• Scope of income tax

Chapter 2
• Computing taxable income
• Types of income
Computing taxable income
• Qualifying interest
and the income tax liability
• Personal allowance
• Computing tax payable
• Transferable personal allowance
• Accrued income scheme
• Gift aid
• Child benefit income tax charge
• Jointly held property
• Married couple/civil partners tax
minimisation

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 Syllabus learning outcomes 1

• Explain how the residence of an individual is determined

• Compute the tax payable on savings and dividend income
• Recognise the treatment of ISAs and other tax exempt investments
• Understand how the accrued income scheme applies to UK Government
securities (gilts)
• Prepare a basic income tax computation involving different types of income
• Calculate the amount of personal allowance available
• Understand the impact of the transferable amount of personal allowance for
spouses and civil partners
• Compute the amount of income tax payable

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 Syllabus learning outcomes 2

• Understand the treatment of interest paid for a qualifying purpose

• Understand the treatment of gift aid donations and charitable giving
• Explain and compute the child benefit tax charge
• Understand the treatment of property owned jointly by a married couple, or by a
couple in a civil partnership
• Understand how a married couple or a couple in a civil partnership can
minimise their tax liabilities
• Basic income tax planning

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 Chapter overview

• In this chapter, we look at computing taxable income,

drawing together all of the taxpayer’s income.
• We look at how the income tax liability is computed on
taxable income.
• We cover the accrued income scheme on gilts, how gift aid
donations are given tax relief, the computation of the child
benefit charge, the transferable personal allowance
between spouses/civil partners and how jointly held
property is taxed.

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 Chapter overview diagram
The computation of
taxable income and
income tax liability

Scope of income
tax

Computing Personal
Qualifying interest
taxable income allowance

Non-savings Dividend
income income Gift aid

Savings Tax
income calculation

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 Tackling the exam

• Specific aspects of income tax may be tested in Section A such as identification

of different types of income or calculation of the personal allowance.
• Section B questions may involve more than one aspect of income tax.
• There will always be one Section C 15-mark question focusing on income tax.
• Income tax may also be tested in the Section C 10-mark question.
• You must be able to set out the pro forma income tax computation for a Section
C question.

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 Scope of income tax 1

• UK resident individuals are liable to UK income tax on their UK and overseas

income.
• Non-UK resident individuals are liable to UK income tax on UK income only.

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 Scope of income tax 2

Automatic overseas test

• Individual will automatically not be UK resident if:
― Present in the UK for less than 16 days in a tax year
― Present in the UK for less than 46 days in a tax year and not resident during
the previous three tax years
― Works overseas full-time and not present in the UK for more than 90 days in
a tax year
• To be present in the UK includes any days where an individual is in the UK at
midnight.

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 Scope of income tax 3

Automatic resident test

• An individual will automatically be UK resident if:
― Present in the UK for 183 days or more in a tax year
― Only home is in the UK
― Works full-time in the UK
• To be present in the UK includes any days where an individual is in the UK at
midnight.

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 Scope of income tax 4

Sufficient ties test

• If an individual's residence cannot be determined by automatic tests, then
status is found by:
― Ties in the UK
― Days present in the UK in a tax year
• To be present in the UK includes any days where an individual is in the UK at
midnight.

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 Scope of income tax 5

Sufficient ties test – cont'd

• Five UK ties:
― Close family in the UK
― Available accommodation in the UK which is used for at least one night in
the tax year
― Substantive work (at least 40 days for three hours a day in tax year) in the
UK
― Present in the UK for more than 90 days during either of the two previous
tax years
― Spending more time in the UK than any other country in the tax year
(previously UK resident only)

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 Scope of income tax 6

Days in UK Previously resident Not previously resident

Less than 16 Automatically NOT resident Automatically NOT resident
16 to 45 Resident if 4 UK ties (or more) Automatically NOT resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties (or more)
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie ( or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

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 Question: Sally

In one tax year Sally spent 15 days in the UK.

