business is
significant and they are business partners or shareholder-directors of a company,
exposure to higher or additional rate income tax is minimised by an equal split of
remuneration.
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 Married Couples & Family
8.1 Utilisation of Personal Allowances and Basic Rate Bands

Full utilisation of these reliefs is achieved by:

2. An appropriate division of ownership of income-generating investments – rented

property, shares and bonds, bank and building society accounts and National
Savings products. If a single asset is jointly owned, income is presumed to be
shared 50:50. A joint declaration can, however, be made to split income according
to actual beneficial ownership if this is different.

The nil rate bands for savings and dividend income must be considered in tax planning
for couples, as it is not sufficient to only look at who is the higher-rate or lower-rate
spouse. It will normally be beneficial to maximise the utilisation of both spouses' nil rate
bands: this may involve transferring income from the lower income spouse to the higher
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earner.
 Married Couples & Family

8.2 Transferable Amount of Personal Allowance

An individual is able to transfer 10% of their personal allowance to their spouse,

provided that neither of them is a higher or additional rate taxpayer. This transferable
amount of personal allowance is also known as the marriage allowance or marriage tax
allowance.

The transfer will be beneficial if the transferor has unused personal allowance, while the
transferee is a basic rate taxpayer. The benefit is given as a reduction of the income tax
liability of the transferee.

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 Married Couples & Family
8.2 Transferable Amount of Personal Allowance

The transfer of allowance is for the entire fixed amount available, £1,260 for the tax
year 2024-25. Partial transfers are not allowed, even if this creates a tax liability for the
transferor.

The benefit to the transferee is a deduction in income tax liability of £252 (£1,260 at
20%). However, this may be restricted, as necessary, if it would otherwise create a
"negative liability", as the recipient’s tax liability cannot be reduced below zero.

An election to transfer the fixed amount of personal allowance may be made up to four
years after the end of the tax year (i.e. by 5 April 2029 for the tax year 2024-25). If the
election is made within the tax year it will continue to apply to subsequent years until
withdrawn or the spouses are no longer eligible. 79
80
 Married Couples & Family

8.3 Gifts to Charity

If charitable donations are made by payroll giving or gift aid, it is more tax beneficial for
them to be made by the spouse/partner liable to higher and additional rate tax.

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 Married Couples & Family

8.4 The High Income Child Benefit Charge

Child benefit is a payment that can be claimed by a person responsible for a child up to
the age of 16 (or older if in full- time education or training). The benefit is payable
irrespective of the recipient's level of income, but can only be claimed by one person
(usually, but not necessarily, the child's mother).

A tax charge was introduced in an attempt to restrict the value of this claim so that the
benefit is targeted more to lower-income households. This is called the High Income
Child Benefit Charge (or, as shown on the tax rates and allowances sheet provided in
the exam, the Child Benefit Income Tax Charge).

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 Married Couples & Family

8.4 The High Income Child Benefit Charge

The charge is made where an individual has an adjusted net income of over £50,000 in
the tax year and is in receipt of child benefit, or is living with a partner in receipt of child
benefit. The charge is made on the partner with the higher adjusted net income.
Adjusted net income is net income less the gross amount of personal pension
contributions less the gross amount of gift aid donations (i.e. the same as adjusted net
income for establishing personal allowance restrictions).

The tax charge is calculated as 1% of the child benefit received for each £200 of
adjusted net income in excess of £60,000. Where adjusted net income is in excess of
£80,000, all of the value of the child benefit is therefore charged.
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 Married Couples & Family

8.4 The High Income Child Benefit Charge

Liability to the tax charge should be declared by self- assessment in the tax return, with
payment due dates and payments on account the same as for income tax. This tax
charge may result in some individuals having to complete a tax return who would
otherwise not need to complete a tax return.

In order to simplify matters, there is an election available for a person eligible to receive
child benefit to not have it paid. This is usually appropriate where the potential claimant
has a certain income in excess of £80,000 and the charge would negate the relief of
any claim.

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 Married Couples & Family

8.4 The High Income Child Benefit Charge

"Partner" is a much wider term than marital spouse or civil partner and refers to people
living together as if they were married.

Note that the charge can (and often will) be made on a person other than the child
benefit claimant. The charge rests with the partner who has the higher income.

