Becker F6 Sample

Finance Act 2014 Edition
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PL STUDY SYSTEM
ACCA
Paper F6 | TAXATION (UNITED KINGDOM)
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Applicable to Exams to 31 March 2016
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TAXATION F6
(UNITED KINGDOM)
STUDY SYSTEM
PL Finance Act 2014 Edition

Applicable to Exams to 31 March 2016
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Paper
F6
Contents
Page
Introduction ...............................................................................................v
about This Study System ............................................................................v
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Syllabus.....................................................................................................vi
aCCa Study Guide .......................................................................................x
Supplementary Instructions ...................................................................xviii
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Tax Rates and allowances ......................................................................xviii
Examination Technique ........................................................................... xxi
Sessions
1 General Concepts and Principles ........................................... 1‑1

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2 Income Tax Computations .................................................... 2‑1
3 Property and Investment Incomes ....................................... 3‑1

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4 Employment Income ............................................................. 4‑1
5 Unincorporated Traders—Assessment and Profits ................. 5‑1
6 Capital allowances ............................................................... 6‑1
7 unincorporated Traders—Relief for Trading losses ............... 7‑1
8 unincorporated Traders—Other Matters................................ 8‑1
9 Capital Gains Tax—basic Principles ....................................... 9‑1
10 Capital Gains Tax—Chattels, land and buildings ..................10‑1
© DeVry/Becker Educational Development Corp. All rights reserved. iii

Contents
Sessions Page
11 Capital Gains Tax—Shares ...................................................11‑1
12 Capital Gains Tax—business assets .....................................12‑1
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13 Corporation Tax—The Tax Computation ...............................13‑1
14 Corporation Tax—loss Reliefs ..............................................14‑1
15 Corporation Tax—Groups of Companies ...............................15‑1
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17
18
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Inheritance Tax ...................................................................16‑1
National Insurance, PayE and Self-assessment ...................17‑1
Tax Compliance ...................................................................18‑1
19 Value added Tax ..................................................................19‑1

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20 Index ..................................................................................20‑1
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iv © DeVry/Becker Educational Development Corp. All rights reserved.

Introduction
abOuT ThIS STuDy SySTEM

This Study System has been specifically written for the Association of Chartered Certified
Accountants Paper F6 Taxation (UK).
It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and as an integral part of your studies to provide you with the
knowledge, skill and confidence to succeed in your ACCA studies.
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How to Use This Study System
You should start by reading through the syllabus, study guide and approach to examining the
syllabus provided in this introduction to familiarise yourself with the content of this paper.
The sessions which follow include the following features:
Focus
Session Guidance
Visual Overview
Definitions
Illustrations
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These are the learning outcomes relevant to the session, as published in
the ACCA Study Guide.
Tutor advice and strategies for approaching each session.
A diagram of the concepts and the relationships addressed in each session.
Terms are defi ned as they are introduced and larger groupings of terms will
be set forth in a Terminology section.
These are to be read as part of the text. Any solutions to numerical

Illustrations are provided.
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These extracts of external content are presented to reinforce concepts and
Exhibits
should be read as part of the text.
These should be attempted using the pro forma solution provided

Examples
(where applicable).
Key Points Attention is drawn to fundamental rules, underlying concepts and principles.
Exam advice These tutor comments relate the content to relevance in the examination.
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Commentaries These provide additional information to reinforce content.
Session Summary A summary of the main points of each session.
These quick questions are designed to test your knowledge of the technical
Session quiz
content. A reference to the answer is provided.
A link to recommended practice questions contained in the Study Question

Study question Bank. As a minimum you should work through the priority questions
bank after studying each session. For additional practice you can attempt the
remaining questions (where provided).
Example Solutions Answers to the Examples are presented at the end of each session.
© DeVry/Becker Educational Development Corp. All rights reserved. v

Session 1
General Concepts
and Principles
FOCUS
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This session covers the following content from the ACCA Study Guide.
A. The UK Tax System and Its Administration

1. The overall function and purpose of taxation in a modern economy
economy.
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a) Describe the purpose (economic, social etc) of taxation in a modern
b) Explain the difference between direct and indirect taxation.

c) Identify the different types of capital and revenue tax.
2. Principal sources of revenue law and practice
a) Describe the overall structure of the UK tax system.
b) State the different sources of revenue law.
c) Describe the organisation HM Revenue & Customs (HMRC) and its terms of
reference.
d) Explain the difference between tax avoidance and tax evasion, and the
purposes of the General Anti-Abuse Rule (GAAR).
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e) Appreciate the interaction of the UK tax system with that of other tax
jurisdictions.
f) Appreciate the need for double taxation agreements.
g) Explain the need for an ethical and professional approach.
B. Income Tax and NIC Liabilities

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1. The scope of income tax

a) Explain how the residence of an individual is determined.
E. Corporation Tax Liabilities

1. The scope of corporation tax
c) Explain how the residence of a company is determined.
Session 1 Guidance
Recognise that this session lists the taxes relevant to the syllabus, explains a series of generally
important concepts relating to one or all of the examined taxes, and outlines the administration of
UK taxation.
Read this session to familiarise yourself with the taxes relevant to F6 (s.1.2), the basic elements of the
self-assessment system adopted in the UK (s.5.2) and the meaning of tax avoidance and tax evasion.
Understand the new rules determining residence of an individual (s.4.2).
F6 Taxation (UK) Becker Professional Education | ACCA Study System

VISUAL OVERVIEW
Objectives: To explain general concepts and principles relevant to the taxes examined, and
to provide an introduction to the administration of the UK tax system.
SCOPE OF THE SYLLABUS
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• Purposes of Tax
• Relevant Taxes
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•
•
•
•
•
GAINS AND TRANSFERS
Income Tax
Capital Gains Tax
Inheritance Tax
Corporation Tax
Value Added Tax (VAT)
SOURCES OF
TAX LAW
• Statute
• European
Directives
• Case Law
• HMRC
Statements/
Concessions
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TAXABLE PERIODS TAX STATUS UK TAX
ADMINISTRATION
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• Tax Years • Meaning

(Personal Taxes) • Tax Authority
• Residence (Individual)
• Accounting Periods • Self-Assessment
• Residence (Company)
(Corporation Tax) • Inheritance Tax
• Double Taxation
• Tax Periods (VAT) Agreements • HMRC Responsibilities
• Professional Tax
Advisers
TAX AVOIDANCE
AND EVASION
• Tax Evasion
• Tax Avoidance
• GAAR
© DeVry/Becker Educational Development Corp. All rights reserved. 1-1

Session 1 • General Concepts and Principles F6 Taxation (UK)
1 Scope of the Syllabus
1.1 The Purposes of Taxation

in a Modern Economy
< Taxation has two main economic roles:
1. The funding of government expenditures;
2. A tool for macroeconomic management of the domestic
economy.
< Taxation is also an important tool in the pursuit of a number of
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social objectives. These include:
1. The redistribution of wealth;
2. The encouragement of individual saving and pension
provision;
3. The discouragement of behaviour such as smoking and
drinking;

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4. "Green" issues, such as the reduction of carbon emissions.
< The overall amount of tax revenue is fundamentally a political
decision. Government has to balance its own financing needs
for its spending programmes with a strategic decision on the
balance between the relative size of the public and private
sectors in the economy.
< Once an overall total tax yield has been determined, the
specific ways of raising tax revenue have to be considered.
One decision concerns the type of tax used. Taxes are either
direct or indirect taxes:
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= Direct taxes are those levied on incomes, chargeable gains
and capital transfers.
= Indirect taxes are applied to expenditures made by
individuals and business enterprises.
Most countries opt for a combination of these taxes, of which
the most important are personal and corporate taxes on
incomes, gains and capital transfers, value added tax (VAT)
and excise duties on specific commodities such as hydrocarbon
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fuels, alcoholic drinks and tobacco products.

Another decision balances the rates of tax against the width
of the tax base (i.e. the types of incomes or expenditures to
be taxed). The current trend among policymakers is towards
creating the largest possible tax base so allowing tax rates to
be kept as low as possible.
1-2 © DeVry/Becker Educational Development Corp. All rights reserved.

F6 Taxation (UK) Session 1 • General Concepts and Principles
1.2 Relevant Taxes

< The following taxes are examinable in Paper F6:
Tax Applies to
Income Tax Taxable incomes of individuals, including persons

deriving their income as profits of trades
conducted as unincorporated businesses (i.e. sole
traders and partnerships).
Corporation All types of taxable profits of companies, including

Tax gains arising on the disposal (i.e. usually a sale) of
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chargeable assets.
Capital Gains Chargeable gains of individuals derived from the

Tax (CGT)* sale or gift of chargeable assets.
*Many of the rules
Inheritance Capital transfers by way of gift or as a result of the of CGT are applied
to companies to
Tax (IHT)
Value Added
Tax (VAT)
National
Insurance
Contributions
(NIC)
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death of an individual.
Taxable supplies of goods and services made in the

UK and on importation into the UK by sole traders,
partners and companies registered for VAT.
The earnings of employees (for Class 1

contributions) and profits of self-employed persons
(for Classes 2 and 4 contributions). Where an
individual is an employee, his employer is also
liable to Class 1 NIC (based on employee earnings)
calculate gains liable to
corporation tax.
and Class 1A NIC (based on the taxable value of

employee benefits in kind).
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2 Taxability of Incomes, Gains and Transfers
2.1 Income Tax

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< A liability to UK income tax is established if:

= incomes arise within the territory of the UK; or
= incomes arise outside of the UK and the person entitled to
the income is resident in the UK for tax purposes.
2.2 Capital Gains Tax (CGT) The F6 syllabus

< A liability to UK CGT is established if the gain arises inside or is confined to the
taxation of incomes
outside the UK and the taxpayer is resident in the UK.
and gains arising in
the UK and to capital
2.3 Inheritance Tax (IHT) transfers of UK
< A liability is established if the transfer is of property located property only.
inside or outside of the UK, but if the latter only if the
transferor is domiciled (i.e. has a permanent home) in the UK.

2.4 Corporation Tax

< A liability to UK corporation tax on income or chargeable gains
is established if:
= income or gains arise within the territory of the UK; or
= the income or gains arise outside of the UK and the
company entitled to the income or making the gain is
resident in the UK for tax purposes.
2.5 Value Added Tax (VAT)

< A liability to UK VAT on a potentially taxable supply is
established if the place of supply is the UK.
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3 Taxable Periods
3.1 Tax Years for Personal Taxes
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< Income tax, CGT and NIC are assessed for the tax year
6 April to 5 April. 2014/15, the principal year for examination
purposes, is 6 April 2014 to 5 April 2015.
< IHT is assessed as and when a chargeable lifetime gift is
made or when a person dies, but the tax year 6 April to 5 April
is relevant for the application of certain exemptions and for
identifying when some tax is payable.
3.2 Accounting Periods for Corporation Tax

< Corporation tax is assessed for the chargeable accounting period
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of the company. This period can never exceed 12 months in
length and is usually the same as the period of account for
which the company prepares its annual financial statements.
3.3 Tax Periods for VAT

< VAT is assessed for a tax period, normally of three months.
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4 Tax Status
4.1 Meaning of Tax Status

< The tax status of an individual or corporate taxpayer is
fundamental in deciding whether or not that person or
company falls within a charge to a UK tax. Only residence rules
< The tax status of an individual is determined by reference to: are examinable in the
= the residence and domicile of that person for the purposes
F6 (UK) syllabus.
of income tax and CGT; and
= domicile for IHT.
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< The tax status of a company for the purposes of corporation tax
is determined by reference to the residence of that company.
4.2 Residence of an Individual

< The determination of residence is achieved (where there is any
<
= automatically UK resident; or
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doubt) by application of a statutory residence test. This test
has three stages, each with a number of criteria, to establish
whether an individual is:
= automatically treated as not resident; or
= subject to a review of ties to the UK (rather like badges

of residence).
The automatic overseas tests, which result in the individual
being treated as not UK resident, are:
i) If previously UK resident, less than 16 days spent in the
UK in the current tax year.*
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ii) If not previously UK resident in any of the three years, less *A day in the UK
than 46 days spent in the UK in the current tax year. usually means being
present in the UK at
iii) Working full-time overseas with no significant breaks, less
midnight.
than 91 days spent in the UK and less than 31 working
days in the UK.
< The automatic UK tests, which result in the individual being
treated as UK resident, are:
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i) Spending 183 days or more in the UK during a tax year.

ii) If the individual has a UK home, spending 30 or more
days present in it (unless an overseas home is also owned
and used).*
iii) Working full-time in the UK for any period of at least
365 days (with no significant break and at least 75% of *Thus a person whose
workdays in the UK). only home is in the
UK is automatically
< For individuals for whom neither overseas nor UK automatic resident.
tests are conclusive, residence is tested by considering a
number of indicative "ties" to the UK, together with the
number of days spent in the UK. The more ties that apply,
and the greater the number of days, the more likely a person
is to be UK resident.

Residence can be established using the following table (which

is provided in the rates and allowances sheet):
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
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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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The application of the ties test depends on whether or not the
person has been resident in the UK for any of the previous three
tax years. The five "ties" to be considered are:
i) Family tie (UK resident spouse, partner or child under 18).
ii) Accommodation tie (a place available to live in the UK for at
least 91 days).*
iii) Work tie—substantive work in the UK (40 or more days at
any time in the tax year).
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*This can include using
iv) 90-day tie—having spent more than 90 days in the UK in the home of a close
either of the previous two tax years. relative.
v) Country tie—spending more days in the UK than in any other

country in the tax year.*
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*This tie is only relevant to a person UK resident in any of the three

previous years (i.e. it is ignored for persons arriving in the UK).
It is therefore more difficult for a person resident in the UK to

become non-resident than it is for a person arriving in the UK to
remain non-resident.

Illustration 1 Individual's Residence
(a) Anna
Anna, not previously resident in the UK, was present in the UK for
42 days during the tax year 2014/15.
She will automatically be treated as not resident in the UK. (Less
than 46 days, not previously resident).
(b) Ben
Ben spent 60 days working in the UK during the tax year 2014/15.
While in the UK, he stayed at his family home.
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Ben has been in the UK too long to be automatically non-resident.
If his UK home is his only home, he will be automatically UK
resident. If he has another home abroad that he uses, residence
will be determined according to the number of ties and his previous
status.
(c) Charles
family in the UK.

