BASIC INCOME TAX Individuals
(Natural
COMPUTATION Persons)
INCOME TAX COMPUTATION FOR INDIVIDUAL
FOR THE PERIOD 6 APRIL 2023 TO 5 APRIL
2024
Particulars Non-saving Saving Dividends Total
income (£) income (£) (£) (£)
Employment Income X X
Trading Income X X
Pension Income X X
Property Income X X
Building Society X X
Interest
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 (X) (X) (X) (X)
Allowance
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 Dividend
(£) Saving Income (£) (£) Total (£)
Employment income 90,000 90,000
Q1: Property Income 10,000 10,000
SOLUT Bank Interest
Dividend
5,000
10,000
5,000
10,000
ION Total Income 100,000 5,000 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 Dividend
(£) Saving Income (£) (£) Total (£)
Trading Income 15,500 - - 15,500
Q2: Employment income 90,000 90,000
SOLU Property Income
Saving Income
10,000
5,000
10,000
5,000
TION Dividend
Total Income 115,500 5,000
10,000
10,000
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