Individuals
BASIC INCOME TAX COMPUTATION (Natural Persons)
INCOME TAX COMPUTATION FOR INDIVIDUAL FOR THE PERIOD 6 APRIL 2023
TO 5 APRIL 2024
Particulars Non-saving income (£) Saving income (£) Dividends (£) Total (£)
Employment Income X X
Trading Income X X
Pension Income X X
Property Income X X
Building Society Interest X X
Bank Interest X X
Dividends X X
Total Income X X X X
Less: Reliefs (X) (X) (X) (X)
Net Income X X X X
Less: Personal Allowance (X) (X) (X) (X)
Taxable Income X X X X
EXEMPT INCOME
Q: EXEMPT INCOME
RELIEF AGAINST TOTAL INCOME
Tax relief is available for deduction from Total Income for:
• trading losses, and
• certain qualifying interest payment
Qualifying interest payment: Interest on loan incurred to finance expenditure for
qualifying purpose such as:
• Purchase of plant/machinery by employed person to use in employment ( and by a
partner to use in the partnership business,
• Purchase of share in an employee-controlled trading company by full time employee,
and
• For capital or loan to partnership by a partner.
RELIEF AGAINST TOTAL INCOME- QUESTION
Harry earned following income in the tax year 2023/24:
Salary: 40,000
Allocation of profit from partnership business: 50,000
Income from property: 10,000
Bank Interest: 5,000
Dividend: 10,000
What would be Harry taxable income in each of the following case:
1. 2,000 interest paid on the mortgage for his private residence, or
2. 2,000 interest paid on the loan to invest in the partnership business where he is the
partner.
PERSONAL ALLOWANCES
12,570 for Tax year 2023/24
Use in the following order to save more tax:
1. Non-saving income, then
2. Saving income, then
3. Dividend income
If PA still remains after setting against dividend income, then the Surplus PA is Lost
as it:
- Can not be set off against capital gains.
- Can not be carried forward for next year.
However, Certain fixed PA can be transferred to spouse as Marriage Allowance.
REDUCTION OF PERSONAL ALLOWANCES FOR HIGH
INCOME INDIVIDUALS
EXAMPLE: PERSONAL ALLOWANCE
Q1. Mr. X earned following income in the tax year 2023/24:
Salary: 90,000
Income from rent of residential property: 10,000
Bank Interest: 5,000
Dividend: 10,000
Mr. X paid gift aid donation of 4,000 during the tax year.
Compute Mr. X taxable income for the tax year.
Non-saving income (£) Saving Income (£) Dividend (£) Total (£)
Employment income 90,000 90,000
Q1:
Property Income 10,000 10,000
Bank Interest 5,000 5,000
SOLUTION Dividend
Total Income 100,000 5,000
10,000
10,000
10,000
115,000
Less: Relief - - - -
Net Income 100,000 5,000 10,000 115,000
Less: Adjusted PA (W) (7,570) - - (7,570)
Taxable Income 92,430 5,000 10,000 107,430
Working: Adjusted PA Amount (£) Amount (£)
Basic PA 12,570
Net Income 115,000
Less: Gross gift aid donation (4,000/80%) (5,000)
Adjusted Net Income 110,000
Less: Income Limit (100,000)
Excess 10,000
Reduction of PA (10,000*50%) (5,000)
Adjusted PA 7,570
EXAMPLE: PERSONAL ALLOWANCE
Q2.
In the previous Q1 If Mr. X also has net taxable income from retail business 15,500 in
the tax year 2023/24:
Compute Mr. X taxable income for the tax year.