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Charles was a UK resident and homeowner, working full-time in
the 2012/13 and 2013/14 tax years. In April 2014 he purchased a
property abroad where he stayed most of the year, but in January
to March 2015 he spent 60 days in the UK (42 of them working),
staying at his UK home, which he had kept on. Charles has no
Charles is in the UK too many days to be automatically non-

resident. Because of his overseas home and nine-month absence,
he also will not be automatically UK resident.
He has three ties (accommodation, work and 90-day ties, but not
family or country ties) and will therefore be UK resident.
Note: If Charles had arranged his work over only 38 days instead
he only would have two ties and would not, therefore, have been
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treated as UK resident.
4.3 Residence of a Company

< A company is resident in the UK for tax purposes if:
= it is incorporated in the UK; or
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= central management and control (CMC) of the company is

exercised in the UK.
< The incorporation rule states that, with certain exceptions,
a UK incorporated company is resident in the UK for tax
purposes and so taxed on its worldwide income.
< CMC means the highest level of control of the company or the
parent company of a subsidiary—normally, but not necessarily,
the board of directors.
< CMC is the primary test of residence for companies not
incorporated in the UK.

4.4 Double Taxation Agreements

Because it is possible for an individual, or a company, to be
resident in the UK and another country at the same time ("dual
residence"), or for a source of gains or income to fall under two
separate tax jurisdictions, the possibility of double taxation arises.
Double taxation agreements between contracting states aim to
ensure that tax is paid only once on profits, income or gains.
Typically, a double tax agreement will specify which territory has
the right to tax, and will act so that a person will:
< pay tax in the country of residence and get an exemption or
relief where the income arises; or
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< pay tax in the country of the income source and get an
exemption or relief in the country of residence.
Where no tax treaty exists, the UK allows unilateral relief to avoid
double taxation, whereby a tax credit is allowed equivalent to the
lower of either the UK tax liability on the foreign income or the
foreign tax actually paid overseas on that income.
5 UK Tax Administration
5.1 Tax Authority

PL
< Responsibility for the assessment and collection of UK taxes
lies with HM Revenue & Customs (HMRC).
< HMRC was formed in April 2005, following the merger of
the Inland Revenue and Her Majesty's Customs and Excise
departments. HMRC is responsible for the administration and
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collection of taxes and duties including income tax, corporation
tax, National Insurance and VAT. HMRC pays and administers
Child Benefit, Child Trust Fund and Tax Credits. In addition,
HMRC is responsible for National Minimum Wage enforcement
and the recovery of student loans.
 HMRC is a non-ministerial government department ultimately
accountable to the Chancellor of the Exchequer, but
functionally operating under the oversight of the Treasury.
SA
 Legal powers and responsibilities of the department are

vested in HMRC Commissioners appointed by the Queen, and
these Commissioners exercise their functions in the name of
the Crown.
 For governance purposes the department's reporting,
performance and strategic direction are reviewed by a board
of both executive and non-executive members.
5.2 Self-Assessment—All Taxes Except

Inheritance Tax
< The basic principle of the system is one of self-assessment
where the taxpayer:
i) makes regular tax returns (or declarations)—once a year
for income tax, CGT and corporation tax and at the end of
each tax period for VAT;
ii) calculates the related tax liabilities; and
iii) pays the tax due, unless already collected at source, by
the due date(s) set by HMRC.

< Each person liable to UK income tax or CGT is required to

submit a personal tax return and complete separate tax
computations for each tax year. For this purpose, husband
and wife and civil partners (i.e. same-sex married persons)
are separate persons.
< Each company liable to UK corporation tax must submit a
corporation tax return together with a tax computation for
each chargeable accounting period, even if a member of a
group of companies under common ownership.
< Deduction at source is applied for collection of some income
tax and NIC. This means that tax is deducted from income
by a third party before it is made available to the recipient.
E
The most important example in the UK is the Pay As You Earn
(PAYE) system operated by employers in relation to income
tax and NIC on the wages and salaries of their employees.
< Taxpayers—people and companies—have to make claims for
certain reliefs (e.g. losses) and specific tax treatments. Unless
another time limit applies, all claims must be made within four
years of the end of the:
= tax year (income tax and CGT);
= chargeable
or = tax period (VAT).
5.3 Inheritance Tax

PL
accounting period (corporation tax);
< Self-assessment does not apply to inheritance tax (IHT).

Instead, a relevant person is required to disclose information
relating to lifetime transfers and a person's estate at death,
and HMRC then determines the amount of tax due.
< Relevant persons are the transferor or transferee of a lifetime
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gift and the personal representatives of deceased person (e.g.
the executor of that person's will).
< The relevant persons are responsible for paying IHT
liabilities by the due date(s) set by HMRC.
5.4 Responsibilities of HMRC

< HMRC:
= Issues all tax returns;
SA
= Reviews these returns and may conduct compliance checks

into the content and accuracy of them;
= Manages the collection of the taxes; and
= Imposes interest and other penalties for the late payment
of tax, the late submission of returns and for the loss of tax
arising from inaccurate or fraudulent returns.
5.5 Professional Tax Advisers

< A taxpayer may appoint an accountant or other professional
adviser to complete tax returns, agree tax liabilities and to
deal with disputes and HMRC compliance checks.
< Use of professional assistance is most common for self-
employed persons running their own businesses and for
companies where an accountant is already preparing the
accounts or conducting an audit. However, wealthy individuals
with complex income structures, chargeable gains and estates
(for IHT purposes) also use professional advisers.

< Professional advisers must:

= Exercise their duties competently;
= Have due regard to potential conflicts of interest and not
benefit personally (apart from fees charged) from their
dealings with their clients;
= Keep proper records of their dealings with their clients and
HMRC; and
= Otherwise act in an ethical manner in accordance
with principles established by their professional body
(e.g. the ACCA).
< The main professional bodies have issued guidance on
E
the procedures to be followed in the event of a possible
irregularity in a client's tax affairs.*
= The adviser should explain the situation to the client and
*Tax offences that
recommend disclosure to HMRC. may amount to money
= If the client refuses to disclose after normal persuasive laundering include tax
advice, then formal written advice should be given evasion (see s.6.1)
<
=
=
=
=
PL
regarding the potential consequences.
Where the client still will not authorise disclosure, then the
adviser must cease to act, and also:
Advise the client they are no longer acting for them;
Notify HMRC they have ceased to act, if relevant;
If appropriate, consider whether to advise HMRC that
accounts or statements carrying a signed report can no
longer be relied upon;
Respond in a professionally appropriate and careful manner
to any professional clearance letter from a subsequent
and deliberate
refusal to correct
known errors.
adviser; and
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= Consider whether any reporting is required under money
laundering regulations. It would normally be good practice
to at least refer the issue to the Money Laundering
Reporting Officer (MLRO) within the advising member's firm.
Illustration 2 Intention to
Underpay Tax
SA
Anthony tells his tax adviser that he intends to underpay tax. This
would be tax evasion and a money laundering offence if he does so.
The tax adviser should apply his professional body's ethical guidance
to persuade Anthony to comply with the law. If Anthony' intention
still remains in doubt, the tax practitioner should consider carefully
whether he can continue to act for Anthony.

6 Tax Avoidance and Evasion
6.1 Tax Evasion

< Tax evasion is the illegal avoidance of tax achieved by
negligence or fraud (e.g. non-disclosure of income, chargeable
gains or transfers).*
*It includes making
6.2 Tax Avoidance false returns (including
< Tax avoidance is the minimisation of tax liabilities achieved supporting documents)
through the organisation of a taxpayer's financial affairs within and deliberate failure
E
the limits of tax law. In large measure, tax avoidance is the to submit returns.
utilisation of tax reliefs and exemptions and ensuring the lowest
rate(s) of tax ultimately apply to taxable incomes, chargeable
gains and transfers and taxable supplies for VAT purposes.
< Although legal, if a tax avoidance arrangement becomes too
costly for the government or is deemed to run contrary to the
6.3
PL
intention of the law, the tax advantages of the arrangement
can be removed by changes to the tax law (i.e. specifically
targeted anti-avoidance legislation).
General Anti-Abuse Rule (GAAR)

As an addition to specifically targeted anti-avoidance legislation,
the Finance Act 2013 introduced a code to control a whole general
class of tax avoidance arrangements.
This measure is called the General Anti-Abuse Rule
("GAAR"), and seeks to control those avoidance schemes and
arrangements that are considered particularly abusive. This is
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not a general anti-avoidance rule, but targets instead situations
of serious abuse through a "double reasonableness" test,
challenging those arrangements that "cannot reasonably be
regarded as a reasonable course of action" in relation to the
relevant tax provisions.
Where this type of arrangement is found, the effect of the GAAR is
to make such adjustments as are just and reasonable in order to
SA
counteract the tax advantage that would otherwise arise.

The GAAR has been developed with a wide degree of consultation
with the tax profession and other interested parties. It is not
likely to be widely used and its early applications will be followed
with interest; it may well be that its major effect is to act as a
deterrent to the implementation of abusive schemes rather than
challenging and adjusting them.

7 Sources of Tax Law
7.1 Statute
< Each year, one Finance Act (sometimes two) is passed
extending, reducing or modifying existing law. The last act
relevant to this exam is Finance Act 2014.
< When appropriate, the cumulative total of Finance Acts is
consolidated into unifying acts. These unifying acts now
comprise the following:
= Inheritance Tax Act 1984;
E
= Taxation of Capital Gains Act 1992 ("TCGA92");
= Social Security Contributions and Benefits Act 1992;
= Value Added Tax Act 1994;
= Capital Allowances Act 2001;
= Income Tax (Earnings and Pensions) Act 2003;
7.2
PL
= Income Tax (Trading and Other Income) Act 2005;
= Income Tax Act 2007 ("ITA07");
= Corporation Tax Acts 2009 and 2010; and
= Taxation (International and Other Provisions) Act 2010.
European Union Directives

< The European Union (EU) passes directives that apply to all
member states. In relation to tax, these mainly apply to VAT
and corporation tax.
7.3 Case Law

M
< Judgments made in the High Court, Court of Appeal, the
Supreme Court and the European Court of Justice may modify
or add to the body of statute law.
7.4 HMRC Statements of Practice and

Extra-Statutory Concessions
< Statements of Practice and Extra-Statutory Concessions are
SA
issued by HMRC to assist in interpreting the meaning and

application of the statute law.

Session 1
Summary
< Income tax applies to individuals, including those who earn profits from unincorporated
businesses (sole proprietors and partnerships).
< A multi-stage statutory residence test determines whether an individual is UK resident.
< Married couples and civil partners are separate taxable persons, as are children, although
parents are responsible for a child's tax affairs until age 18.
< Withholdings for income tax and NIC are usually made at source under the Pay As You Earn
(PAYE) system.
E
< Capital gains tax arising from the sale or gift of assets is assessed on individuals.
< Inheritance tax is assessed on lifetime capital transfers as well as the transfer of a deceased
person's estate.
< Corporation tax applies to all types of taxable profit of companies including chargeable gains.
< A company is resident in the UK if it is incorporated in the UK, or central management and
control is exercised in the UK.
<
<
<
<
<
period for each type of tax.
PL
Claims for certain reliefs, including losses, must be made within four years of the applicable
VAT is an indirect tax on the sale of goods and services by unincorporated businesses as
well as companies. It is assessed for a tax period, normally of three months.
The tax year for income tax, CGT and NIC is from 6 April to 5 April.
Corporation tax is assessed for a chargeable accounting period that can never exceed
12 months.
HMRC is ultimately responsible for tax assessment and collection. The tax regime of self-
assessment in the UK applies to all taxpayers and all taxes with the exception of IHT.
< Tax avoidance describes legal minimisation of tax liabilities. Tax evasion is illegal.
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SA

Session 1 Quiz
Estimated time: 25 minutes
1. State how a liability is established for:

• income tax; (2.1)
• CGT; (2.2)
• inheritance tax; (2.3)
• corporation tax; (2.4)
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• VAT. (2.5)
2. State the tax year for personal taxes. (3.1)
3. State the normal tax period for VAT. (3.3)
4. State the tests for establishing residence of an individual. (4.2)
5. State when a company is resident in the UK. (4.3)
PL
6. Name the tax authority responsible for assessing and collecting taxes in the UK. (5.1)
7. List the THREE responsibilities of tax payers under the UK self-assessment system. (5.2)
8. State what is meant by "deduction of tax at source" and the main example of its use. (5.2)
9. Distinguish between "tax avoidance" and "tax evasion". (6.1, 6.2)
Study Question Bank

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Priority Estimated Time Completed
Q1 Tax Status 45 minutes

SA

NOTES
E
PL
M
SA

Session 2
Income Tax Computations
FOCUS
E

3. Income from self-employment
tax liability
PL
a) Recognise the basis of assessment for self-employment income.
4. Property and investment income
f) Compute the tax payable on savings and dividend income.
5. The comprehensive computation of taxable income and income
a) Prepare a basic income tax computation involving different types of income.

b) Calculate the amount of personal allowance available generally and for people
born before 6 April 1948.
c) Compute the amount of income tax payable.
d) Understand the treatment of interest paid for a qualifying purpose.
e) Understand the treatment of gift aid donations and charitable giving.
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f) Explain and compute the child benefit tax charge.
g) Understand the treatment of property owned jointly by a married couple, or by
a couple in a civil partnership.
7. The use of exemptions and reliefs in deferring and minimising income
tax liabilities
a) Explain and compute the relief given for contributions to personal pension
schemes and to occupational pension schemes.
SA
b) Understand how a married couple or couple in a civil partnership can minimise

their tax liabilities.
Session 2 Guidance
Pay particular attention to the pro forma computational layout and how this then incorporates the
items covered later in the session.
Know the sources of earned income (s.2.1) and unearned income (s.2.2), the basic rules for "couples"
(s.2.4) and the two bases of assessment (s.2.5).
Work through Examples 3 and 4. Personal allowances (s.3) are given in the examination. Examined
most frequently are the extension of the basic band (pension/charity donations) and using the
restriction rule (s.3.3).
(continued on next page)
F6 Taxation (UK) Session 2 • Income Tax Computations
VISUAL OVERVIEW
Objective: To prepare in a suitable format the income tax computation for an individual,
taking into account the different sources of income and the availability of relevant deductible
allowances and reliefs.
INCOME TAX COMPUTATION
E
• Introduction
• Pro Forma
INCOME PERSONAL
ALLOWANCE (PA)
• Earned
•
•
•
Unearned
Exempt
Married Couples
and Civil Partners
• Basis of
Assessment
DEDUCTIONS FROM TOTAL

PL INCOME TAX PAYABLE
• Tax Rates and
Taxable Income
• Special Case—10% Rate
• Basic Rules
• Persons Born After
5 April 1948
• Persons Born
Before 6 April 1948
MARRIED COUPLES AND

INCOME FAMILY
M
• Summary • Utilising PA and Basic
• Qualifying Loan Interest Rate Band
• Tax-Free Investments
• Gifts to Charity
• High Income Child
Benefit Charge
SA
DONATIONS TO CHARITIES PENSIONS

• Payroll Gifts • Types
• Gift Aid • Personal Schemes
• Extended Basic and Higher • Personal Schemes and PA
Rate Relief • Occupational Schemes
• Gift Aid and PA • Additional Matters
Session 2 Guidance
Understand what is meant by "qualifying loan interest" (s.5.2) and attempt Example 5.
Work carefully through charitable donations (s.6) and pensions (s.7) as they are regularly
examined.
Read through tax planning for "married couples" (s.8); it may also feature as part of a question.

