COURSE: ACCA – TAXATION (TX-UK)

Lecture Topic: Calculation of Income Tax Liability/ Payable

1.1 Income Tax Computations

 Income tax is paid by individuals.

It is a tax on what individuals make from their jobs, their businesses and their savings and investments.

Individuals include employees, self-employed persons/sole traders and persons in receipt of pension income or
investment income.

 Income tax is charged in relation to tax years. A tax year runs from 6 April in one year to 5 April in the next year.

 There are two main aspects to an income tax computation:

1. Computing the individual’s Taxable Income

2. Computing the Income Tax Liability (and if required, the Income Tax Payable).

1.1.1 Computing Taxable Income

An individual may have income from different sources. In an income tax calculation, we include income from all
sources, but this income must be separated into three categories:

1. Non- savings income, which includes

(i) Trading Income/Profit (income from a trade or profession, i.e. income from a business)
(ii) Employment Income
(iii) Property Business Income (income from renting property)
(iv) Income from Pensions

2. Savings income

This is interest income received by an individual.

3. Dividend income

This is dividends received by an individual.

1.1.2 Exempt Investment Income

Some investment income is exempt from income tax (i.e., not taxable), e.g.

(a) Prizes received from premium bonds.

(b) Profit or interest on savings certificates issued by National Savings and Investments (NS & I) Bank.
(c) Dividends and interest received from an Individual Savings Account (ISA)

You must identify exempt income by using a zero (instead of the actual amount of exempt income received).

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1.1.3 Deductible interest

Deductible interest is interest paid by an individual that HMRC allows as a deduction from the individual’s Total
Income (i.e. tax relief is available for these payments). The interest can only be treated as deductible interest if the loan
is for one of the following purposes:

(a) To buy plant or machinery for partnership use.

(b) To buy plant or machinery for employment use.
(c) To buy an interest in an employee-controlled company.
(d) To invest in a partnership.
(e) To invest in a co-operative.

Deductible interest is deducted from total income to give net income. It is deducted from non-savings income first.
Any interest remaining is then deducted from savings income, and finally from dividend income.

1.1.4 Personal Allowance

 The personal allowance for the tax year 2022-23 is £12,570.

The personal allowance is deducted from net income in order to arrive at the figure of taxable income.

The personal allowance is firstly deducted from non-savings income, and any remaining amount is then deducted
from savings income and finally dividend income.

Any unused personal allowance is lost.

 The amount of personal allowance that a person is entitled to depends on their Adjusted Net Income (ANI):

1) If Adjusted Net Income ≤ £100,000, then the P.A. is £12,570.

2) If Adjusted Net Income ≥ £125,140, then the P.A. is nil.

3) If Adjusted Net Income is between £100,000 and £125,140 then the P.A. is calculated as follows:

12,570 – ½ (ANI – 100,000)

Note: Adjusted net income = Net income – (gross personal pension payments + gross gift aid donations paid).

1.1.5 Transferable Amount of Personal Allowance

 It is possible to elect to transfer a fixed amount of the personal allowance to a spouse or registered civil partner.

The transferable amount (also known as the marriage allowance or marriage tax allowance) is £1,260.

The relief is given to the recipient as a reduction in their income tax liability at the basic rate of tax rather than as
an actual increase to their own personal allowance. Therefore, the recipient’s tax liability is reduced by £252
(1,260 × 20%).

 If the recipient’s tax liability is less than £252, then the tax reduction is restricted so that the recipient’s tax liability
is not reduced below zero.

 A transfer is not permitted if either spouse or civil partner is a higher or additional rate taxpayer.

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2.1 Computing the tax liability
The income tax liability is the total amount of tax charged on the individual’s ‘taxable income’. It is computed by
applying the relevant rates of tax to the taxable income figure(s).

The rates of income tax for the tax year 2022-23 can be shown as follows:

Tax Bands Taxable Income Non-Savings Savings Dividends

Basic rate £1 - £37,700 20% 20% 8.75%

Higher rate £37,701 - £150,000 40% 40% 33.75%

Additional rate £150,001 and over 45% 45% 39.35%

 Non-savings income is dealt with first.

Non-savings income is taxed at 20% if it falls below the basic rate limit of £37,700, at 40% if it falls between the
basic rate limit of £37,700 and the higher rate limit of £150,000, and at 45% if it exceeds the higher rate limit of
£150,000.

 Savings income is then added on top of non-savings income to determine which rate band(s) it falls in.

Any rate bands that were not totally utilized by non-savings income are allocated to savings income.

Certain amounts of savings income can benefit from a 0% rate:

1. There is the savings income nil rate band, which works as follows:

(a) If the individual is a basic rate taxpayer (someone whose total taxable income is ≤ £37,700), then the
savings income nil rate band is £1,000. This means that the first £1,000 of savings income will be charged
to tax at 0%, with the remainder being charged to tax at the normal rates.

(b) If the individual is a higher rate taxpayer (someone whose total taxable income is between £37,700 and
£150,000), then the savings income nil rate band is £500. This means that the first £500 of savings income
will be charged to tax at 0%, with the remainder being charged to tax at the normal rates.

2. In addition to the savings income nil rate band, savings income can also benefit from a starting rate of 0%.

This starting rate only applies where savings income falls within the first £5,000 of taxable income. When this
happens, any savings income that falls within the first £5,000 of taxable income is charged to tax at 0%.