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Married Couples & Family

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Married Couples & Family

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 Basic Income Tax Planning

9.1 Tax-Free Investments

In addition to the basic tax planning measures for married couples and civil partners,
there are some basic tax planning measures that should be considered by all individuals.
Exposure to tax can be minimised by making tax-free investments, including:

• a maximum tax-free annual investment in an Individual Savings Account;

• the maximum affordable contributions into a registered personal or occupational

pension scheme; and

• making any charitable donations by payroll or gift aid.

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 Conclusion

Syllabus Coverage

B. Income Tax and NIC Liabilities

4. Property and investment income

g) Compute the tax payable on savings and dividend income.

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 Conclusion
Syllabus Coverage

B. Income Tax and NIC Liabilities

5. The comprehensive computation of taxable income and income tax liability

a) Prepare a basic income tax computation involving different types of income.
b) Calculate the amount of personal allowance available.
c) Understand the impact of the amount of transferable allowance for spouses and civil
partners.
d) Compute the amount of income tax payable.
e) Understand the treatment of interest paid for a qualifying purpose.
f) Understand the treatment of gift aid donations and charitable giving.
g) Explain and compute the child benefit tax charge.
h) Understand the treatment of property owned jointly by a married couple, or by a
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couple in a civil partnership.
 Conclusion

Syllabus Coverage

B. Income Tax and NIC Liabilities

7. The use of exemptions and reliefs in deferring and minimising income tax
liabilities
a) Explain and compute the relief given for contributions to personal pension schemes
and to occupational pension schemes.
b) Understand how a married couple or couple in a civil partnership can minimise their
tax liabilities.
c) Basic income tax planning.

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 Conclusion

Summary

• Net income = total income after qualifying interest paid and trade losses. Taxable income
= net income less personal allowance. Tax on earnings from employment and pensions is
typically collected under PAYE. Tax on other earnings is typically collected by self-
assessment.

• Personal allowance = £12,570 for the tax year 2024-25. If adjusted net income (ANI) >
£100,000 personal allowance is reduced by £1 for every £2 that net income exceeds
£100,000. ANI = net income less gross personal pension contributions and gross gift aid
donations.
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 Conclusion
Summary

• Income tax rates change based on income level and type of income. Savings and
non-savings income are taxed at the same rates except that savings may benefit
from a nil rate band (£1,000 for basic rate taxpayer, £500 for higher rate taxpayer and
£0 for additional rate taxpayer) and can be taxed at a starting 0% rate for low-income
taxpayers, pensioners, etc where non-savings income does not exceed £5,000.
Interest is received gross from most investments. Dividend income is also received
gross, and the first £500 received is taxable at 0%.

• Deductions from total income (i.e. before personal allowance) include reliefs for:

- interest on qualifying loans (e.g. purchase of partnership interest); and

- applicable trading losses. Unrelieved trading losses can be carried forward, so 93

interest deductions should be applied before trading losses.
 Conclusion
Summary

• Any amount of charitable donation made under gift aid attracts tax relief. For basic rate
taxpayers, 20% relief is given at source and the income tax computation ignores the
gift. For higher and additional rate taxpayers, relief is given by extension of rate bands
when computing tax liability (extension = actual amount paid x 100/80).

• Pensions received are taxable as earned income except a lump sum (up to 25% of
fund) is non-taxable.

• Contributions to an occupational scheme are deducted from employment income.

Personal pension contributions are paid net of 20% tax relief. Higher or additional rate
relief is given as for gift aid.

• Amounts in excess of current year annual allowance plus unused allowances (up to
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three years) do not attract any effective tax relief.
 Conclusion

Summary

• Each spouse is a separate taxpayer. Income from jointly-owned assets is split 50:50
unless a joint declaration is made to split it according to actual ownership.

• In certain circumstances £1,260 of personal allowance may be transferred from one

spouse to another, giving a tax reducer of £252.

• Charitable donations should be made by the spouse/partner subject to higher tax

rate.

• A high income child benefit charge acts to claw back the benefit if one partner has
adjusted net income in excess of 60,000.
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 Conclusion

Technical Articles

In addition to the Finance Act 2024 Article, there are several technical articles for Taxation
(UK). However, there are no technical articles that relate specifically to this chapter.

For more recent articles and other resources please visit the ACCA global website.

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