Session 2 • Income Tax Computations F6 Taxation (UK)
1 Income Tax Computation
1.1 Introduction Foreign taxable

incomes (i.e. amounts
< Income tax is a tax levied on individuals by reference to their arising outside UK)
taxable income for a tax year. are not examinable
< Taxable income is an individual's total income liable to income in F6.
tax (i.e. not specifically exempt) less certain deductible amounts.
< In order to calculate a tax liability, tables of rates, allowances
and other information must be used.*
E
Illustration 1 Tax Liability
Computation
*The tables are
For 2014/15 an individual has taxable income of £160,000. His tax included at the
liability will be computed as follows (using the income tax rates from front of this Study
the table): System and should
be referred to when
£
31,865 @ 20%
118,135 @ 40%
10,000 @ 45%
160,000
PL £
6,373
47,254
4,500
58,127
< The key to a successful tax computation is a standardised

computational approach which must be learned and applied.
undertaking a tax
computation.
M
SA

1.2 Pro Forma Income Tax Computation, 2014/15

£ £
Earned income
1. Profits of an unincorporated trade
x
Less: Relief for an earlier trading loss
2. Employment income x
3. Pensions x
4. Rents from furnished holiday accommodation x
x
E
Unearned income
1. Dividends on shares (gross) x
2. Interest
from banks and building society deposit
accounts (gross), corporate loan stocks and x
government bonds
3.
accommodation
Total income
Less: (1) Qualifying interest paid
PL
Rent from property other than furnished holiday
(2) Loss relief set off against total income
Net income
x
(x)
(x)
x
x
(x)
x
Less: Personal allowance (x)
M
Taxable income x
Tax thereon at appropriate rates x
Income tax liability x
Less: Tax collected at source on income (x)
Income tax payable x
SA

2 Income
2.1 Earned Income
Earned Income
E
Employment Rent from
Income (Note 1) Pensions Trading Profits furnished
holiday
Earnings from
employment principally
1. Pay received
(e.g. salaries)
2. Cash equivalent
values of taxable
PL Pensions
(both
state and
private)
Adjusted trading
profits arising from
self-employment
conducted by
unincorporated
businesses
(i.e. sole traders
accommodations
in the UK
benefits (e.g. use

and partnerships)
of company car)
M
Taxable earnings = Adjusted profits = Rent = gross
gross amounts less accounting net profit on an rent accrued
allowable expenses accruals basis as adjusted less allowable
of employment for tax purposes (Note 3) expenses
SA
Tax generally collected at Tax collected Tax collected

source under PAYE, by self- by self-
otherwise by self-assessment (Note 2) assessment assessment
Notes:
1. See Session 4 for details of employment income.
2. See Session 17 for details of the PAYE system and of self-assessment.
3. See Session 5 for details of the process of adjustment of trading profits.

2.2 Unearned Income
Unearned Income
Rents from furnished
E
Dividends
and unfurnished lettings
Interest
(excluding furnished
holiday accommodation)
PL
Arising gross on
1. National
Savings &
Investments
(NS&I)
2. UK
government
gilt-edged
Arising net of 20%
tax at source on
1. Bank deposits
2. Building
society interest
Arising net
of 10% tax
deemed
deducted at
source
(see Key
Point below)
securities
M
Rent = gross rent Gross equivalent included in the tax
accrued due less computation for higher rate purposes
allowable expenses i.e. amount received × 100⁄80 or 100⁄90
SA
Tax at all rates collected Tax not collected at source

by self-assessment collected by self-assessment
The tax credit on dividends is a deemed tax credit because the paying
company does not actually deduct tax when paying the dividend.
Therefore, although recognised as tax already paid at source
by the shareholder it is not refundable to a shareholder who is a
non-taxpayer.

2.3 Exempt Income

< Some (but not many) types of income are exempt from
income tax.
< The main examples of exempt income are:
= Income from letting a room in the taxpayer's own home
(see Session 3);
= Certain investment incomes (see Session 3);
= Certain employment incomes and benefits (see Session 4);
= Interest on tax repayments made to individuals; and
= Betting and gaming winnings (including the National Lottery
and Premium Bonds).
E
2.4 Income of Married Couples and Persons
in a Civil Partnership
< Each spouse or civil partner is separately assessed for income
tax purposes on his own taxable income including appropriate
shares of income from jointly-owned assets. (That is, a
< PL
separate income tax computation is prepared for each spouse
or civil partner for each tax year.)
Income arising from jointly-owned assets will be split equally
(i.e. 50:50) between the spouses or civil partners unless
the taxpayers make a joint declaration to split the income
according to their actual interests in the assets.*
*Ways in which a
married couple can
reduce their exposure
to income tax are
discussed later in
this session.
M
SA

2.5 Basis of Assessment—Actual or Current Year
Two Bases
E
Actual Current Year
Means income received or Means trading profits accruing for the
For example, income arising

between 6.4.14–5.4.15
is assessed in 2014/15.
PL
accrued in the current tax year
is assessed in this SAME tax year.
whole accounting period ENDING in
the current tax year are assessed in
that tax year. For example, profit for
the 12 months to 30.6.14 is assessed
in 2014/15.
Applies to all income Special rules apply:

except trading profits. • in the first three tax years of a trade—
M
the "opening years" (Note 1);
• in the last tax year of assessment
(Note 1);
• when the accounting date is
permanently changed (Note 2).
SA
Notes:
1. See Session 5 for details of the current year basis as it applies in the opening years and
on cessation of the trade.
2. The detailed rules applying when the accounting date is changed are no longer
examinable within the F6 syllabus.
< The current year basis (CYB) is used because UK trading

enterprises are allowed to choose their own accounting
dates rather than, as in some other countries, being obliged
to prepare accounts for the tax year itself. Applying this
convention means that unless a self-employed person liable to
income tax chooses to prepare accounts for the year ending
5 April, the use of the actual basis would mean that a single
tax year's assessment would use the profits of parts of two
adjacent accounting periods instead of only one. This is clearly
impractical and the solution was the adoption of the CYB.

Illustration 2 Accounting Dates
Three self-employed persons, A, B and C, have each adopted

different accounting dates as follows:
A: Year ended 5 April
B: Year ended 31 December
C: Year ended 30 April
The basis periods under the CYB for 2014/15 are as follows:
A: Year ended 5 April 2015. This would have been the same
under the actual basis as the accounting period = the tax year
2014/15.
E
B: Year ended 31 December 2014. The whole profit of this
accounting period is assessed in 2014/15 although only
nine months of the profits actually accrue in the tax year
beginning 6 April 2014. The logic of the CYB means that the
whole of the profits of the year ended 31 December 2015 will be
assessed in 2015/16.
C: Year ended 30 April 2014. The whole profit of this accounting
3
PL
period is assessed in 2014/15 although only one month of the
profits actually accrue in the tax year beginning 6 April 2014.
Again, the logic of the CYB means that the whole of the profits of
the year ended 30 April 2015 will be assessed in 2015/16.
Personal Allowance
3.1 Basic Rules

M
< Personal allowance ("PA") is a specific tax amount given to
each taxpayer for each tax year with the effect of raising the
starting point of income tax.
< PA is deducted from net income. If PA exceeds net income,
the unused amount cannot be carried forward to the following
tax year or transferred to a spouse or civil partner.
3.2
SA
Persons Born After 5 April 1948

< A person born after 5 April 1948 qualifies for the standard PA
of £10,000 for 2014/15.
< If the taxpayer's net income exceeds £100,000, the PA is
reduced to nil at the rate of £1 for every £2 that net income
exceeds £100,000.
< As a result, taxpayers with net income in excess of £120,000
will have no personal allowance.*
*The effect of this progressive reduction of the personal allowance is

that net incomes between £100,000 and £120,000 actually suffer an
effective marginal tax rate of 60%.

Example 1 Personal Allowance
Brown was born in 1980.

Required:
Calculate his taxable income assuming his net income for 2014/15 is:
(1) £60,000;
(2) £110,000;
(3) £120,000.
Solution
E
£ £ £ £
(1) (2) (3)
Total income = net income 60,000 110,000 120,000
(1) PA
(2) PA
Less:
(3) PA
Less:
Taxable income
PL
M
3.3 Persons Born Before 6 April 1948*
< If an individual is born before 6 April 1948, he is entitled to a
higher PA:
= £10,500 if born between 6 April 1938 and 5 April 1948; or *The previous regime
= £10,660 if born before 5 April 1938.
of higher age-related
allowances has now
However, if the taxpayer's net income is more than the
SA
< been replaced, and

income limit for persons born before 6 April 1948 (£27,000 as the allowances
for 2014/15) the relevant higher PA is reduced to £10,000 at for persons born
the rate of £1 for every £2 that net income exceeds £27,000. before 6 April 1948
< This rule ensures that the higher PA is only given to people are not planned to
increase year on year,
with comparatively low incomes. The minimum PA will be
the benefit to older
£10,000 unless the person has net income of more than persons is effectively
£100,000, when, as for people born after 5 April 1948, the being phased out.
PA can be lost altogether.
Levels of personal allowances and income limits are given in the rates
and allowances sheet.

Example 2 Persons Born Before 6 April 1948
Mr Smith was born on 1 April 1948.

Required:
Calculate his taxable income assuming his net income for 2014/15 is:
(1) £16,000;
(2) £27,500;
(3) £32,000.
Solution
E
£ £ £ £
(1) (2) (3)
Net income 16,000 27,500 32,000
(1) Higher PA
(2) Higher PA
Less 1⁄ (
2
Minimum amount = £
(3) Higher PA
Less 1⁄ (
2
PL
−27,000)
−27,000)
Minimum amount = £
M
Taxable income
SA

4 Calculation of Income Tax Payable
4.1 Tax Rates and the Composition

of Taxable Income
< The rates of income tax not only change with the level of
taxable income (i.e. basic and higher rates) but also according
to its composition (i.e. dividends, savings income and other
income) as follows:
Dividends Savings
E
% Income %* Other %
Basic rate
10 20 20
£1–31,865
Higher rate
32.5 40 40
£31,866–150,000
Additional rate
£150,001 or more
PL 37.5 45
*Savings income is all forms of interest received (i.e. from banks

and building societies and interest on corporate loan stocks and
government bonds).
45
Other income is all income except dividends and savings income.

M
< In order to correctly tax these different components of
income, taxable income must be analysed between:
= "dividends" (deemed to be the "top slice" of taxable income);
= "savings income" (deemed to be next slice of taxable
income); and
= "other income" (deemed to be balance of taxable income).
SA
< PA is deemed to relieve other income first, then savings

income and then dividends (i.e. it is used in the most
beneficial way).

Example 3 Income Tax Payable

(a) Robert, a single man born in 1963, has the following incomes and
outgoings for 2014/15:
£
Earnings of employment 30,600
Bank interest received 8,000
Dividends received 1,800
Tax of £4,232 was deducted at source from the £30,600 of employment income under
the Pay As You Earn (PAYE) scheme.
Required:
E
Calculate the income tax payable by Robert for 2014/15.
Solution
(a) Higher rate taxpayer
Income tax computation, 2014/15
£ £
Earned income
Unearned income
Dividends (gross)
Interest (gross)
PL
Total income = net income
Less: Personal allowance
Taxable income
Analysis
M
£
1 = dividends (= top slice)
2 = savings income (interest)
3 = other (= balance of the taxable income)

SA
Income tax
£ % £
Other income
Savings income
Dividends
Dividends
Income tax liability

Less: Tax credits
Dividends
Interest
PAYE
Income tax payable

Example 3 Income Tax Payable (continued)

(b) Facts as in (a) above except Robert's employment income is £143,000 and
tax deducted at source under PAYE is £50,798.
Required:
Calculate the income tax payable by Robert for 2014/15.
Solution
(b) Additional rate taxpayer
£ £
Earned income
E
Employment income
Unearned income
Dividends (gross)
Interest (gross)
Taxable income
Analysis
2
= dividends (= top slice)
= savings income (interest)

PL £
3 = other (= balance of the taxable income)

M
Income tax
£ % £
Other income
SA
Savings income
Savings income
Dividends

Less: Tax credits
Dividends
Interest
PAYE
Income tax payable

4.2 Special Case—10% Rate on Savings Income

< Where other income does not exceed £2,880 for 2014/15,
savings income is taxed at the rate of 10% until total taxable
income reaches £2,880. Thereafter, savings income is taxed
at 20%, 40% and 45% in accordance with the table of rates
given previously. The 10% rate and the
< In practice, the 10% rate or savings income will typically apply £2,880 limit are also
to the following taxpayers: given on the rates
and allowances table
= Children with substantial savings incomes but no
in the exam.
employment income (not examinable in Paper F6);
= Spouses with substantial savings income but insignificant
E
income from employment, self-employment or property
rentals;
= People born before 6 April 1948 whose pensions are largely
excluded from tax due to the higher personal allowance.
Example 4 Basic Rate Taxpayer—

10% Rate on Savings
PL
Jean was born in 1946. Her income for 2014/15 is as follows:
State pension (no tax deducted at source).