Non-saving income (£) Saving Income (£) Dividend (£) Total (£)
Trading Income 15,500 - - 15,500
Employment income 90,000 90,000
Q2: Property Income 10,000 10,000
SOLUTION Saving Income
Dividend
5,000
10,000
5,000
10,000
Total Income 115,500 5,000 10,000 130,500
Less: Relief - - - -
Net Income 115,500 5,000 10,000 130,500
Less: Adjusted PA (W) - - - -
Taxable Income 115,500 5,000 10,000 130,500
Working: Adjusted PA Amount (£) Amount (£)
Basic PA 12,570
Net Income 130,500
Less: Gross gift aid donation (4,000/80%) (5,000)
Adjusted Net Income 125,500
Less: Income Limit (100,000)
Excess 25,500
Reduction of PA (25,500*50%) (12,570)
Adjusted PA -
SET OFF OF RELIEFS AND PERSONAL ALLOWANCE
INCOME TAX LIABILITY
After the calculation of Taxable Income, the next step in income tax
computation is to calculate income tax liability on the taxable income. Income
tax liability should be calculated on income in a strict order as follows:
1. Non-Saving Income
2. Saving Income
3. Dividend Income
Income Tax Rate
for 2023/24
APPLYING APPROPRIATE RATES OF TAX ON SAVING
INCOME
Saving income is taxed as a next slice of income only after ‘non-saving income’. Therefore,
the rates of tax applicable to saving income depend on the level of ‘non-saving income’
Procedure to determine appropriate tax rates on saving income:
• First calculate income tax on ‘non-saving income’.
• Then apply different tax rate on saving income in the following order:
1. Starting rate ( of 0%) on saving income which falls within 5,000 of taxable income:
-If taxable non-saving income = 0, the first 5,000 of taxable saving income is taxed at 0%
-If taxable non-saving income < 5,000, saving income within 5,000 of total taxable income is
taxed at 0%.
-If taxable non-saving income > 5,000, then 0% starting rate is not applicable.
APPLYING APPROPRIATE RATES OF TAX ON
SAVING INCOME
2. Saving income nil rate band:
After applying starting 0% rate, if there remains further saving income, consider
nil rate band. If taxpayer is:
- A basic rate taxpayer – the next 1,000 falls in the saving income nil rate band is
taxed at 0%
- A higher rate taxpayer – the next 5,00 falls in the saving income nil rate band is
taxed at 0%.
- An additional rate taxpayer – (if total taxable income is more than 150,000)- not
applicable
APPLYING APPROPRIATE RATES OF TAX ON
SAVING INCOME
3. Normal rate:
After applying Nil rate band, if there remains further saving income, apply
normal saving rate as follows:
- Basic rate: Saving income falling within first 37,700 of taxable income – 20%
- Higher rate: Saving income falling between 37,700 to 125,140 of taxable
income – 40%
-Additional rate: Saving income falling above 150,000 of taxable income –
45%
APPLYING APPROPRIATE RATES OF TAX TO DIVIDEND
INCOME
COMPREHENSIVE QUESTIONS: NON-SAVING,
SAVING AND DIVIDEND TAX RATES
Q3. Mr. X earned following income in the tax year 2023/24:
Gross Salary: 20,000
Bank Interest: 5,000
Dividend: 10,000
Compute Mr. X Income tax liability for the tax year 2023/24.
COMPREHENSIVE QUESTIONS: NON-SAVING,
SAVING AND DIVIDEND TAX RATES
Q4. Mr. X earned following income in the tax year 2023/24:
Gross Salary: 50,000
Bank Interest: 15,000
Dividend: 10,000
Mr. X paid 2,000 interest on loan taken to purchase laptop which is used in his
employment.
Compute Mr. X Income tax liability for for the tax year 2023/24.
COMPREHENSIVE QUESTIONS: NON-SAVING,
SAVING AND DIVIDEND TAX RATES
Q5. Mr. X earned following income in the tax year 2023/24:
Gross Salary: 50,000
Profit from Retail business: 40,000
Bank Interest: 15,000
Dividend: 10,000
Mr. X paid 2,000 interest on loan taken to purchase laptop which is used in his
employment.
Compute Mr. X income tax liability for the tax year 2023/24.
COMPREHENSIVE QUESTIONS: NON-SAVING,
SAVING AND DIVIDEND TAX RATES
Q6. Mr. X earned following income in the tax year 2023/24:
Gross Salary: 50,000
Profit from Retail business: 40,000
Rental from residential property: 25,000
Bank Interest: 15,000
Dividend: 10,000
Mr. X paid 2,000 interest on loan taken to purchase laptop for personal use.
Compute Mr. X Income tax liability for the tax year 2023/24.
CHARITABLE GIVING
DONATION UNDER GIFT AID SCHEME
To encourage donation to charity taxpayer who makes gift of money to charity are
provided tax relief under the gift aid scheme as follows:
• relief at the donor’s highest rate of tax
• No minimum or maximum donation limit and gift can be one off or series of
donations.
