Chapter: Income Tax Computations
Key Definitions:
Income Tax: A tax on an individual's annual taxable income.
Taxable Income = Total income (from all sources) minus:
o Allowable deductions (e.g., pension contributions, trading losses)
o Personal Allowance (£12,570 in 2024/25).
Types of Income:
Income is divided into 3 main categories for tax purposes:
(A) Non-Savings Income (Taxed First)
This includes money you earn from:
Employment (salaries, bonuses, company benefits like a car).
Pensions (state or private pensions).
Self-employment (profits from your own business).
Rental Income (from properties, but not savings/dividends).
(B) Savings Income (Taxed Second)
This is interest you earn from:
Bank accounts.
Government bonds.
Corporate loans.
Tax Rules:
First £1,000 is tax-free (if you’re a basic-rate taxpayer).
0% tax if your non-savings income is below £5,000.
(C) Dividend Income (Taxed Last)
This is money from:
Company shares.
Investments in stocks.
Tax Rules:
First £500 is tax-free (for everyone).
After that:
o Basic rate (8.75%)
o Higher rate (33.75%)
o Additional rate (39.35%)
Tax Bands & Rates (2024/25):
Tax Band Income Range Non-Savings Rate Savings Rate Dividend Rate
Basic Rate £0-£37,700 20% 20% 8.75%
Higher Rate £37,701-£125,140 40% 40% 33.75%
Additional Rate £125,141+ 45% 45% 39.35%
Pension Rules:
Types of Pensions
Type Funded By Tax Relief on Contributions Tax on Withdrawals
State Pension NI Contributions N/A Taxable as income
Occupational Employer + Employee Yes (salary deduction) 25% lump sum tax-free, rest taxable
Personal Individual 20% auto + higher rate claim Same as occupational
The annual allowance for the tax years 2023-24 and 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.
Pension Tax Relief
Annual Allowance: £60,000 (2024/25)
Tapered Allowance: Reduces by £1 for every £2 over £260,000 income and taxpayers with income of
£360,000 or more would have an allowance of £10,000.
Carry Forward: Unused allowance from past 3 years can be used
Marriage & Joint Tax Planning:
Marriage Allowance
Transfer 10% (£1,260) of personal allowance to spouse
Conditions:
o Neither spouse is higher/additional rate taxpayer
o Transferor must have unused allowance
Saves: £252/year (20% of £1,260)
Income Splitting
Jointly owned assets: income split 50:50 unless declaration states otherwise
Strategy: Equalize income between spouses to maximize allowances and lower tax bands
Child Benefit & High-Income Charge:
Child Benefit: Tax-free if adjusted net income (ANI) ≤ £60,000
High-Income Charge:
o (1% is charged Per £100 exceeding 50,000£ So for 3000, 30% will be charged)
o ANI £60k-£80k: 1% of benefit lost per £200 over £60k
o ANI >£80k: 100% lost
ANI Calculation: Net Income - Gross pension contributions - Gross Gift Aid
Charitable Giving:
Gift Aid
Basic rate: 20% relief at source
Higher/additional rates: Extra relief via tax return (extends basic rate band)
Example: £1,000 donation → Basic rate band extends to £38,700
Payroll Giving:
Donations deducted from salary before tax
No limit on donations
Trading Losses:
Can be offset against:
1. Other income in same tax year (reduces tax bill)
2. Carry forward to future profits
Key Rule: Must be same business (can't offset against new business income)
Tax-Free Investments:
ISA: £20,000 annual allowance (tax-free growth/withdrawals)
Pension Contributions: Tax relief up to annual allowance
Premium Bonds: Winnings tax-free
IMPORTANT POINTS:
1. PAYE vs. Self-Assessment:
o Employment/pension taxes collected via PAYE.
o Other income (e.g., rentals, dividends) via self-assessment.
2. Order of Deductions:
o Trading losses carried forward after interest relief (important for tax computations).
3. Pension Contributions:
o Excess over annual allowance (+3-year carry forward) gets no tax relief.
o Relief for contributions paid into personal pension schemes is available to all individual tax
payers.
4. Gift Aid Band Extension Formula:
o Extension amount = donation × 100/80 (e.g., £80 donation → £100 extension).
5. Spousal Tax Planning:
o Explicit note that charitable donations should be made by the higher-rate spouse.
o Donations: Always route Gift Aid through the higher-earning spouse for optimal tax savings.
Calculation steps:
1. Calculate total income. (If salary mentioned then subtract Employee contribution from salary to
get employment income)
2. Calculate net income by subtracting qualifying interests.
3. Calculate adjusted net income to know your personal allowance.
ANI= Net income – Gross Gift aid donations – Gross personal pension contribution.
Increase band by TRC and gross G.A.D. (TRC = LOWER VALUE BETWEEN
RELEVANT INCOME AND GROSS PPC)
4. Subtract personal allowance from net income to get taxable income.
5. Calculate NRB of savings income if mentioned by checking the status of tax payer.
6. Calculate tax
7. Calculate adjusted income to check tax relief allowance.
A.A= Total net income + Employee occupational pension contribution + Employer
occupational pension contribution
8. Calculate Reduction working for Excess on tax relief.
TRC + Employee occupational pension contribution + Employer occupational pension
contribution
9. Adjust any PAYE and child benefit returns in last.
10. To calculate net PPC simply multiply TRC BY 20% and subtract it by gross PPC.