Private pension (£117 of tax deducted at source under PAYE)
Dividends received
Building society interest received
£
5,587
5,500
1,800
3,600
Required:
M
Calculate the income tax payable by or repayable to Jean for 2014/15.
SA

Example 4 Basic Rate Taxpayer—

10% Rate on Savings (continued)
Solution
£ £
Earned income
Pensions—state
Pensions—private
E
Unearned income
Dividends
Interest
Taxable income
Analysis
Dividends = top slice

PL £
Savings income
M
Other income
Income tax
£ % £
Other income
SA
Savings income
Dividends
Taxable income

Less: Dividends
Interest
PAYE
Income tax payable/(repayable)

5 Deductions From Total Income
5.1 Summary
< Deductions from total income, irrespective of the nature of
that income, are deducted in arriving at net income.
< They are deducted before personal allowance.
< Those relevant to Paper F6 are:
= relief for interest on qualifying loans; and
= relief for trading losses relievable against total income (see
E
Session 7).
< Relief for qualifying loan interest is taken before loss relief
because an unrelieved trading loss, but not unrelieved
interest, may be carried forward for relief in future tax years.
5.2 Qualifying Loan Interest
<
PL
< This is interest on a fixed loan (not a bank overdraft) taken
out for a qualifying purpose.
Qualifying purposes include:
= The purchase of an interest in a partnership by a full equity
partner (or prospective partner). This relief is particularly
useful to a new partner borrowing money to finance his
investment in the firm's capital.
= The purchase of ordinary shares in a close trading company
by a shareholder who has/will have ≥ 5% of the ordinary
The F6 examiner does
not require candidates
to understand either
the definition of or the
detailed consequences
of being a close
company.
share capital of the company.
= Purchase of plant and machinery by a partner on behalf
M
of his firm or shareholder on behalf of his close trading
company or by an employee for use in his employment.
Relief in this case is only given for three tax years.
< Tax relief as a deduction from total income is capped at
a maximum of the greatest of £50,000 or 25% of the
individual's adjusted total income.
This cap on income

SA
tax reliefs will only

be examined where
trading loss relief
is claimed against
total income (see
Session 7).

Example 5 Relief for Qualifying Loan Interest
Alice is single and self-employed. She had the following income for 2014/15:
£
Tax adjusted trading profits 48,000
Bank interest (gross) 1,000
During 2014/15, Alice paid £2,000 of interest on a loan taken out in 2010 to finance her
contribution to the capital of the firm in which she is a partner.
E
Required:
Calculate the income tax payable by Alice for 2014/15.
Solution
£
Earned income
Trading profits
Unearned income
Bank interest (gross)
Total income
Less: Qualifying loan interest
Net income
PL
Less: PA
M
Taxable income
Analysis of income
£
Savings income
SA
Other income
Tax
£ % £
Other income
Savings income

Less: Tax paid at source
Income tax payable/(repayable)

6 Donations to Charities
6.1 Payroll Gifts

< Where an employer sets up an approved payroll giving
scheme, employees may treat gifts to charity that are made
out of their salaries as allowable expenses of employment for
income tax purposes.
< Although the relief is strictly given as a deduction from
employment income in the income tax computation, relief is
actually given at source under PAYE (i.e. the employer deducts
E
the gift(s) from the employee's salary before the salary is
taxed at source.)
< The payroll gifts deducted must be authorised by the
employee and paid to the designated charity (or charities)
through an HMRC-approved agent.
< There is no limit to the amount an employee can give in each
tax year.
PL
6.2 Donations Under the Gift Aid Scheme
< Any taxpayer, irrespective of the composition of his total
income, can make donations to charity under the gift aid
scheme. The donations can be one-off single payments or a
series of payments over time.
< Any amount can be donated in a tax year and attract tax relief.
< Strictly speaking, gift aid donations to charity rank as
deductions from total income like qualifying loan interest (see
s.5.1). However, the UK tax system deals with the relief in
M
different ways as follows:
= Basic rate taxpayers—20% relief is given at source when
the payment is made (i.e. taxpayer only pays the net
amount (80%) to the charity and the payment is ignored
in the income tax computation as complete relief has been
given at source).
= Higher and additional rate taxpayers—20% relief given at
SA
source (as above), but higher and additional rate relief is

given in the income tax computation by "extension" of the
higher and additional rate bands (see s.6.3).
< Charities, as non-tax payers, are entitled to the gross amount
of the donations. They reclaim direct from HMRC the basic rate
tax relief given at source to the donors.

6.3 Extended Basic and Higher Rate Relief

(EBHR)
< Where the donor taxpayer's taxable income before considering
higher rate relief for gift aid is more than £31,865—the normal
higher rate threshold for 2014/15—the gift aid donations
attract higher rate relief by extending the basic rate band.
< Similarly, if the donor taxpayer's taxable income before
considering additional rate relief for gift aid is more than
£150,000—the normal additional rate threshold for 2014/15—
the gift aid donations attract additional rate relief through
extending the higher rate band.
E
< Extension of the basic and higher rate bands is applied by
adding the gross amount of the gift aid payment—the actual
amount paid × 100⁄80—to £31,865 and £150,000, thereby
raising the starting point for higher and additional rate tax.
Thus higher and additional rate relief for the payment is given
by taxing an equivalent amount of income at 20% or 40%
(instead of 40% or 45%).
PL
< If the raised thresholds affect dividend income (as opposed to
savings or other incomes), the adjusted rates will be 10% or
32.5% (instead of 32.5% or 37.5%).
M
SA

Example 6 Relief for Charitable Donations
Katherine and Simon are husband and wife, both aged 33 years. The following information
relates to 2014/15:
Katherine Simon
Salaries from employment 20,000 50,000
Payroll gift to charity — 1,000
Gift aid donation to charity 800 1,600
The amounts paid to charity under both the payroll giving and gift aid schemes are the actual
amounts paid, where appropriate net of 20% tax relief at source.
E
Required:
Calculate the income tax liability of Katherine and Simon for 2014/15.
Solution
Income tax computations, 2014/15
Katherine Simon
£ £
Earned income
Employment salaries
Less: Payroll gift
Less: PA (W1)
Tax
PL
Taxable incomes (= other income)
% £ £ £ £
Other income
Basic rate
M
Extended basic rate (W2)
Higher rate
Income tax liabilities

SA
Workings
(1) Adjusted net income for personal allowance
K S
£ £
Net income
Less: Gross gift aid
Adjusted net income
(2) Extended basic rate band—Simon

£
Normal higher rate threshold
Add: Gross gift aid

Revised threshold

6.4 Gift Aid and Personal Allowance

< A gift aid payment is strictly a deduction from total income
because it is deductible irrespective of the composition of the
taxpayer's total income (see s.6.2). This is not, however, how
the tax relief is normally given (see s.6.3).
< The strict treatment of gift aid is, however, applied for the
specific purpose of determining eligibility for the full amount of
PA. This matters in two circumstances:
= the donor has net income exceeding £100,000; or
= the donor, being born before 6 April 1948, is entitled to Adjusted net income
the higher PA and his net income exceeds £27,000. is net income less the
E
< Where gift aid payments are made, adjusted net income gross amount of gift
(instead of net income) must be used to determine whether aid paid.
the full PA entitlement is available.
Example 7 Gift Aid and Higher PA
Solution
Net income
PL
Donald was born in 1946. His net income for 2014/15, ignoring a payment of £800 to a
charity made under gift aid scheme, is £28,900.
Required:
Calculate his taxable income for 2014/15.
£ £ £
Less: PA
M
Net income
Less: Gift aid (gross)
Adjusted net income

Less: Income limit
SA
Taxable income

7 Pensions
7.1 Types of Pension

7.1.1 State Pension (the National Insurance Retirement Pension)
< A person's state pension is funded from national insurance
contributions payable by employees, their employers and
the self-employed. (See Session 17 for details of national
insurance).
< National insurance contributions do not normally rank as a
E
deductible payment for income tax purposes. However, income
(or corporation) tax relief is given, as a business expense, for
the contributions paid by employers as these represent an
additional cost of employing an individual in a business.
< The annual pension received is treated as taxable earned
income of the retired person.
7.1.2 Private Pensions
PL
< There are two types of private pension schemes; occupational
pensions and personal pensions:
Occupational pensions (i.e. a pension

scheme run for the employer's own
staff and partly or wholly funded by
Personal pensions (i.e. a pension
scheme funded by an individual for
his own benefit)
the employer)
M
Usually available to all staff, but Available to any person even
membership not obligatory if already a member of an
occupational pension scheme
SA
Tax relief for contributions into a registered pension scheme

(i.e. a scheme approved by HMRC)
Pension received on retirement usually taken either wholly as an annuity

(taxable) or partly as a lump sum (tax exempt) and partly as an annuity
(taxable). The tax-free lump sum cannot exceed 25% of the individual's total
pension fund available at the date of retirement.

7.2 Relief for Contributions Paid Into Personal

Pension Schemes
< An individual policyholder can claim income tax relief for the
contributions he makes into a personal pension scheme (PPS)
up to 100% of the amount of his relevant earnings for the tax
year in which the contributions are paid.
< Relevant earnings of the tax year are those liable to UK tax
and include:
= employment incomes—pay and benefits;
= tax adjusted trading profits arising from a
self-employment; and
E
= net rents from the letting of furnished holiday
accommodation.
< Contributions are paid net of 20% tax relief at source, even if
the policyholder is a non-taxpayer.
< If the taxpayer is not entitled to higher or additional rate relief,
the contributions are ignored in the personal tax computation.
<
7.3
PL
If higher or additional rate relief is appropriate, this relief is
given by EBHR in the tax computation (as for gift aid).
Personal Pension Contributions

and Personal Allowance
< Strictly, personal pension contributions should be a deduction
from net relevant earnings in the income tax computation.
However, as explained (in s.7.2) this is not how the tax relief
is given.
< As already explained in relation to gift aid payments (see
M
s.6.4), adjusted net income must be used to determine
whether the full amount of PA is awarded. This principle
also applies where the taxpayer pays personal pension
contributions (i.e. adjusted net income is net income less the
gross equivalent of personal pension contributions paid).
SA
If both gift aid and personal pension contributions are paid, then both
amounts (grossed up) must be deducted from net income.

Example 8 Relief for Pension Contributions
Parks is a single man born in 1975. He is not enrolled in an occupational pension scheme but
is a member of a personal pension scheme. The following figures relate to him for 2014/15:
£
Employment income—salary 160,000
Personal pension contributions paid in 2014/15 38,000
Required:
Calculate Parks' income tax liability for 2014/15.
E
Solution
Income tax liability 2014/15
£
Earned income
Employment income = net income
Less: PA (W1)
Other income
PL
Taxable income (= other income)
Tax
– basic rate
– EBHR (W2)
£ % £
– higher rate
M
– EBHR (W2)
Workings
SA
(1) Personal allowance
£
Net income
Less: Gross personal pension contributions
Adjusted net income
(2) Extended basic/higher rate relief
Higher rate Additional rate

£ £
Normal threshold
Add: Gross personal pension contributions
Revised threshold

7.4 Relief for Contributions Paid Into

Occupational Pension Schemes
< An employee who is a member of his employer's occupational
pension scheme (OPS) can claim income tax relief on the
same basis as an individual claiming relief for personal pension
contributions (i.e. relief given for contributions up to 100% of
his relevant earnings for the particular tax year).
< However, unlike PPS relief:
= Contributions are paid gross into the scheme (i.e. no basic
rate relief is given at source); and
= Tax relief at all rates is given by deducting the contributions
E
from the employee's employment income.
< Additionally, employers make contributions into occupational
pension schemes. Their contributions are:*
= A tax deductible trading expense for determining the income
or corporation tax on trading profits;
= Treated as tax-free income of the employee (i.e. an exempt
PL
benefit for income tax purposes).
*Employers can also make contributions into personal pension

schemes. In this case the tax arrangements are identical to those
just described for contributions into occupational schemes.
M
SA

Example 9 Occupational Pension Contributions
Facts as for Example 8, except Parks was a member of his employer's occupational pension
scheme. The following figures relate to him for 2014/15:
Employment income £ £
Salary 126,500
Employer's contributions into occupational pension scheme 28,500
155,000
Employee's contributions paid into occupational pension scheme 19,000
Required:
E
Calculate Parks' income tax liability for 2014/15.
Solution
Income tax liability 2014/15
£ £
Earned income
Employment income:
Salary
PL
Less: Employee's pension contributions
Benefit = employer's pension contributions

Less: Exemption

M
Less: PA
Taxable income (= other)
£ % £
Other income – basic rate
– higher rate
SA

7.5 People With Relevant Earnings Not

Exceeding £3,600
< Individuals who contribute to a personal or occupational
pension scheme can obtain tax relief (limited to the basic rate
of 20%) at source on contributions up to £3,600 (gross) per
tax year if:
= they do not have any relevant earnings (e.g. a person who
is working abroad and whose earnings are not taxable in the
UK); or
= relevant earnings do not exceed £3,600.
7.6 Annual Allowance
E
< The annual allowance is the total pension input that qualifies
for income tax relief in a tax year.
<
PL
Total pension input—the sum of all the contributions paid by an
individual and his employer into personal and occupational schemes.
< The annual allowance for 2014/15 is £40,000 plus the unused
annual allowance brought forward for the three previous tax
years (2011/12, 2012/13 and 2013/14).
The limit in these earlier years was £50,000, so the unused
allowance for an earlier tax year is £50,000 less the total
pension input for that year.
M
< Unused allowance cannot arise for any tax year in which the
taxpayer is not a member of a registered pension scheme.
< If the annual allowance includes unused allowance from earlier
tax years, pension contributions must be matched with the
current year's allowance and then with the unused amounts on
a FIFO basis (i.e. earliest year first).
< As unused allowance cannot be carried forward for more
than three tax years, a taxpayer with unused allowance must
SA
make pension contributions in the current tax year of at least

£40,000 plus the unused allowance of the earliest tax year if
potential tax relief is to be maximised.
7.7 Annual Allowance Charge

< Where total pension input is in excess of the annual allowance,
the excess tax relief is clawed back by way of an annual
allowance charge. The basic and highest rate bands are
extended by the full amount of contributions, but the annual
allowance charge is added to taxable income and taxed at the
individual's marginal rate.

Example 10 Unused Annual Allowance
Jack, born in 1975, is self-employed and has been a member of a registered personal pension
scheme since 2004.
He paid pension contributions prior to 6 April 2014 as follows:
£
2011/12 28,000
2012/13 40,000
2013/14 32,000
His income for 2014/15 is:
£
E
Tax adjusted trading profits 160,000
Bank interest received (gross) 1,000
Required:
(a) Calculate the income tax liability of Jack for 2014/15 assuming he pays sufficient
personal pension contributions in 2014/15 to utilise the maximum pension
annual allowance available to him for that year.
(b)
(a)
PL
Advise Jack as to the minimum amount of personal pension contributions
he should pay in 2014/15 if he is not to waste any of his pension annual
allowance available for 2014/15.
Solution
Earned income
Adjusted trading profits
Unearned income
£
Bank interest received (gross)

M
Less PA (W1)
Taxable income
Analysis of income: Dividends
Savings income
Other
SA
£ % £
Tax: (W3)
Other income:
Savings income

Example 10 Unused Annual Allowance (continued)
Workings
£
Net income
Less: Gross personal pension contributions (W2)
Adjusted net income
(2) Personal pension contributions
E
Because Jack has unused annual allowances brought forward, the maximum tax
effective pension contributions are:
£
Current annual allowances for 2014/15
+ unused annual allowances b/f
(3)
2011/12
2012/13
2013/14
PL
Extended basic and higher rate bands

£ £
Normal thresholds
M
Add: Gross personal pension contributions (W2)
Revised threshold
(b) Minimum tax effective personal pension contributions for 2014/15

SA
< If the total pension input in a tax year exceeds the annual
allowance (including any unused amounts) available for that
tax year, the excess does not attract tax relief. This excess
pension input problem is addressed by:
= initially giving relief for all contributions paid by the
individual and his employer; and
= treating the excess as additional taxable income chargeable
to income tax at the taxpayer's marginal rate of tax
(i.e. 20%, 40% or 45%).