Required
State, with reasons, if Sally would be UK resident in that tax year.

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 Answer: Sally

Sally has spent less than 16 days in the UK in the tax year.
Sally is therefore automatically not UK resident in that tax year.

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 Question: Jimmy

Jimmy has lived in Tokyo all his life where he owns a house. He came to the UK
on 1 May 2021 having sold his house in Tokyo the month before. He decided to
buy a flat in London which he used as his only home.
Jimmy lived in the London property until 30 September 2021 and then went on a
backpacking holiday for a year.
Required
State, with reasons, if Jimmy would be UK resident for 2021/22.

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 Answer: Jimmy

Jimmy does not satisfy the automatic overseas test because he is present in the
UK for 46 days or more in the tax year and does not work overseas full time.
Jimmy satisfies the automatic UK test because he only has a UK home.
Jimmy is therefore UK resident in 2021/22.

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 Question: Andy

Andy was UK resident in 2020/21 but was only present in the UK for 80 days in
that tax year. He does not meet either the automatic overseas or the automatic
UK test in 2021/22.
In the tax year 2021/22, Andy spent 48 days working 5 hours a day in the UK
where he was present at midnight. Andy's wife lives in the UK in their joint home
and Andy lives in this home when he is in the UK. Andy spent the rest of the tax
year 2021/22 in Spain.
Required
State, with reasons, if Andy would be UK resident in 2021/22.

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 Answer: Andy

Andy has:
• Been present in the UK for between 46 and 90 days (48 days) in the tax year
• Three UK ties (close family, available accommodation and substantive UK
work)
Andy is therefore UK resident in 2021/22.

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 Question: Specimen exam question A15

Nigel has not previously been resident in the UK, being in the UK for less than 20
days each tax year. For the tax year 2021/22, he has three ties with the UK.
What is the maximum number of days that Nigel could spend in the UK during the
tax year 2021/22 without being treated as UK resident for that year?
 90 days
 182 days
 45 days
 120 days (2 marks)

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 Answer: Specimen exam question A15

Answer: 90 days
Nigel was not previously resident in the UK. He will be
UK resident for 2021/22 with three UK ties if he spends at
least 91 days in the UK during that tax year.
Therefore, maximum number of days that Nigel could
spend in the UK during the tax year 2021/22 without
being treated as UK resident for that year is 90 days.

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 Computing taxable income
Non-savings Income Savings income Dividend income
£ £ £
Trading income X
Less: loss relief (X)
X
Employment income X

Property income X

UK dividends X

Bank/ building society interest X

Other interest a X a

TOTAL INCOME X X X
Less: qualifying interest paid (X)
Less: loss relief (X) __ __
NET INCOME X X X
Less: personal allowance (X) __ __
TAXABLE INCOME X X X

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 Types of income 1

• Non-savings income:
― Trading income
― Employment income
― Pension income
― Property income

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 Types of income 2

• Savings income is interest income.

• Includes:
― Bank interest
― Building society interest
― Company loan stock interest
― Government stocks (gilts) interest
― National Savings and Investments (NS&I) accounts interest

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 Types of income 3

• Dividend income is dividends received from owning shares in companies.

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 Types of income 4

• Exempt income is not subject to income tax.

• Includes:
― Income from National Savings Certificates
― Statutory redundancy money
― Winnings (including premium bond prizes)
― Scholarships
― Interest on damages for personal injuries
― Local authority grants
― Income from investments made through individual savings accounts (ISAs)

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 Types of income 5

Individual Savings Accounts (ISAs)

• Two types of ISA:
― Cash ISA (only cash component)
― Stocks and shares ISA (only stock and shares component unless provider
allows some cash held)
• Annual investment limit: £20,000
• Can withdraw and replace funds in same tax year in flexible cash ISA without
using up any of the annual limit
• Investments within ISAs are exempt from:
― Income tax
― Capital gains tax
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 Question: Specimen exam question A12