If non-savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.

 Dividend income is then added on top of savings income to determine which rate band(s) it falls in.

Any rate bands that were not totally utilized by non-savings income and savings income are allocated to dividend
income.

There is also a £2,000 nil rate band that applies to dividend income. This is available to all taxpayers.

This means that the first £2,000 of dividend income is charged to tax at 0%, with the remainder being charged at the
usual rates (see table above).

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2.2 Tax payable
Some income may have had tax already deducted from it at source, for example PAYE from employment income.

Therefore, PAYE must be deducted from the income tax liability to arrive at the figure of income tax payable (or
repayable).

Therefore, the Income Tax Payable is computed as follows:

£
Income Tax Liability X
Less: 1. PAYE X
Income Tax Payable (Repayable) X

3. Gift Aid Donations

A gift aid donation is a charitable donation made under the Gift Aid Scheme. The actual amount of the gift aid paid is
treated as a net figure. This net figure must be multiplied by 100/80, which will give the gross gift aid.

Where an individual makes a gift aid donation it has the following effects on the income tax computation:

(i) The gross gift aid is deducted from Net Income when calculating Adjusted Net Income.

(ii) For higher rate taxpayers, tax relief is given in the personal tax computation by extending the donor’s
basic rate band and, if necessary, the higher rate band by the gross amount of the gift aid donation.

4. Child benefit income tax charge

 An income tax charge applies where a person’s adjusted net income exceeds £50,000 and they (or their spouse or
civil partner) receive child benefit. Child benefit is a tax-free payment that can be claimed in respect of children,
and the tax charge in effect removes the benefit for those on higher incomes.

(i) Where adjusted net income is between £50,000 and £60,000, the child benefit income tax charge is calculated
as follows:

Child Benefit × 1% × (ANI – 50,000)/100

(ii) For people whose adjusted net income exceeds £60,000, the amount of the child benefit income tax charge is
equivalent to the amount of child benefit received.

 The child benefit income tax charge is added to the person’s income tax liability as calculated.

5. Jointly held property

If property is held jointly by a married couple or civil partners, the income arising from that property is taxed as if it was
shared equally unless the couple makes a joint declaration to HMRC specifying the actual proportion to which each is
entitled.

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Questions

1.
For the tax year 2022-23, Brianna has a trading profit of £52,570.

She also received bank interest of £2,500 and dividend income of £7,200.

In that same year she paid interest of £1,000 on a loan to buy machinery for partnership use.

What is her income tax liability for 2022-23?

2.
For the tax year 2022-23, Christina had trading income of £35,000.

She also received interest of £20,000, as well as dividend income of £900.

What is her income tax liability for 2022-23?

3.
Diana has the following income in 2022-23.
£
Employment income 18,000
Property business income 19,000
Building society interest 300
Dividend income 19,000

Diana also received interest of £1,200 on the maturity of a savings certificate from National Savings & Investments.

Calculate her income tax payable, assuming that PAYE of £3,000 had been deducted from her employment income.

4.
For the tax year 2022-23, Elena has pension income of £15,500 and bank interest of £8,000.

What is her income tax payable?

5.
Fiona had employment income of £9,000 for the tax year 2022-23. Income tax of £610 was deducted from this figure
under PAYE.

Fiona also received building society interest of £17,000 and dividends of £9,000.

Calculate the amount of income tax payable (or repayable) for the year.

6.
For the tax year 2022-23, Gina has a trading profit of £103,500, bank interest of £8,000 and dividend income of £7,000.

What is her income tax liability?

7.
For the tax year 2022-23, Hannah has employment income of £94,500, bank interest of £10,000 and dividend income of
£4,000.

What is her income tax liability?

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8.
Josh and Katrina are a married couple. For the tax year 2022-23, Katrina has a salary of £35,570 and Josh has a trading
profit of £8,000. They have made an election to transfer the fixed amount of personal allowance from Josh to Katrina.

Calculate their respective income tax liabilities.

9.
For the tax year 2022-23, Lena has a trading profit of £60,000. She made a gift aid donation of £1,600 (net).

Calculate her income tax liability.

10.
For the tax year 2022-23 Mena has a trading profit of £75,000. She made a gift aid donation of £3,600 (net).

Calculate her income tax liability.

11.
For the tax year 2022-23 Nina has a trading profit of £105,000. She made a gift aid donation of £2,500 (gross).

Calculate her income tax liability.

12.
For the tax year 2022-23 Oneida has a salary of £64,000. She received child benefit of £1,056 during the year.

How much is the child benefit income tax charge?

13.
For the tax year 2022-23 Priya has a trading profit of £56,000. She received child benefit of £1,752 during the year.

How much is the child benefit income tax charge?

14.
Quincy and Rihanna are a married couple. In 2022-23, Quincy received gross employment income of £60,000, and
Rihanna received gross employment income of £30,000.

Quincy owns 80% of a holiday cottage and Rihanna owns the other 20%. The total property business income derived
from the cottage in 2022-23 was £10,000.

Should the couple make a joint declaration to HMRC specifying the amount of property business income to which each
is entitled, and why?

15.
Steve and Tatiana are a married couple. For the tax year 2022-23, Steve will have a salary of £160,000 and savings
income of £400. Tatiana will have a salary of £60,000 and dividend income of £8,000.

What possible measures can the couple take to reduce their tax liabilities?