Example 11 Pension Relief With Excess Pension Input
Kenneth, born in 1952, is self-employed. In 2014/15 he paid personal pension contributions (net)
of £48,000. His pension annual allowance is £40,000 and he does not have any unused annual
allowances brought forward at 6 April 2014. His only income for 2014/15 is tax-adjusted trading
profits of £220,000.
Required:
Calculate the income tax liability of Kenneth for 2014/15 taking into account the effect
of the overpayment of pension contributions for 2014/15.
Solution
Income tax computation, 2014/15 £
Earned income
E
Adjusted trading profits = total = net income
Less: PA (W1)

£ % £
Tax: (W2)
Other income:
PL
Add: Annual allowance charge
M
Workings
£
Net income
SA

Adjusted net income
(2) Extended basic and higher rate bands

£ £
Normal thresholds
Add: Gross personal pension contributions (W1)
Revised threshold
7.8 Lifetime Allowance Charge

< When a person retires and withdraws his pension benefits,
and the value of those benefits exceeds the lifetime allowance
(£1,250,000 for 2014/15), any value in excess of this Lifetime allowance
allowance limit will be additionally taxed as follows: charge will not
be examined
= Amount taken as a tax-free lump sum—at 55%;
computationally.
= Amount taken as a taxed annual pension—at 25%.

8 Married Couples and Family

< For the purpose of this section, a married couple means either a
husband and wife or same-sex partners in a civil partnership.
8.1 Utilisation of Personal Allowances and Basic

Rate Bands
< As separate tax payers, each spouse is entitled to a full
or partial personal allowance (unless adjusted net income
exceeds £120,000) and the use of the basic rate tax band of
£31,865 each.
E
< Full utilisation of these reliefs is achieved by:
1. Both spouses working. In this context, if a husband is
running his own business and his wife can only work part-
time in the business (due to parenting commitments) her
employment can produce a double tax saving—once for
the husband as an allowable trading expense (provided
tax by her PA.

PL
that remuneration is reasonable for duties undertaken) and
again because her salary is wholly or partly sheltered from
Alternatively, where participation of both spouses in the

business is significant and they are business partners or
shareholder-directors of a company, exposure to higher or
additional rate income tax is minimised by an equal split of
remuneration.*
2. An appropriate division of ownership of income-generating
*HMRC does not
normally question
the profit-sharing
arrangement for a
trading business.
investments—rented property, shares and bonds, bank and

building society accounts and National Savings products. If
M
a single asset is jointly owned, income is presumed to be
shared 50:50. A joint declaration can, however, be made
to split income according to actual ownership.
8.2 Tax-Free Investments

< Exposure to tax can be minimised by each spouse making
tax-free investments, including:
SA
= a maximum tax-free annual investment in a New Individual

Savings Account (see Session 3);
= holding the maximum entitlement to exempt National
Savings Certificates (see Session 3);
= the maximum affordable contributions into a registered
personal or occupational pension scheme.
8.3 Gifts to Charity

< If charitable donations are being made by payroll giving or
gift aid, they should be made by the spouse/partner liable to
higher and additional rate tax.

8.4 The High Income Child Benefit Charge

< Child benefit is a payment that can be claimed by a person
responsible for a child up to the age of 16 (or older if in full-
time education or training). The benefit is payable irrespective
of the recipient's level of income, but only can be claimed by
one person (usually, but not necessarily, the child's mother).
< From January 2013, a tax charge has been introduced in an
attempt to restrict the value of this claim so that the benefit is
targeted more to lower-income households. This is called the
High Income Child Benefit Charge (or, as shown on the rates
and allowances sheet, the Child Benefit Income Tax Charge).
E
< The charge is made where an individual has an adjusted
net income of over £50,000 in the tax year and is in receipt
of child benefit, or is living with a partner in receipt of child
benefit. The charge is made on the partner with the higher
adjusted net income.* *Adjusted net income
< The tax charge is calculated as 1% of the chid benefit received is after loss relief,
for each £100 of adjusted net income in excess of £50,000. qualifying interest
PL
Where adjusted net income is in excess of £60,000, all of the
value of the child benefit is therefore charged.
< Liability to the tax charge should be declared by self-
assessment in the tax return, with payment due dates and
payments on account the same as for income tax.
< In order to simplify matters, there is an election available for
a person eligible to receive child benefit to not have it paid.
This is usually appropriate where the potential claimant has
a certain income in excess of £60,000 and the charge would
payments, charitable
gift aid payments and
pension contributions,
and has the same
meaning as for
establishing personal
allowance restrictions.
negate the relief of any claim.

M
"Partner" is a much wider term than marital spouse or civil partner
and refers to people living together as if they were married.
That the charge can (and often will) be made on a person other than
the child benefit claimant.
SA

Example 12 High Income Child Benefit Charge
John and Norma live together and have two children under 16. During the year 2014/15,
Norma received child benefit payments totalling £1,752.
Required:
Calculate the High Income Child Benefit Charge given the following income levels in
2014/15, and state who bears the charge:
John Norma
£ £
E
(a) 50,000 50,000
(b) 53,000 52,000
(c) 20,000 56,000
(d) 65,000 10,000
Solution
(a)
(b)
(c)
PL
M
(d)
SA

Summary
< Earned income can be derived from employment, pensions, trading profits or rent from
furnished holiday accommodation (FHA). Tax on earnings from employment and pensions is
typically collected under PAYE. Tax on other earnings is typically collected by self-assessment.
< Unearned income can be derived from rents (other than FHA) and interest and dividends
arising in the UK. Interest is received gross from investments in NS&I and UK government
gilts. Other interest is taxed at source at 20%. Dividends are deemed to have 10% tax
deducted at the source.
< Rents are gross (accrued) less allowable expenses.
E
< Personal allowances are set out in the tax rates and allowances provided in the examination;
only rules for restricting it at income limits need to be learned.
< Income tax rates change based on income level and type of income. Savings and other
income are taxed at the same rates except that savings are taxed at only 10% for low-
income pensioners, etc.
< Deductions from total income (i.e. before personal allowance) include reliefs for:
<
<
•
•
PL
interest on qualifying loans (e.g. purchase of partnership interest); and
applicable trading losses. Unrelieved trading losses can be carried forward, so interest
deductions should be applied before trading losses.
Any amount of charitable donation made under gift aid attracts tax relief. For basic rate
taxpayers, 20% relief is given at source and the income tax computation ignores the gift.
For higher and additional rate taxpayers, relief is given by extension of rate bands when
computing tax liability.
Pensions received are taxable as earned income except a lump sum (up to 25% of fund) is
non-taxable.
< Contributions to an occupational scheme are deducted from employment income. Personal
M
pension contributions are paid net of 20% tax relief. Higher or additional rate relief is given
as for gift aid.
< Amounts in excess of current year annual allowance plus unused allowances (up to three
years) do not attract tax relief.
< Each spouse is a separate taxpayer. Income from jointly-owned assets is split 50:50 unless
a joint declaration is made to split it according to actual ownership.
< Charitable donations should be made by the spouse/partner subject to higher tax rate.
SA
< A High Income Child Benefit Charge acts to claw back the benefit if one partner has relevant
earnings in excess of £50,000.

Session 2
Session 2 Quiz
Estimated time: 1.5 hours
1. Explain what is meant by "taxable income" and "income tax payable". (1.1, 1.2)
2. State the TWO principal types of employment income. (2.1)
3. Explain what is meant by "adjusted trading profit". (2.1)
4. State which forms of interest are received gross by a personal taxpayer. (2.2)
5. Define "gross equivalent" of:
= bank interest received; and
= dividends received. (2.2)
E
6. State how married couples are taxed in the UK. (2.4)
7. State what is meant by:
= actual basis of assessment; and
= current year basis of assessment. (2.5)
8. State what is the personal allowance and whether it is the same for all taxpayers. (3.1)
income. (4.1)
PL
9. Define "savings income" and "other income" in determining the composition of taxable
10. State why is it necessary to separately distinguish dividends, savings income and other
income for the purpose of calculating income tax liability. (4.1)
11. Give an example of "qualifying loan interest" and state how income tax relief is given
for it. (5.1, 5.2)
12. State the TWO ways by which individuals can donate to charities and obtain tax
relief. (6.1, 6.2)
13. State the purpose of "extended basic and higher rate relief". (6.3)
14. State the TWO principal forms of private pension schemes. (7.1)
M
15. State THREE types of relevant earnings. (7.2)
16. State how basic rate and higher rate reliefs are given for contributions made into a personal
pension scheme. (7.2)
17. State how tax relief is given for contributions by an employee into an occupational pension
scheme. (7.4)
18. State how employer's contributions into an occupational pension scheme are treated for tax
purposes by:
SA
= the employer; and

= the employee (7.4)
19. "HMRC does not normally question the profit-sharing arrangement for trading business."
Explain how this may be useful for a married couple planning their tax affairs. (8.1)
Study Question Bank

Priority Estimated Time Completed

Q2 Michael 30 minutes
Additional
Q3 Long Life
Q4 The Pike Family

EXAMPLE SOLUTIONS
Solution 1—Personal Allowance
£ £ £ £
(1) (2) (3)
Total income = net income 60,000 110,000 120,000
(1) PA (10,000)
(No restriction as net income < 100,000)
E
(2) PA 10,000
Less: ⁄2 (110,000–100,000)
1
(5,000)
5,000 (5,000)
(3) PA 10,000
Less: ⁄2 (120,000–100,000)
1
(10,000)
Taxable income
PL
Solution 2—Persons Born Before 6 April 1948
£
0
50,000
£
(1)
105,000
£
(2)
120,000
£
(3)
0
Net income 16,000 27,500 32,000

M
(1) Higher PA (10,500)
no restriction as net income < 26,100
(2) Higher PA 10,500
Less: ⁄2 (27,500−27,000)
1
(250)
10,250 (10,250)
Minimum amount = £10,000
SA
(3) Higher PA 10,500

Less: ⁄2 (32,000−27,000)
1
(2,500)
8,000
Minimum amount = £10,000 (10,000)
Taxable income 5,500 17,250 22,000

Solution 3—Income Tax Payable
(a) Higher rate taxpayer
Income Tax Computation 2014/15
£ £
Earned income
Employment income (Note 1) 30,600
Unearned income
Dividends (gross)
1,800 × 100
⁄90 (Note 1) 2,000
E
Interest (gross)
8,000 × 100
⁄80 (Note 1) 10,000
12,000
Total income = net income 42,600
Less: Personal allowance (Note 3) (10,000)
Taxable income 32,600
Analysis (Note 2)
1
2
3
PL
= other (= balance of the taxable income)
Income Tax
£
2,000
10,000
20,600
32,600
£ % £
Other income – basic rate 20,600 20 4,120
M
Savings income – basic rate 10,000 20 2,000
Dividends – basic rate 1,265 10 126
31,865
Dividends – higher rate 735 32.5 239
32,600
Income tax liability 6,485
SA
Less: Tax credits

Dividends (10% × 2,000) 200
Interest (20% × 10,000) 2,000
PAYE 4,232
(6,432)
Income tax payable 53
Notes:
1. Incomes must be included in the tax computation inclusive of any tax
deducted at source (i.e. gross). Investment incomes taxed at source must
be "grossed up" at the appropriate rate.
2. Dividends = top slice above savings income and then other income.
3. PA and other deductions made in arriving at taxable income are deducted in
the most favourable way (i.e. against other income, savings income and then
dividends). PA is not restricted as net income is less than £100,000.

Solution 3—Income Tax Payable (continued)
(b) Additional Rate Taxpayer

Income tax computation, 2014/15 £
Earned income
Employment income 143,000
Unearned income
Dividends (gross) 1,800 × ⁄90
100
2,000
Interest (gross) 8,000 × ⁄80
100
10,000
E
Less: Personal allowance* 0
Analysis *No PA is available as

net income exceeds
1
2
3
PL
= other (= balance of the taxable income)
Income tax
Other income — basic rate
£
31,865
%
20
£
2,000
10,000
143,000
155,000
6,373
£100,000 + (10,000
× 2) = £120,000
— higher rate 111,135 40 44,454

M
143,000
Savings income — higher rate 7,000 40 2,800
150,000
Savings income — additional rate 3,000 45 1,350
153,000
Dividends — additional rate 2,000 37.5 750
SA
155,000
Less: Tax credits
Dividends (10% × 2,000) 200
Interest (20% × 10,000) 2,000
PAYE 50,798
(52,998)
Income tax payable 2,729

Solution 4—Basic Rate Taxpayer—10% Rate
on Savings
£ £
Earned income
Pensions—state 5,587
Pensions—private 5,500
11,087
Unearned income
(gross) £1,800 × 100⁄90
E
Dividends 2,000
Interest Building Society (gross) £3,600 × 100
⁄80 4,500
6,500
Less: Personal allowance (net income < £27,000) (10,500)
Analysis
Dividends = top slice

Savings income
Other income (≤ £2,880)
PL
As other income does not exceed £2,880, savings income of £2,880 − 587 = £2,293
£
2,000
4,500
587
7,087
will be taxed at the lower rate of 10%.