Winston has already invested £8,000 into a cash individual savings account (ISA)
during the tax year 2021/22. He now wants to invest into a stocks and shares
ISA.
What is the maximum possible amount which Winston can invest into a stocks
and shares ISA for the tax year 2021/22?
 £20,000
 £12,000
 £0
 £10,000 (2 marks)

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 Answer: Specimen exam question A12

Answer: £12,000
£(20,000 – 8,000) = £12,000

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 Personal allowance 1

• Personal allowance (PA): £12,570

• Deducted from net income to arrive at taxable income
• Given to all individuals (subject to tapering – see next slide),
including children
• For TX – UK purposes, deducted from non-savings income
first, then savings income, then dividend income

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 Personal allowance 2

• If an individual's 'adjusted net income' (ANI) exceeds £100,000, the personal

allowance is reduced by £1 for every £2 excess income.
• Once an individual's ANI reaches £125,140 or over it will be reduced to nil.
• ANI is after deducting gross gift aid and gross personal pension contributions
(see later in this chapter).

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 Question: Jesse

Jesse has net income of £105,000.

Required
Calculate Jesse's personal allowance for 2021/22.

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 Answer: Jesse

£
Personal allowance 12,570
Less reduction
Income 105,000
Less limit (100,000)
5,000
× ½ (2,500)
Adjusted personal allowance 10,070

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 Computing tax payable 1

• Tax liability: income tax on taxable income

• Tax payable: tax liability less tax already deducted at source (PAYE on
employment income and pension income)

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 Computing tax payable 2

NSI SI DI

Additional rate 45% 45% 39.35%

band
(>£150,000)
Higher rate band 40% 40% 33.75%
(<£37,700)

Basic rate band 20% 20% 8.75%

0%*

*The 0% savings starting rate applies to savings income only in the first
£5,000 of taxable income. See next slide.

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 Computing tax payable 3

• Savings income starting rate applies to savings income where it falls in the first
£5,000 of taxable income.
• If non-savings income after the personal allowance is greater than £5,000 then
starting rate does not apply.

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 Computing tax payable 4

• Savings income nil rate band given in addition to the starting rate for savings
income.
• Covers first £1,000 of savings income for basic rate taxpayers.
• Covers first £500 of savings income for higher rate taxpayers.
• No savings income nil rate band for additional rate payers.

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 Question: Holly

Holly received a salary of £45,420 (PAYE deducted in year £6,570) and £8,000 of
bank deposit interest in the tax year.
What is Holly's tax payable for the year?
 £8,700
 £2,130
 £2,030
 £7,058

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 Answer: Holly

Answer: £2,130 Non-savings Savings

income income Total
£ £ £
Employment income 45,420
Bank interest 8,000

Net income 45,420 8,000 53,420

Less: PA (12,570) a a
Taxable income 32,850 8,000 40,850

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 Answer: Holly – cont'd

Income tax thereon:

NS 32,850  20% 6,570

SI 500  0% (NRB higher rate taxpayer) 0

4,350 (37,700 – 32,850 – 500)  20% 870

3,150 (8,000 – 500 – 4,350)  40% 1,260

Tax liability 8,700

Less: PAYE (6,570)

Tax payable 2,130

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 Question: Marella

Marella has property income of £13,570 and bank interest of £15,000 in the tax
year.
What is Marella's income tax liability for the tax year?
 £3,200
 £2,300
 £3,000
 £2,200

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 Answer: Marella

Answer: £2,200 Non-savings Savings

income income Total
£ £ £
Property income 13,570
Interest income
15,000

Net income 13,570 15,000 28,570

Less: PA (12,570) a a
Taxable income 1,000 15,000 16,000

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 Answer: Marella – cont'd

£
Income tax thereon:
NS 1,000  20% 200
SI 4,000 (5,000 – 1,000)  0% 0
1,000  0% (NRB basic rate taxpayer) 0
10,000 (15,000 – 4,000 – 1,000)  20% 2,000
Tax liability 2,200

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 Computing tax payable 5

• Dividend nil rate band covers the first £2,000 of dividend income for all
taxpayers.