• Payment for donation are made by individual net of 20% basic rate tax deducted
at source. The 20% basic rate deducted is claimed by charity from HMRC. For
example, if Mr. X wants to make gift of money to ABC charity for 100, then
-Mr. X will only pay 80 to ABC charity and
-ABC will claim 20 deducted by MR. X from HMRC.
RELIEF FOR DONATION UNDER GIFT AID SCHEME
COMPREHENSIVE Q FOR TAXABLE INCOME
Alex is one of the three partners of a trading business where the partners share profits or losses
equally. Alex being a managing partner also received annual salary of 10,000 from the
partnership business in the tax year 2023/24. The net profit of the partnership business for the
year ending 31 December 2023 is 30,000.
Alex has a saving account in a bank from which he received 45,000 interest in the tax year.
Further he has shares in many companies from which he received dividend of 55,000 in total in
the tax year 2023/24.
Alex has taken a loan to invest in the partnership business on which he paid interest of 5,000
during the tax year 2023/24. He has also paid 9,000 to a charity on 1 January 2024.
Calculate the income tax liability of Alex for the tax year 2023/24.
INCOME TAX PAYABLE
The income tax liability calculated is the total tax to be paid on the income earned during the tax
year.
However, some of the tax may have been paid by the taxpayer under PAYE (Pay as You Earn
System).
For example,
An individual received employment income after deduction of income tax. The employer is required to
deduct income tax from employment income under PAYE system and pay it to HMRC on behalf of the
employee.
However, the amount included as employment income in taxable income computation is gross amount.
i.e. amount before deduction of income tax on employment income.
Therefore, tax liability also includes income tax which have already been paid by the taxpayer
through PAYE system.
To avoid double payment of tax, credit is given for income tax already paid through PAYE system by
deducting it form income tax liability to get income tax payable/receivable.
Income tax liability X
Less: Income tax already paid through PAYE (X)
Income tax payable/ (receivable) X/(X)
Q: INCOME TAX PAYABLE
In the previous case if Alex has suffered PAYE of 2,000 in the tax year 2023/24.
What is Alex’s income tax payable or receivable for the tax year 2023/24.
MARRIAGE ALLOWANCE
Electing to Marriage allowance allows marriage couple to transfer
• a fixed amount of PA (10% of PA = 1,260 for 2022/23) regardless of the amount of unused PA.
• to other spouse (or civil partners)
• provided neither is a higher rate or additional rate taxpayer.
No provision for transferring less or more than 1,260 for 2022/23.
The relief is given for MA as a deduction from recipient income tax liability.
The recipient’s own PA is not increased.
Transferring spouse PA is reduced by fixed amount of 1,260.
The recipient’s income tax liability is reduced by max of 252 ( 1,260 *20% basic rate income tax)
If recipient’s income tax liability is less than 252, no tax repayment but transferor’s PA is reduced
by 1,260.
If unused PA < 1,260, fixed amount of 1,260 must be transferred, therefore, transferring spouse
may have to pay some tax
Therefore, max. tax saving for the couple = unused PA * Basic rate income tax
ELECTION TO BE MADE FOR MARRIAGE ALLOWANCE
To be effective for the tax year 2023/24, the election can be made:
In advance
by 5 April 2024
the election will remain in force for future tax years, unless
withdrawn, or
the condition for the allowance no longer met
In arrears
by 5 April 2028 (i.e. within 4 years of the end of the tax year)
the election will only apply to the tax year 2023/24 in isolation.
Q WITH MA
If Alex has trading income of 20,000 and saving income of 5,000 and dividend of
5,000.
Tina is a wife of Alex and the have opted for transfer of marriage allowance.
Calculate income tax liabilities of both Alex and Tina for the tax year 2023/24
when Tina has:
Case 1: Part time salary of 2,000
Case 2: Salary of 12,000
Case 3: Salary of 15,000
Case 4: Bank interest of 12,000
Case 5: Bank interest of 15,000
TAX PLANNING FOR MARRIED COUPLES
• By using individual spouse personal allowances and income tax rate bands.
• Election to transfer a fixed amount of PA.
• Transfer income generating assets between them, at no cost, to minimize their joint
tax liability by utilizing starting and Nil rate band available to both of the spouse.
CHILD BENEFIT TAX CHARGE