M
Income tax
£ % £
Other income — basic rate 587 20 117
Savings income — lower rate 2,293 10 229
2,880
— basic rate 2,207 20 442
SA
5,087
Dividends 2,000 10 200
Income tax liability 988
Less Dividends (10% × 2,000) 200
Interest (20% × 4,500) 900
PAYE 117
(1,217)
Income tax payable/(repayable) (229)

Solution 5—Relief for Qualifying Loan Interest
£
Earned income
Trading profits 48,000
Unearned income
Bank interest (gross) 1,000
Total income 49,000
Less: Qualifying loan interest (2,000)
E
Net income 47,000
Less: PA (net income < £100,000) (10,000)
Analysis of income
Savings income
Other income
Tax
Other income
PL
— basic rate
— higher rate
£
31,865
4,135
%
20
40
£
£
1,000
36,000
37,000
6,373
1,654
Savings income — higher rate 36,000
M
1,000 40 400
37,000
Less: Tax paid at source on interest: (200)
20% × 1,000
Income tax payable/(repayable) 8,227
SA

Solution 6—Relief for Charitable Donations
Income tax computations, 2014/15
Katherine Simon
£ £
Earned income
Employment salaries 20,000 50,000
Less: Payroll gift (1,000)
Total income = net income 20,000 49,000
Less: PA (W1) (10,000) (10,000)
E
Taxable incomes (= other income) 10,000 39,000
Tax
% £ £ £ £
Other income
Basic rate 20 10,000 2,000 31,865 6,373
Extended basic rate (W2)
Higher rate
Income tax liabilities
Workings
PL
(1) Adjusted net income for personal allowance
20
40
2,000
2,000
33,865
5,135
39,000
400
2,054
8,827
K S
M
£ £
Net income 20,000 49,000
Less: Gross gift aid £800 × 100
⁄80 (1,000)
£1,600 × 100
⁄80 (2,000)
Adjusted net income 19,000 47,000
As these amounts are less than £100,000, full PA is available.
SA
(2) Extended basic rate band—Simon
As taxable income (£39,000) exceeds £31,865, the gift aid attracts

higher rate relief.
*No higher rate
£ relief is available for
Normal higher rate threshold 31,865 Katherine's gift aid
payment as her taxable
Add: Gross gift aid* £1,600 × 100
⁄80 2,000 income before the
Revised threshold 33,865 gift aid is less than
£31,865.

Solution 7—Gift Aid and Higher PA
£ £ £
Net income (ignoring gift aid payment) 28,900
Less: PA 10,500
Net income 28,900
Less: Gift aid (gross) (1,000)
Adjusted net income 27,900
Less: Income limit (27,000)
900 ×½= (450)
E
Minimum PA = £10,000 10,050 (10,050)
Solution 8—Relief for Pension Contributions

Income tax liability, 2014/15
Earned income
Employment income = net income
Tax
Other income
PL
Less: PA (W1) £10,000−½ (112,500−100,000)
– basic rate
£
31,865
%
20
£
160,000
(3,750)
156,250
£
6,373
– EBHR (W2) 47,500 20 9,500
M
79,365
– higher rate 70,635 40 28,254
150,000
– EBHR (W2) 6,250 40 2,500
156,250
SA
Workings
£
Net income 160,000
£38,000 × 100
⁄80 (47,500)
As this is greater than £100,000 and less than £120,000, PA is restricted.
(2) Extended basic/higher rate relief
As taxable income exceeds £150,000, the personal pension contributions attract both
higher and additional tax relief
£ £
Normal threshold 31,865 150,000
Add: Gross personal pension contributions (W1) 47,500 47,500
Revised threshold 79,365 197,500

Solution 9—Occupational Pension Contributions
Income tax liability, 2014/15
£ £
Earned income
Employment income:
Salary 126,500
Less: Employee's pension contributions (19,000)
107,500
Benefit = employer's pension contributions 28,500
E
Less: Exemption (28,500)
0
Total income = net income 107,500 *Adjusted net income
Less: PA* (£10,000−½ (107,500−100,000) (6,250) = net income as
Taxable income (= other) 101,250 contributions into
occupational pension
Other income

– basic rate
– higher rate
PL £
31,865
69,385
101,250
%
20
40
£
6,373
27,754
34,127
schemes are paid
gross not net. As
this is greater than
£100,000 but less
than £120,000, PA is
restricted.
M
SA

Solution 10—Unused Annual Allowance
(a) Income tax computation, 2014/15
£
Earned income
Adjusted trading profits 160,000
Unearned income
Bank interest received (gross) 1,000
Less PA (W1) (10,000)
E
Analysis of income: Dividends 0
Savings income 1,000
Other 150,000
151,000
Tax: (W3)
Other income:
Savings income
PL
Basic rate
EBHR
Higher rate
EBHR
£
31,865
65,000
96,865
53,135
150,000
1,000
%
20
20
40
40
£
6,373
13,000
21,254
400
151,000
M
SA

Solution 10—Unused Annual Allowance (continued)
Workings
£
Net income 161,000
Less: Gross personal pension contributions (W2) (65,000)
As this is less than £100,000, a full PA is available.
(2) Personal pension contributions
E
Because Jack has unused annual allowances brought forward,
the maximum tax effective pension contributions are:
*In order to utilise
£
the available annual
Current annual allowances for 2014/15 40,000 allowance for 2014/15,
+ unused annual allowances b/f Jack must pay personal
2011/12
2012/13
2013/14 PL
£50,000−(28,000 ×
£50,000−(40,000 ×
£50,000−(32,000 ×

100
100
100
⁄80)
⁄80)
⁄80)
15,000
10,000
65,000*
0
Higher rate
£
pension contributions
of £52,000 (net of 20%
tax relief at source) in
2014/15.
Additional rate
£
Normal thresholds 31,865 150,000
M
(b) Minimum tax effective personal pension contributions for 2014/15

The unused annual allowance of 2011/12 cannot be used in 2015/16, so the
minimum amount of personal pension contributions that Jack must pay in 2014/15
in order not to waste any annual allowance is 80% × £55,000 = £44,000 where
the figure of £55,000 comprises the current annual allowance of £40,000 plus the
SA
2011/12 unused annual allowance of £15,000.

Solution 11—Pension Relief With Excess Pension Input
£
Earned income
Adjusted trading profits = total = net income 220,000
Less: PA (W1) 0
Taxable income (= other income) 220,000
£ % £
E
Tax: (W2)
Other income: Basic rate 31,865 20 6,373
EBHR 60,000 20 12,000
91,865
Higher rate 58,135 40 23,254
150,000
Add: Annual allowance charge PL

EBHR
£(60,000−40,000) at appropriate marginal rate

Additional rate
60,000
210,000
20,000
230,000
40
45
24,000
9,000
74,627
Workings
M
£
Net income 220,000
£48,000 × 100
⁄80 (60,000)
As this exceeds £120,000, no PA is available.
SA

£ £
Normal thresholds 31,865 150,000

Solution 12—High Income Child Benefit Charge
(a) Neither partner has earnings in excess of £50,000 so no charge arises.
(b) Both partners have income in excess of £50,000, but John has the higher income and he
bears the tax charge, calculated as £1,752 × 1% × ((53,000−50,000)/100) = £526.
(c) Norma has the higher income, which is between £50,000 and £60,000, so suffers a tax
charge of £1,752 × 1% × ((56,000−50,000)/100) = £1,051 .
(d) John has the higher income, which exceeds £60,000, so bears a charge of 100% of the
child benefit received by Norma, i.e. £1,752.
E
PL
M
SA

Session 3
Property and Investment

Incomes
FOCUS
E
PL
4. Property and investment income
a) Compute property business profits.
b) Explain the treatment of furnished holiday lettings.
c) Understand rent-a-room relief.
d) Compute the amount assessable when a premium is received for
the grant of a short lease.
e) Understand how relief for a property business loss is given.
g) Explain the treatment of new individual savings accounts (NISAs)
and other tax exempt investments.
M
SA
Session 3 Guidance
Recognise that this session contains two distinct topics: property income and investment income.
Comprehend that in terms of exam focus, property income requires a series of calculations to support
a full income tax calculation. Each element is equally examinable and all individual rules should be
learnt. Understand the general principles (s.1.1) and the composition (s.1.2).
Attempt Example 1, which illustrates the narrative that can be given in an exam-style question. For
lease premiums (s.1.3), the formula P – (P × 2% × (n − 1)) is not given in the rates and allowances
and, therefore, must be learnt and applied.
Be aware that income from rental property will attract expenses associated with the property which,
as a general rule, are allowable (s.1.4).
(continued on next page)
VISUAL OVERVIEW
Objective: To explain in detail the tax treatment of property income derived from the
letting of property in the UK and the different types of investment income that are exempt
from income tax, including the tax exempt personal investment plan called a New Individual
Savings Account (NISA).
E
PROPERTY
AND
INVESTMENT INCOME
•
•
PROPERTY BUSINESS
PROFITS
General Principles
Composition
PL INVESTMENT INCOME
• Exempt Incomes
• New Individual
Savings Accounts
• Lease Premiums (NISA)
M
• Allowable Expenses
• Rent-a-Room
Letting
• Furnished Holiday
Lettings
• Losses and Loss
Relief
SA
Session 3 Guidance
Pay particular attention to the distinction between capital and revenue expenses. Only revenue
expenses are allowable. Common sense can generally be applied but the allowance for wear and
tear must be learnt.
Use the pro forma solutions for Examples 2 and 3 to guide you in calculating property business
profits. Rent-a-room relief is self-explanatory (s.1.5) but the exemption limit will not be given
in the examination so commit it to memory. Note the conditions relating to furnished holiday
accommodation and its specific tax advantages (s.1.6).
Note that the effects of investment income on an individual's income tax calculation have already
been covered in Session 2.

Session 3 • Property and Investment Incomes F6 Taxation (UK)
1 Property Business Profits
1.1 General Principles

 Individuals are subject to income tax on the profit arising from
the letting of furnished and unfurnished property (commercial
or residential) situated in the UK.
 The amount assessable for a tax year is usually the net profit
arising from the letting of all properties owned by the landlord
calculated for the landlord's accounting period (the tax
year) ending on 5 April. However, if let property comprises
E
a mixture of furnished holiday accommodation and other
lettings, two computations must be prepared as the former is
treated as earned income and the latter as unearned income,
and losses cannot be offset between the two.
1.2 Composition of Property Business Profit
Rent accrued due

PL
 Property business profit comprises:
Income element of a short lease premium (see s.1.3) received
Less: Accrued allowable expenses
Net profit
£
x
x
x
(x)
x
M
1.3 Lease Premiums
 A lease premium is a one-off lump sum, usually payable at the
start of a lease, which represents an advance payment of rent.
 If the premium payment were treated as a capital receipt of
the landlord, then income tax would not apply. In order to
prevent an evasion of income tax, particularly where the lease
is a short lease (i.e. one of 50 or fewer years' duration), a
SA
premium received for the grant of a short lease is treated as

partly income and partly capital as shown below:
£
Gross premium x
Less: Capital element = 2% × Gross premium × (n − 1) (x)
Income element x
n = the number of complete years of the lease.
 As the pro forma calculation shown demonstrates, the amount

treated as capital increases by 2% each year as the duration The capital element
of the lease lengthens. Thus, a premium on a lease of 51 or of the premium is
more years is a 100% capital sum. assessable to CGT,
but this matter is
not examinable in
Paper F6.

F6 Taxation (UK) Session 3 • Property and Investment Incomes
Example 1 Short Lease Premium
Mr B grants a 20-year lease on a commercial property to Mr A on

25 March 2015 at a premium of £10,000.
Required:
Calculate the proportion of the premium assessable as
property business profit on Mr B for 2014/15.
Solution
Income portion of lease premium
E
Gross premium
Less: Capital element
Income element
1.4 Allowable Expenses

PL
 Allowable expenses are those of a revenue nature incurred by
the landlord wholly and exclusively in relation to the letting of
the property before, during or between leases:
 Property maintenance (e.g. cleaning);
 Repairs (but not if the cause was before the property
was acquired);
 Insurance;
 Management (e.g. accountancy and legal costs);
M
 Rent payable;
 Water charges;
 Council tax (residential property only) and business rates
(commercial property);
 Capital allowances on the cost of plant and machinery used
for property maintenance (e.g. cleaning equipment);
 Impairment losses (bad debts);
SA
 Loan interest;
 Wear-and-tear allowance on furnishings used in residential
properties = 10% × (gross rent less water rates and
Council tax).
 For furnished holiday lettings, capital allowances on
furniture, white goods etc within the property.

Example 2 Property Business Profit Computation
Miss Davis purchased a house on 6 July 2014. It was let on a furnished basis from 6 September
2014 at an annual rent of £6,000 payable monthly in advance.
When the lease was granted, for a period of 10 years, a lease premium of £5,000 was received
from the tenant.
Expenses in the accounting period were:
Repairs of £4,000, incurred in August 2014. £2,200 of this amount related to the repair of
the roof damaged by a storm in May 2014. The price Miss Davis paid for the property was
discounted to take account of the cost she would incur on the repairs. The other £1,800 relates
to external and internal painting and decoration.
E
Council tax of £600 relating to the year 1 July 2014–30 June 2015 paid in July 2014, and utility
bills accrued of E270.
Letting agents fees of £500 paid in September 2014.
Required:
Calculate the property business profit assessable on Miss Davis for 2014/15.
Solution
PL
Property business profit, 2014/15
Rental income accrued:

Lease premium received:
Gross premium
Less: Capital element

£ £
Income element
M
Less allowable expenses:
SA
Net profit

1.5 Rent-a-Room Letting

 "Rent-a-room" letting = the letting of one (or more) rooms in
the taxpayer's principal private residence (i.e. his home).
 If gross income is £4,250 or less, it is exempt from income tax. The £4,250 limit is
not given on the rates
 If income exceeds £4,250 the taxable amount is either: and allowances exam
 net profit (gross income less expenses); or sheet and should,
 the excess of gross income over £4,250 (provided a rent-a- therefore, be learnt.
room election is made).
 The rent-a-room election must be made by 31 January within
two years of the end of the tax year (e.g. 31 January 2017
for 2014/15). It remains in force until either revoked or gross
E
income falls below £4,250.
 If two persons are entitled to the rent-a-room income from the
same property (e.g. husband and wife), the relief limit is shared
50:50, with each person having a separate right to make the
rent-a-room election if gross income exceeds £2,125.
 The taxpayer may elect for the rent-a-room exemption not to
Example 3 Rent-a-Room
PL
apply where income is less than £4,250. This would be beneficial
if a loss had been incurred. The same time limit applies (i.e. by
31 January within two years of the end of the tax year).
Roger lets out a spare room in his principal private residence to his lodger, Peter. During
2014/15, Peter paid a weekly rent of £120 and Roger incurred expenses of £5,100. Roger made
a rent-a-room election in an earlier year that has not been withdrawn.
Required:
M
Advise Roger whether or not he should withdraw the rent-a-room election.
Solution
With rent-a-room election

£
Gross rents accrued
Less: Exemption
SA
Assessable
Without rent-a-room election

£
Gross rents accrued
Less: Deductible expenses
Assessable
Advice:

1.6 Furnished Holiday Lettings

1.6.1 Conditions
For F6 purposes, accommodation will always be located in the UK.

The conditions to be met are not given in the rates and allowances
schedule, and should be learnt.
E
 Furnished holiday accommodation (FHA) is a property
located in the UK or any country of the European Economic
Area (EEA) that is let on a commercial basis and which
satisfies all the following conditions:
1. It is available to let for at least 210 days a year; and
2. It is actually let for at least 105 days a year; and
PL
3. Longer-term lettings do not exceed 155 days a year.
A longer-term letting is a single letting to the same person of more

than 31 consecutive days and does not count as a holiday letting.
 If a taxpayer has a number of properties let as FHA, each

property must individually meet conditions 1 and 3.
M
The election available to satisfy condition 2 is not examinable.
SA

Example 4 Furnished Holiday Lettings l
Miss Jones lets two furnished properties, A and B, during the year ended 5 April 2015 as follows:
A B
Days Days
Lettings not exceeding 31 days each 200 150
Lettings exceeding 31 days each 120 165
Unlet (including 30 days when used by landlord) 45 50
365 365
E
Required:
Determine whether or not the two properties qualify as furnished holiday
accommodation in 2014/15.
Solution
Property A:
PL
Qualifies/Does not qualify for the FHA tax treatment
Property B: Qualifies/Does not qualify for the FHA tax treatment

M
SA
1.6.2 Tax Consequences

 The profits arising from the letting of FHA are treated as
earned rather than unearned income. Consequently, the
profit or loss from FHA must be calculated separately from
other UK property letting profits or losses.
 FHA attracts the following specific tax advantages:
The profit = relevant earnings for pension contribution
relief purposes.
The cost of all fixtures and equipment (i.e. furnishings,
kitchen equipment, and sanitary ware) attract the more
favourable plant and machinery capital allowances (see
Session 6) instead of the normal wear-and-tear allowance.
FHA is a business asset for CGT purposes attracting
rollover relief, holdover for gifts, and the entrepreneurs'
relief rate of tax (see Session 12).