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 Question: Faryl

Faryl has the following income in the tax year:

Salary £11,370 (PAYE £75)
Building society interest £10,000
Dividends £54,500
Required
Calculate Faryl’s income tax payable.

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 Answer: Faryl

Non-savings Savings Dividend

income income income
£ £ £
Employment income 11,370
BSI 10,000
DI A a 54,500
Net income 11,370 10,000 54,500
Less: PA (11,370) (1,200)a a
Taxable income - 8,800 54,500

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 Answer: Faryl – cont'd

£
SI 5,000  0% 0
500  0% (NRB higher rate taxpayer) 0
3,300 (8,800 – 5,000 – 500)  20% 660
DI 2,000  0% (NRB) 0
26,900 (37,700 – 8,800 – 2,000)  8.75 2,354
25,600 (54,500 – 2,000 – 26,900)  33.75 8,640

Income tax liability 11,654

Less: PAYE (75)

Income tax payable 11,579

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 Question: Rajesh

Rajesh has trading income of £130,000 in the tax year. He also received building
society interest of £3,750 and dividends of £40,000.
Required
Calculate Rajesh's income tax liability.

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 Answer: Rajesh

Non-savings Savings
income income Dividends
£ £ £

Trading profit 130,000

BSI 3,750

DI 40,000

Less: PA (nil) *

Taxable income 130,000 3,750 40,000

* No personal allowance as Rajesh's adjusted net income of £173,750 (130,000

+ 3,750 + 40,000) exceeds £125,140.

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 Answer: Rajesh – cont'd

Income tax
£
37,700  20% 7,540
92,300  40% 36,920
130,000

3,750  40% (no NRB for additional rate taxpayer) 1,500

2,000  0% 0
14,250  33.75% 4,809
150,000

23,750 (40,000 – 2,000 – 14,250)  39.35% 9,853

Tax liability 60,622

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 Transferable personal allowance 1

• May be referred to as marriage allowance.

• Taxpayer may elect to transfer a part of the personal allowance to their spouse
or civil partner.
• Useful where one spouse/partner is not making full use of their personal
allowance.
• Transferable amount is fixed at 10% of the personal allowance rounded up to
nearest £10.
• Transferee receives the allowance as a reduction in their tax liability at 20%
rather than an increase in their personal allowance.
• Tax reducer is therefore 20% × £1,260 = £252 in the tax year 2021/22.

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 Transferable personal allowance 2

• Transfer of personal allowance cannot result in a negative income tax liability,

ie will not result in repayment of income tax.
• Transfer of the personal allowance cannot be made if either spouse/partner is
a higher rate or additional rate taxpayer.

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 Question: Ash and Den

Ash and Den are married. Ash has trading income of £10,090 and Den has
employment income of £43,620.

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 Question: Ash and Den (1)

(1) How will the transferable personal allowance work

for Ash and Den?
 It is not allowed as Den is a higher rate
taxpayer.
 It is not allowed as Ash is using some of this
year's personal allowance.
 Ash transfers £1,260 of the personal allowance
to Den.
 Den transfers £1,260 of the personal allowance
to Ash.

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 Answer: Ash and Den (1)

Answer: Ash transfers £1,260 of the personal allowance

to Den
Den is not a higher rate taxpayer as after his personal
allowance his taxable income is £(43,620 – 12,570) =
£31,050.
Ash is using some of the personal allowance but that
does not prevent the transfer. It is still beneficial if some
of Ash's personal allowance is unused.
The transfer would be from Ash to Den.

