MODULE 2
INCOME TAX COMPUTATION
Individuals are assessed to Income Tax on the income arising in the tax year. The tax year
runs from April 6 to following April 5. Therefore, the tax year 2023/24 runs from 6 April,
2023 to 5 April, 2024. Each source of taxable income requires its own basis of assessment to
determine how much of that income is to be assessed to tax in each such tax year.
Computation of Taxable Income
There are two main parts to the Income Tax computation.
๏ firstly the computation of the taxpayer’s Taxable Income and
๏ secondly the calculation of the Income Tax Liability and/or Income Tax Payable thereon.
The Taxable Income will be divided into three analysis columns.
๏ Non-Savings Income which will be made up of employment income, trading profits of the
self-employed and property income, also pension income,
๏ Savings Income such as interest from banks and building societies, and
๏ Dividend income.
Tax liability and Tax Payable
Having calculated the taxable income, the next part of the computation is to compute the
Tax Liability and/or the Tax Payable of the taxpayer.
(a) Tax liability = income tax on taxable income
(b) In calculating the Tax Liability it is necessary to take each part of the
Taxable Income in order, non-savings income followed by savings
income and finally the dividend income as these sources of taxable
income have different tax rates that apply to them and rates that also
change depending on how much taxable income the taxpayer has
(c) Tax payable = tax liability
LESS
tax already deducted at source,
Pay As You Earn (PAYE) on employment income
Income from investments - savings and dividends
Savings income is interest income which is received gross without any deduction of tax at
source and will include interest from banks, building societies
Savings income is assessed in the tax year that it is received.
Dividend income is received from shares held in a Limited Company and will be
received gross without any deduction of tax.
Dividend income is assessed in the tax year that it is received.
Calculation of tax
(a) Taxable interest received from banks and building societies is included in the saving
income column of the computation.
(b) Any deductions in the income tax computation (personal allowance and reliefs) are
deducted first from non-savings income, then savings income, then dividend income, hence
the order in which the analysis columns are listed.
(c) Tax suffered at source (PAYE) is deducted from the tax liability in order to arrive at tax
payable.
(d) The different types of taxable income are taxed as follows and in this order:
Non Savings Income
£1 to £37,700 20% basic rate
£37,701 – 125,140 40% higher rate
£125,141 + 45% additional rate
Savings
Savings income benefits from a 0% rate. For basic rate taxpayers, the savings income nil rate
band for the tax year 2023/24 is £1,000, and for higher rate taxpayers it is £500. Additional
rate taxpayers do not benefit from any savings income nil rate band.
Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20%
if it falls below the basic rate threshold of £37,700, at the higher rate of 40% if it falls
between the basic rate threshold of £37,700 and the higher rate threshold of £125,140, and at
the additional rate of 45% if it exceeds the higher rate threshold of £125,140.
Personal allowance
The Personal Allowance (PA) is a level of tax free income available to UK taxpayers. It is
deducted from Net Income to derive Taxable Income on the Income Tax Computation. It is
deducted from the analysis columns in the order of firstly non-savings income, followed, if
necessary, by savings income and finally dividend income.
The normal PA for 2023/24 is £12,570. This allowance is gradually reduced to nil where a
person’s adjusted net income (ANI) exceeds £100,000.
Savings income can also benefit from a starting rate of 0%. However, the starting rate only
applies where savings income falls within the first £5,000 of taxable income. If non-savings
income exceeds £5,000, then the starting rate of 0% for savings does not apply
Dividends The first £1,000 of dividend income for the tax year 2023/24 benefits from a 0%
rate. This £1,000 nil rate band is available to all taxpayers, regardless of whether they pay tax
at the basic, higher or additional rate. However, the dividend nil rate band counts towards the
basic rate and higher rate bands.
Dividend income in excess of the £1,000 nil rate band is taxed at: ๏ 8.75% if it falls below
the basic rate threshold of £37,700, ๏ at 33.75% if it falls between the basic rate threshold of
£37,700 and the higher rate threshold of £125,140, and ๏ at 39.35% if it exceeds the higher
rate threshold of £125,140.
Transferable amount of the Personal Allowance (PA)
An election may be made to transfer a fixed amount of the PA to a spouse or civil partner -
the amount is set at £1,260 for the tax year 2023/24. This is also known as the marriage tax
allowance. The election is only available when both taxpayers are either just basic rate
taxpayers or nontaxpayers. The election is only likely to be made when one spouse is a non-
taxpayer and has an amount of unused PA that would otherwise be wasted and the other
spouse is only a basic rate taxpayer.
Deductions from Total Income
Qualifying interest is:
(a) On a loan to purchase an interest in a partnership or a contribution to the partnership of
capital or a loan
(b) On a loan to purchase plant or machinery used in the business, by a partner
(c) On a loan to purchase plant and machinery by an employee if used in the performance of
duties
(d) On a loan to purchase an interest in a close company.
Child Benefit Income Tax Charge
Child benefit is a tax free benefit payable to parents irrespective of the level of taxpayer they
may be. An income tax charge applies if a taxpayer or his/her partner receives child benefit
but one of them has adjusted net income (ANI) > £50,000.
If both partners have income over £50,000 the partner with the higher income is liable for the
charge. The following information will therefore be provided in the tax rates and allowances
section of the examination paper: Where income is between £50,000 and £60,000 the charge
is 1% of the amount of child benefit received for every £100 of income over £50,000.