Example 5 Furnished Holiday Lettings ll
Mark owns a house in the UK that is let on a commercial basis and satisfies the conditions to be
treated as furnished holiday letting for tax purposes. Relevant details for 2014/15 are:
£ £
Rents due and received 35,000
Allowable expenses:
Letting agency fees 5,000
Cleaning and repairs 2,500
E
Council tax 1,000
Water charges 250
Insurance 150
(8,900)
Required:
PL
Calculate the amount of property business profit arising from the letting of the
furnished holiday accommodation in 2014/15 and state how the amount will be shown
in the income tax computation.
Solution
26,100
Capital allowances on furniture and fittings for the house amounted to £7,000 for 2014/15.
Mark and his family use the house for two months each year.
Furnished holiday accommodation business profit, 2014/15

M
£ £
Rental income accrued
Less: Allowable expenses
SA
Capital allowances
Net profit
1.7 Losses and Loss Relief

 Losses arise when expenses exceed income (including the
income element of short lease premium).
 Losses are relieved against first available future property
business profits as follows:
 loss from the letting of FHA—against future profits from FHA
lettings only;
 loss on all other let properties—against future profits from
all lettings except FHAs.

2 Investment Income
2.1 Exempt Incomes

 The following types of investment income are exempt from
income tax:
 interest from National Savings Certificates, and winnings
from Premium Bonds (investments made with NS&I);
 interest and dividends received from a New Individual
Savings Account (NISA).
E
2.2 New Individual Savings Accounts (NISA)
 A NISA may be opened by any individual who is aged 18
years or older and is resident in the UK.
 The maximum amount that can be invested each tax year is
£15,000.

another.
PL
 A taxpayer can invest with two different account managers—the
cash element with one and the stocks and shares element with
Alternatively, the investment may be made with one account

manager which may comprise either or both cash and stocks
and shares, up to the maximum value of £15,000.
Banks, building societies and insurance companies are the
principal account managers.
Individuals are not obliged to invest every year, and not in
every class.
 Apart from the annual income—interest and dividends—being
M
exempt from income tax, chargeable gains (and losses) arising The £15,000 limit
on the disposal of shares and units of unit trusts are also applicable from
exempt from CGT. July 2014 is given
 NISA investments can be held indefinitely. in the rates and
allowances sheet.
The predecessor
ISA scheme is not
examinable.
SA

Summary
 Individuals are taxed on property business profits arising from furnished, unfurnished,
commercial and residential property lettings in the UK.
 Property business profit is calculated as:
£
Rent accrued due x
Income element of a short lease premium received x
E
Less: Accrued allowable expenses (x)
Property business profit x
 The income element of a short lease premium (lump-sum advance payment) is the
difference between the gross premium and capital element.
 Capital element = Gross premium × 2% (n – 1), where n is the number of years (≤50).


Rent-a-room letting:
•
•
PL
Allowable expenses include property maintenance, insurance, council tax and business
rates, capital allowances, bad debts, loan interest and wear-and-tear allowance.
Wear-and-tear allowance on furnishings used in residential properties = 10% × (gross rent
less water rates and council tax).
≤£4,250 is exempt from income tax;

>£4,250 is taxed on net profit or gross excess (under rent-a-room election).
A rent-a-room election remains in force until revoked or until income falls below £4,250.
Spouses/civil partners may share rent-a-room relief 50:50.
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 Furnished holiday accommodation must be available for at least 210 days a year, actually
let for at least 105 days a year and longer-term lettings (essentially >31 days) do not
exceed 155 days a year. Profits and losses from letting FHA are treated as earned and are
calculated separately from other property lettings.
 FHA tax advantages include inclusion in relevant earnings for pension contribution relief,
plant and machinery capital allowances on all fixtures and equipment, and treatment as a
business asset for CGT purposes.
 National Savings Certificates and New Individual Savings Accounts (NISAs) provide tax-
SA
exempt income (interest and/or dividends) and tax-exempt capital gains on disposal.

Session 3
Session 3 Quiz
1. Explain how the income element of a short lease premium is calculated. (1.3)
2. Give the formula for calculating wear-and-tear allowance for furnished lettings. (1.4)
3. State the rules relating to the rent-a-room election for letting income. (1.5)
4. List the specific tax advantages arising under the furnished holiday
accommodation scheme. (1.6)
5. State the investment limit for New Individual Savings Accounts (NISAs). (2.2)
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Study Question Bank
Priority
Q5 Brigid Jones
PL Estimated Time
40 minutes
Completed
M
SA

EXAMPLE SOLUTIONS
Solution 1—Short Lease Premium
£
Gross premium 10,000
Less: Capital element 2% × £10,000 × (20 − 1) (3,800)
Income element 6,200
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Solution 2—Property Business Profit Computation
Miss Davis—Property income, 2014/15
£ £
Rental income accrued: £6,000 × 7⁄12 =
Lease Premium received:
Gross premium PL
Less: Capital element 2% × (10 − 1)
Income element
Less: Allowable expenses:

5,000
(900)
4,100
3,500
4,100
7,600
Repairs (Note 1) 1,800

M
Council tax (£600 × 9⁄12) 450
Utilities 270
Letting agent's fees 500
Wear-and-tear allowance (Note 2)
10% × 7,600 − (450 + 270) 688

SA
(3,708)
Net profit 3,892
Notes:
1. The roof repair is not an allowable expense because the repair
cost is a capital cost. This is because the cause of the repair arose
before Miss Davis acquired the house and the purchase price was
discounted to allow for the cost of the repair.
2. The wear-and-tear allowance on furnishings is only available because
the house is let on a furnished residential basis.

Solution 3—Rent-a-Room
With rent-a-room election
£
Gross rents accrued 6,240
Less: Exemption (Note) (4,250)
Assessable 1,990
Without rent-a-room election
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Gross rents accrued 6,240
Less: Deductible expenses (see Note) (5,100)
Assessable 1,140
Note: If deductible expenses exceed £4,250
the election basis is not beneficial.
2017 at the latest.
Solution 4—Furnished Holiday Lettings I

Property A:
PL
Advice: Roger should withdraw the election for 2014/15 by 31 January
(1) Available for lettings as FHA for 200 + (45 − 30) = 215 days (≥ 210 days).
M
(2) Actually let as FHA for 200 days (> 105 days).
(3) Longer-term lets = 120 days (< 155 days).
Therefore it qualifies for the FHA tax treatment.
Property B:
(1) Available for letting as FHA for 150 + (50 − 30) = 170 days (< 210 days).
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(2) Actually let as FHA for 150 days (>105 days).

(3) Longer-term lettings = 165 days (> 155 days).
Therefore it does not qualify for the FHA tax treatment, failing on (1) and (3).

Solution 5—Furnished Holiday Lettings II
Furnished holiday accommodation business profit computation,
2014/15
£ £
Rental income accrued 35,000
Less: Allowable expenses
Letting agents fees 5,000
Other £3,900 × ⁄12
10
3,250
Capital allowances £7,000 x ⁄12
10
5,833
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(14,083)
Net profit 20,917
The profit from the FHA will be shown as earned income in Mark's income
tax computation
PL
M
SA

NOTES
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PL
M
SA

Index
A C
Accounting dates CAP, See Chargeable accounting period
cessation of trade .......................... 14-7 Capital
Accounting estimates ........................ 5-18 allowances .............................. 6-2, 8-10
Accounting periods, See also Chargeable expenditures ................................. 5-16
accounting period gains tax (CGT) ........................ 1-3, 9-2
corporation tax ........................ 1-4, 13-2 losses ........................................ 14-12
non-coterminous ......................... 15-12 share ......................................... 11-12
short .......................................... 13-13 Carry forward ....................................7-5
Accounting records ......................... 19-22 Case law ......................................... 1-12
Accumulated wealth, Cash
See also Inheritance tax accounting .................................. 19-29
E
Accumulation principle ...................... 16-7 equivalent values ........................... 4-11
Adjusted Cash basis ....................................... 8-15
net income ................................... 2-21 Cessation
trading loss ............................. 7-2, 14-2 business .........................................5-8
trading profit ........................... 2-4, 13-7 compliance check .......................... 18-7
Adjustment of profit .......................... 5-12 partnership .....................................8-4
Allowable expenses
PL
AIA, See Annual investment allowance
employment....................................4-4
property business profits ..................3-3
Allowances
annual.......................................... 2-27
capital ............................................6-3
employment.................................. 17-4
expense .........................................4-4
personal ....................................... 2-31
reliefs .................................. 7-12, 14-7
trading ......................................... 6-11
CGT, See Capital gains tax
Change of employment ..................... 17-7
Change
profit-sharing arrangement ...............8-2
Chargeable
accounting period (CAP) ................. 13-2
assets ................................. 9-3, 12-20
disposals ................................ 9-2, 10-2
Annual gains .............................................7-8
accounting .................................. 19-28 illustration ......................................9-9
M
employment allowance ................... 17-4 lifetime transfers (CLTs) .................. 16-8
exemption ............................ 9-5, 16-23 period ............................................6-3
investment allowance (AIA)...............6-3 persons ..........................................9-4
value ........................................... 4-11 transfer ........................................ 16-4
Appeals ........................................... 18-8 Charitable donations ................. 2-18, 13-8
Assessable profits ............................. 13-2 Chattels .........................................., 9-3
Associated companies .............. 13-14, 15-2 Child benefit charge .......................... 2-32
Claims for tax reliefs
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B allowable expenses ..........................4-7

entrepreneurs' relief ..................... 12-16
Bad debt relief ............................... 19-16 holdover relief ............................... 12-9
Badges of trade ..................................5-2 partial .......................................... 6-20
Balancing adjustments ...................... 6-11 rollover relief ................................ 12-4
Basic tax point ............................... 19-14 time limit .................................... 17-16
Basis of assessment Class 1A contributions ....................... 17-2
cash earnings ..................................4-3 Class 1 contributions ......................... 17-2
corporation tax .............................. 13-2 Class 2 contributions ......................... 17-3
current year ....................................5-4 Class 4 contributions ......................... 17-3
income tax......................................2-7 Code number ................................... 17-5
Benefits ............................................4-8 Commencement of trade ................... 7-10
Blocked input tax............................ 19-12 Companies
Bonus issues .................................... 11-9 associated ........................... 13-14, 15-2
Brought forward losses ........................9-7 group ........................................... 15-4
Business main rate .......................... 13-10, 17-13
assets .......................................... 12-7 self-assessment ........................... 17-12
cessation ........................................5-8 small profits rate ................ 13-10, 17-13
own car ..........................................4-5
property .........................................3-2
use of home .................................. 10-7
F6 Taxation (UK) Session 20 • Index
Company Enhancement expenditure ...................9-4

cars ............................................. 4-17 Entrepreneurs' relief ....................... 12-14
directors .........................................4-3 Errors ........................................... 19-25
vans ............................................ 4-19 European Economic Area (EEA) ............3-6
Compliance, See Tax compliance European Union
Compulsory registration .................... 19-5 directives...................................... 1-12
Continuing trades ............................. 14-2 single market .............................. 19-18
Corporate taxpayers ......................... 11-3 Excluded property ............................ 16-4
Corporation tax ..................................1-3 Exclusivity test ................................. 8-13
accounting periods ...........................1-4 Exempt
computation................... 13-5, 13-7, 14-3 assets ............................................9-3
long periods of account................... 6-24 benefits ..........................................4-8
loss reliefs .................................... 14-3 disposals ........................................9-2
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payment ..................................... 17-13 incomes .................................. 2-6, 3-9
penalties ...................................... 18-3 supplies........................................ 19-3
property business profits ................ 13-6 Exemptions
TTP ............................................ 13-10 lifetime transfers ......................... 16-22
Credit notes ................................... 19-23 spouse ......................................... 16-5
Current-year basis of VAT registration ............................. 19-7
D PL
assessment ........................... 2-7, 5-4
Current-year losses.............................9-7
Damage to non-wasting assets ........... 10-9