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 Question: Ash and Den (2)

(2) What is Den's income tax liability for the tax year 2021/22?
 £3,696
 £252
 £5,958
 £6,210

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 Answer: Ash and Den (2)

Answer: £5,958
£
Employment income 43,620
Less: PA (12,570)
Taxable income 31,050

Income tax liability:

31,050  20% 6,210
Tax reducer 20%  £1,260 (252)
5,958

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 Gift aid 1

• One-off or regular charitable gifts qualify for tax relief under the gift aid scheme.
• Payments are always made net of basic rate (20%) tax.
• Higher rate taxpayers are entitled to a further 20%
(40% – 20%) relief on their gross donation.
• Additional rate taxpayers are entitled to a further 25% (45% – 20%) relief on
their gross donation.

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 Gift aid 2

• These further reliefs are given by increasing the basic rate limit and the higher
rate limit by the gross donation:
― Basic rate limit:
£37,700 + (gift aid donation × 100/80)
― Higher rate limit:
£150,000 + (gift aid donation × 100/80)
• Gross gift aid donation also deducted to compute ANI for tapering the personal
allowance.

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 Question: Specimen exam question A3

Martin is self-employed, and for the year ended 5 April 2022 his trading profit was
£109,400. During the tax year 2021/22, Martin made a gift aid donation of £800
(gross) to a national charity.
What amount of personal allowance will Martin be entitled to for the tax year
2021/22?
(2 marks)
£

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 Answer: Specimen exam question A3

Answer: £8,270
£
Personal allowance 12,570
Less ½ (108,600 – 100,000) (4,300)
8,270
W1 Adjusted net income
£
Net income 109,400
Less gross gift aid donation (800)
108,600

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 Question: Gloria

Gloria has employment income of £120,000. She made a gift aid donation of
£7,200 (net) to a charity.
Required
Calculate Gloria's income tax liability for 2021/22.

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 Answer: Gloria
£
Employment income 120,000
Less: PA (W) (7,070)
Taxable income 112,930

Increase BR & HR limits

37,700 + 9,000 = £46,700
150,000 + 9,000 = £159,000

Income tax liability:

46,700  20% 9,340
66,230  40% 26,492
112,930 35,832
Working: Adjusted net income
£
Employment income 120,000
Less: gift aid donation 7,200  100/80 (9,000)
111,000
Less: limit (100,000)
11,000

Personal allowance 12,570

Less ½  11,000 (5,500)
7,070

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 Qualifying interest

• Interest paid on the following can be deducted from total income:

― Loan to buy plant and machinery for use in partnership or employment
― Loan to invest in partnership
― Loan to buy interest in employee-controlled company
― Loan to invest in a co-operative

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 Married couple/civil partners tax minimisation

• Spouses and civil partners should ensure, where possible, that sources of
income are owned so that each spouse/civil partner uses:
― Personal allowance
― Savings income nil rate band
― Dividend nil rate band

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 Question: Joanne and Robert

Joanne and Robert are a married couple. For the tax year 2021/22, Joanne will
have a salary of £165,000 and savings income of £480 interest from a bank
account and Robert will have a salary of £70,000 and dividend income of £2,800
from shareholdings.
Required
Advise Joanne and Robert how they could transfer assets between themselves to
minimise their overall income tax liability.

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 Answer: Joanne and Robert

Joanne is an additional rate taxpayer, so she does not have a savings income nil
rate band. Robert is a higher rate taxpayer and has an unused savings income nil
rate band of £500. Joanne should therefore transfer the funds in the bank account
to Robert so that he can open a similar account which will save income tax of
£(480  45%) = £216 for 2021/22.
Robert has used his dividend nil rate band of £2,000 and has an excess of
£(2,800 – 2,000) = £800 dividend income. Joanne has an unused dividend nil rate
band of £2,000. Robert should transfer shares to Joanne producing dividends of
£1,800 which will save income tax of £(800  32.5%) = £260 for 2021/22.

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 Jointly held property

• Income from jointly held property is split 50:50.

• Unless the couple make a joint declaration to HMRC specifying the actual
proportions they are each entitled to.

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 Child benefit income tax charge

• Individual or partner in a tax year:

― Receives child benefit
― Has adjusted net income between £50,000 and £60,000
• Income tax charge of 1% of the amount of child benefit received for every £100
of adjusted net income over £50,000.
• If adjusted net income exceeds £60,000: income tax charge is amount of child
benefit received.

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 Question: Ralph

Ralph has a salary of £54,000. This is his only income. He received child benefit
of £2,500.
Required
Calculate Ralph's child benefit income tax charge.

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 Answer: Ralph

The child benefit income tax charge is £1,000.

(£2,500  40% (54,000 – 50,000/100))

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 Accrued income scheme 1

• Gilts are securities issued by the government as a way of borrowing money, eg

Treasury Stock.
• Interest is paid to the holder of the gilt (the investor) in fixed amounts on fixed
dates.
• As an interest payment approaches the price of the gilt will start to increase.
• This is because purchaser of the gilt is entitled to the next interest payment, so
the nearer to the interest date, the more expensive the gilt becomes.

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 Accrued income scheme 2

• Usual income tax rules state that interest is taxable on individuals when it is
received.
• Accrued income scheme applies if individual holds government gilts with a total
nominal (face) value of more than £5,000 and sells the gilts for a price which
includes interest.
• Amount of interest which has accrued since the last interest payment up to the
date of the sale is taxed as savings income on the seller on the date of the next
interest payment.
• When interest is paid to new owner of the gilt, they are given tax relief by
deducting the old owner's accrued income from new owner's receipt.

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 Question: Caroline

On 1 May 2021 Caroline bought some 4% gilts from Jamie. They have a nominal
value of £50,000 and pay interest on 31 March and 30 September each year. She
paid £52,000 (including interest) on 1 May 2021 and sold them for £54,500
(including interest) on 31 December 2021 to Tyrone.
How much interest is assessable on Caroline in the tax year 2021/22 in relation to
these gilts?
 £1,000
 £1,333
 £1,500
 £2,333

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 Answer: Caroline

The answer is: £1,333

$
Interest actually received 30.09.21 (1/2 x 4% x £50,000)
= 1,000
Less interest accrued to Jamie (April 2021 1/12 x 4% x £50,000)
= (167)
Add interest accrued up to sale (Oct 2021 - Dec 2021 3/12 x 4% x £50,000)
= 500
Total = 1,333

Sense check: Eight months' ownership, therefore 8/12 x 4% x £50,000 = £1,333

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 Summary 1

Scope of income tax

• UK resident individuals are liable to income tax on all income.
• Non-UK resident individuals are liable to UK income tax on UK
income only.
• There is a statutory test of residence.
Computing taxable income
• Make sure you learn this pro forma.
Types of income
• Income is categorised into three sections – non-savings, savings
and dividend income.

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 Summary 2

Personal allowance
• Everyone receives a personal allowance.
• However, if adjusted net income > £100,000 it is reduced by £1 for
every £2 excess income.
Computing tax payable
• Non-savings income is taxed at 20%/40%/45%.
• Savings income is taxed at 0%/20%/40%/45%.
• Dividend income is taxed at 0%/7.5%/32.5%/38.1%.

Transferable personal allowance

• Transfer of £1,260 between spouses/civil partners as 20% tax
reducer.

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 Summary 3

Gift aid
• Gift aid donations enable the taxpayer to save tax at their
marginal rate.
• For higher rate taxpayers this is achieved by increasing the
basic rate limit and higher rate limit by the gross donation.
Qualifying interest
• Interest on certain loans can be deducted from total income.
Jointly held property
• Split 50:50, unless election made for actual entitlement.
Married couple/civil partners tax minimisation
• Use both personal allowances, savings income nil rate bands and
dividend nil rate bands.

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 Summary 4

Child benefit income tax charge

• If adjusted net income between £50,000 to £60,000 charge will be
1% of amount received for every £100 of income over £50,000.

Accrued income scheme

• Seller taxed on accrued interest received on sale.
• Buyer given tax relief against interest received of amount taxed
on seller.

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