Debenture interest............................ 13-9
Deductions ...................................... 2-16
Default surcharge ........................... 19-25
Depreciation, See Tax depreciation
Expense allowances ..................... 3-3, 4-4
Exports ......................................... 19-17
Extended basic and higher rate relief
(EBHR) ...................................... 2-19
Extra-Statutory Concessions .............. 1-12
F
Flat-rate scheme ............................ 19-30
Foreign profits.................................. 13-5
Deregistration .................................. 19-8 Fuel benefit ..................................... 4-18
Direct taxes .......................................1-2 Future prospects test ........................ 19-5
M
Disallowable expenditure ................... 5-14
Disposals G
chargeable assets .......................... 12-7
chattels ........................................ 10-2 GAAR, See General Anti-Abuse Rule
exempt ..........................................9-2 Gains group ................................... 15-15
Disposal value ....................................6-6 General Anti-Abuse Rule .................... 1-11
Dispute resolution ............................ 18-8 Gift aid............................................ 2-18
Distance selling .............................. 19-19 Gifts
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Distributed profits............................. 13-3 business assets ............................. 12-7

Dividends .................................. 2-5, 13-3 consideration of marriage ............. 16-22
Double taxation ..................................1-8 goods and services ...................... 19-15
married couples ............................. 2-31
E out of income .............................. 16-22
payroll ......................................... 2-18
Earned income ...................................2-4 shares ........................................ 12-11
Earnings............................................4-3 small-gifts exemption ................... 16-22
Election Going concern .................................. 19-8
short-life asset .............................. 6-14 Gross chargeable transfer .................. 16-7
Employee Group relief ..................................... 15-4
higher-paid ................................... 4-10 Group VAT registration ...................... 19-8
P11D..............................................4-9
remuneration ................................ 13-5 H
status .......................................... 8-12
Employment .................................... 8-12 Higher-paid employees ...................... 4-10
allowable expenses ..........................4-4 Hire purchase .................................. 6-20
income .................................... 2-4, 4-2 Historical test................................... 19-5
Enforcement .................................... 18-2

Session 20 • Index F6 Taxation (UK)
HMRC.............................................. 1-12 Limited liability partnership (LLP)......... 8-11

compliance check........................... 18-6 Living accommodation........................ 4-13
employee status............................. 8-12 LLP, See Limited liability partnership
formal reviews............................... 18-8 Loan
tax return completion.................... 17-12 benefits......................................... 4-19
Holdover relief.................................. 12-7 note interest........................... 13-5, 15-4
qualifying interest........................... 2-16
I Losses
assets........................................... 10-9
Identification brought forward...............................9-7
shares.................................... 11-3, 11-7 commencement of trade.................. 7-10
trading loss......................................7-2 group relief.................................... 15-4
IHT, See Inheritance tax identification....................................7-2
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Imports.......................................... 19-17 personal taxpayers...........................9-7
Income planning........................................ 15-8
earned............................................2-4 property business................... 3-8, 14-12
employment.....................................4-2 terminal................................ 7-12, 14-7
exempt...........................................2-6 trading............................................7-2
gifts............................................ 16-22
PL
investment......................................3-9
taxability.........................................1-3
tax computation........................ 2-2, 7-3
Incorrect returns............................... 18-7
Indexation allowance...........................9-9
Indexed pool..................................... 11-3
Indirect taxes.....................................1-2
Individual savings account (ISA)............3-9
Inheritance tax (IHT)......................... 16-2
Initiation of enquiries......................... 18-6
M
Main pool...........................................6-4
Marginal companies................ 13-11, 17-13
Married couples
charitable donations........................ 2-31
IHT............................................... 16-5
incomes..........................................2-6
personal allowances........................ 2-31
tax planning............................. 2-31, 9-8
Input tax recovery........................... 19-12 Material disposals............................ 12-15
Inter-company payments.................... 15-4 Mileage
M
Interest private.......................................... 4-18
benefits......................................... 4-19 statutory rates.................................4-5
inter-company payments................. 15-4 Modified rollover relief........................ 12-6
late payments................................ 18-4
non-trade...................................... 13-8 N
qualifying loan interest.................... 2-16
Inter-spouse transfer...........................9-8 National Insurance............................. 17-2
Intra-group transfer of assets........... 15-16 Nil rate band..................................... 16-5
SA
Investment income..............................3-9 No gain/no loss................ 9-2, 11-12, 15-18

iXBRL............................................. 17-13 Non-EU countries............................ 19-17
Non-occupation................................. 10-6
J Non-trade interest............................. 13-8
Non-trade use................................... 12-8
Job-related accommodation................ 4-15 Notice of coding................................ 17-5
Notional intra-group transfers........... 15-19
L
O
Land and buildings............................. 10-4
Large businesses............................. 19-27 Online submission.................. 17-13, 19-24
Late registration................................ 19-7 Opening-year rules..............................5-5
Late submission of return................... 18-2 Open market value............. 6-6, 11-2, 12-12
Lease premiums.......................... 3-2, 5-14 Output tax...................................... 19-13
Letting Overlap
furnished holiday letting....................3-6 profits.............................................5-6
non-occupation.............................. 10-6 relief...............................................8-4
rent-a-room.....................................3-5 Overpaid tax..................................... 18-4
Lifetime Own car.............................................4-5
allowance charge............................ 2-30
transfers........................................ 16-7
F6 Taxation (UK) Session 20 • Index
P Q
P11D employees..................................4-9 Qualifying loan interest...................... 2-16
P45 ................................................. 17-7
P60 ................................................. 17-7 R
Part exchange................................... 6-20
Partial claims.................................... 6-20 Reduced rate supplies........................ 19-3
Partial reinvestment........................... 12-4 Registration for VAT........................... 19-5
Partnerships.......................................8-2 Reimbursed expenses..........................4-4
Patent royalties................................. 13-5 Reliefs
Pay, See Earnings allowable expenses...........................4-7
Pay as you earn (PAYE) bad debt...................................... 19-16
notice of coding.............................. 17-5 entrepreneurs'............................... 12-2
E
self-assessment................................1-9 extended basic and higher rate......... 2-19
Payment of tax group............................................ 15-4
corporation tax............................. 17-13 holdover........................................ 12-7
due dates.................................... 16-25 loss........................................ 7-3, 14-2
interest on late payments................ 18-4 marginal........................................ 10-2
on account................................... 17-10 occupational pension schemes.......... 2-25
PL
responsibility................................ 16-26
self-employment............................. 5-11
surcharges..................................... 18-6
Payroll gifts...................................... 2-18
Penalties
incorrect returns............................. 18-7
late submission.............................. 18-2
Pensions........................................... 2-22
Personal allowance...................... 2-8, 2-31
Personal pensions.............................. 2-23
overlap............................................8-4
practical need................................ 12-2
qualifying loan interest.................... 2-16
rollover................................ 12-2, 15-20
terminal loss.......................... 7-12, 14-7
trading loss.............................. 7-3, 14-2
Rent-a-room letting.............................3-5
Reorganisations............................... 11-12
Residence
company.........................................1-7
Personal taxpayers..............................9-4 individual.........................................1-5
Planning, See Tax planning principal private.............................. 10-6
M
Plant and machinery............................6-2 Restricted trading loss..........................7-5
Pooling...............................................6-4 Returns
Potentially exempt lifetime transfers companies................................... 17-12
(PET)................................ 16-2, 16-13 individuals..................................... 17-8
Preregistration expenditures............. 19-13 late submission..................... 18-2, 19-25
Pre-trading capital expenditures.......... 6-20 online submission......................... 17-13
Pre-trading expenditures.................... 5-19 penalties....................................... 18-7
Principal private residence.................. 10-6 VAT............................................. 19-24
SA
Private Reverse charging............................. 19-18

mileage......................................... 4-18 Rights issues.................................... 11-9
pension......................................... 2-22 Road fuel........................................ 19-15
Professional tax advisers......................1-9 Rollover relief........................... 12-2, 15-20
Profit adjustment............................... 5-12
Profit-sharing arrangements..................8-2 S
Pro forma computation
adjusted profit................................ 5-13 s.72 ITA07........................................ 7-10
capital allowances.............................6-5 s.89 ITA07........................................ 7-12
capital gains tax........................ 9-4, 9-9 Sale at undervalue........................... 12-12
corporation tax............................... 13-6 Savings income................................. 2-11
employment income..........................4-2 Scrip issues...................................... 11-9
holdover relief................................ 12-9 Self-assessment..................................1-8
income tax.......................................2-3 companies................................... 17-12
share identification......................... 11-7 individuals..................................... 17-8
Property business Self-employed persons.........................2-7
losses......................................... 14-12 Self-employment............................... 8-12
profits..................................... 3-2, 13-8 Separate taxable person
married couples................................9-8
partnership......................................8-2

Session 20 • Index F6 Taxation (UK)
Share-for-share exchange................ 11-12 Taxonomies.................................... 17-13

Shares............................................. 11-2 Terminal loss relief..................... 7-12, 14-7
exchange..................................... 11-12 Time limit....................................... 17-16
gift relief....................................... 12-7 Trading
Short accounting periods.................. 13-13 adjusted profit................................ 13-7
Short lease premium.................... 3-2, 5-15 commencement.............................. 7-10
Short-life asset................................. 6-14 income..................................... 5-2, 6-3
Short periods of account..................... 6-21 losses..................................... 7-2, 14-2
Simplified expenses........................... 8-16 partnership profits............................8-2
Small business schemes................... 19-28 Transfer
Small-gifts exemption...................... 16-22 chargeable..................................... 16-4
Small pool balances........................... 6-11 inter-spouse.....................................9-8
Small profits rate.................... 13-11, 17-13 intra-group.................................. 15-16
E
Sources of tax law............................. 1-12 share............................................ 12-8
Special rate pool.................................6-4 used assets.................................... 4-21
Stagger groups............................... 19-22 value............................................ 16-3
Standard-rate supplies....................... 19-3 Travel costs........................................4-5
Statements of Practice....................... 1-12
State pension.................................... 2-22 U
T PL
Statute............................................ 1-12
Surcharges....................................... 18-6
Tax, See also Reliefs; See also Returns

adjusted loss....................................7-2
advisers..........................................1-9
authority.........................................1-8
avoidance...................................... 1-11
UK and foreign profits........................ 13-5
Unearned income................................2-5
Uninsurable risks test......................... 8-13
Value
V
cash equivalent.............................. 4-11

disposal...........................................6-6
band............................................. 16-5 open market....................................9-4
collection at source......................... 17-5 shares........................................... 11-2
M
compliance.................................... 18-2 Value added tax (VAT)..........................1-3
depreciation.....................................6-2 accounting................................... 19-22
evasion......................................... 1-11 capital allowances........................... 6-20
invoices....................................... 19-23 returns........................................ 19-24
periods.................................. 1-4, 19-22 scope............................................ 19-2
planning..........................................9-8 Voluntary registration......................... 19-7
point........................................... 19-14
records.......................................... 18-3 W
SA
value.......................................... 19-13
Taxable Wasting assets.................................. 10-2
entities.......................................... 15-2 Working from home.............................4-6
income.......................................... 2-11 Writing-down allowance........................6-3
periods............................................1-4
persons................................... 9-8, 19-4 Z
supplies......................................... 19-3
total profits.................................... 13-7 Zero-rated supplies............................ 19-3

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PL ABOUT BECKER PROFESSIONAL EDUCATION
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for candidates and professionals looking to advance their
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This ACCA Study System has been reviewed by ACCA's examining team and includes:
• An introductory session containing the Syllabus and Study Guide and approach to examining the
syllabus to familiarise you with the content of this paper
•
•
•
•
•
•
•
Focus on learning outcomes
Visual overviews
Definitions of terms
Illustrations and exhibits
Examples with solutions
Key points
PL
Comprehensive coverage of the entire syllabus
• Exam advice
M
• Commentaries
• Session summaries
• End-of-session quizzes
• A bank of questions
SA
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©2015 DeVry/Becker Educational Development Corp. All rights reserved.

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Finance Act 2014 Edition

Becker Professional Education has more than 20 years

PL Finance Act 2014 Edition

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Exclusion of Damages: UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, TORT,

about This Study System ............................................................................v

aCCa Study Guide .......................................................................................x

Supplementary Instructions ...................................................................xviii

Examination Technique ........................................................................... xxi

1 General Concepts and Principles ........................................... 1‑1

3 Property and Investment Incomes ....................................... 3‑1

4 Employment Income ............................................................. 4‑1

5 Unincorporated Traders—Assessment and Proﬁts ................. 5‑1

6 Capital allowances ............................................................... 6‑1

7 unincorporated Traders—Relief for Trading losses ............... 7‑1

8 unincorporated Traders—Other Matters................................ 8‑1

9 Capital Gains Tax—basic Principles ....................................... 9‑1

10 Capital Gains Tax—Chattels, land and buildings ..................10‑1

© DeVry/Becker Educational Development Corp. All rights reserved. iii

11 Capital Gains Tax—Shares ...................................................11‑1

12 Capital Gains Tax—business assets .....................................12‑1

14 Corporation Tax—loss Reliefs ..............................................14‑1

15 Corporation Tax—Groups of Companies ...............................15‑1

National Insurance, PayE and Self-assessment ...................17‑1

Tax Compliance ...................................................................18‑1

19 Value added Tax ..................................................................19‑1

iv © DeVry/Becker Educational Development Corp. All rights reserved.

abOuT ThIS STuDy SySTEM

Tutor advice and strategies for approaching each session.

A diagram of the concepts and the relationships addressed in each session.

These are to be read as part of the text. Any solutions to numerical

These should be attempted using the pro forma solution provided

Commentaries These provide additional information to reinforce content.

Session Summary A summary of the main points of each session.

A link to recommended practice questions contained in the Study Question

© DeVry/Becker Educational Development Corp. All rights reserved. v

A. The UK Tax System and Its Administration

b) Explain the difference between direct and indirect taxation.

B. Income Tax and NIC Liabilities

1. The scope of income tax

E. Corporation Tax Liabilities

F6 Taxation (UK) Becker Professional Education | ACCA Study System

SCOPE OF THE SYLLABUS

• Tax Years • Meaning

© DeVry/Becker Educational Development Corp. All rights reserved. 1-1

1 Scope of the Syllabus

1.1 The Purposes of Taxation

fuels, alcoholic drinks and tobacco products.

1-2 © DeVry/Becker Educational Development Corp. All rights reserved.

1.2 Relevant Taxes

Income Tax Taxable incomes of individuals, including persons

Corporation All types of taxable profits of companies, including

Capital Gains Chargeable gains of individuals derived from the

Taxable supplies of goods and services made in the

The earnings of employees (for Class 1

and Class 1A NIC (based on the taxable value of

2.1 Income Tax

< A liability to UK income tax is established if:

2.2 Capital Gains Tax (CGT) The F6 syllabus

© DeVry/Becker Educational Development Corp. All rights reserved. 1-3

2.4 Corporation Tax

2.5 Value Added Tax (VAT)

3.1 Tax Years for Personal Taxes

3.2 Accounting Periods for Corporation Tax