2022-ICAS-TC-PoT VIMP

Test of Competence
Principles of Tax:
Notes
2022/23
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Principles of Tax
Index
Tax Rates 2022/23 Page 5
Module 1. Introduction to Taxation Page 23
Module 2. The Income Tax Computation Page 48
Module 3. Other Income, Allowances and Deductions Page 92
Module 4. Property Income Page 112
Module 5. Employment Income Page 143
Module 6. PAYE and NIC Page 172
Module 7. Income Tax Administration Page 195
Module 8. Investments and Pensions Page 214
Module 9. Chargeable Gains Computations Page 234
Module 10. Inheritance Tax Page 274
Module 11. Stamp Taxes Page 303
Module 12. Environmental Taxation and Relief Page 324
Module 13. Professional Conduct Page 338
Module 14. Tax Law and Legislation Page 357
TC – Principles of Tax 2022/23 3

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 4
Tax Rates 2022/23
Contents
Income Tax Allowances 6
Income Tax Main Rates and Bands (excluding Scottish rate) 7
Scottish income tax rates and bands for non-savings, non-dividend income 8
Furnished Holiday Letting (‘FHL’) 9
Individual Savings Account 9
Pension scheme limits 9
Capital Gains Tax Rates 10
Principal Private Residence (‘PPR’) Exempt Periods 2021/22 and 2022/23 10
Official Rate of Interest 10
Employment Income – Car Benefit rates 11
Car Fuel Benefits 12
Van Benefits 12
Approved Mileage Rates (AMR) 13
Schedule 8 TCGA 1992 - Leases 14
National Insurance Rates 15
Inheritance Tax 16
Stamp Taxes 17
Environmental Taxes 20
Harmonised Penalty Regime 21

Tax Rates 2022/23
Income Tax Allowances
2021/22 2022/23
Basic personal allowance £12,570 £12,570
Income level for restriction of personal allowance £100,000 £100,000
Marriage allowance transferable amount £1,260 £1,260
Blind person’s allowance £2,520 £2,600
Property income allowance £1,000 £1,000
Rent-a-room relief £7,500 £7,500

Income Tax Main Rates and Bands (excluding Scottish rate)
Income Tax Rates 2021/22 2022/23
Main and savings rates
Starting rate for savings income only 0% 0%
Basic rate for non-savings and savings income 20% 20%
Higher rate for non-savings and savings income 40% 40%
Additional rate for non-savings and savings income 45% 45%
Dividend rates
Dividend ordinary rate – dividends taxable at the basic rate 7.5% 8.75%
Dividend upper rate – dividends taxable at the higher rate 32.5% 33.75%
Dividend additional rate – dividends taxable at the additional rate 38.1% 39.35%
Income Tax Bands
Basic rate on income up to £37,700 £37,700
Higher rate on income £37,701 - £150,000 £37,701 - £150,000
Additional rate on income over £150,000
Savings income starting rate band £5,000 £5,000
Personal savings allowance:
Basic rate taxpayers £1,000 £1,000
Higher rate taxpayers £500 £500
Additional rate taxpayers Nil Nil
Dividend allowance at 0% £2,000 £2,000

Scottish income tax rates and bands for non-savings, non-dividend income
Scottish income tax rates 2021/22 2022/23
Starter rate 19% 19%
Basic rate 20% 20%
Intermediate rate 21% 21%
Higher rate 41% 41%
Top rate 46% 46%
Scottish income tax bands 2021/22 2022/23
Starter rate on income up to £2,097 £2,162
Basic rate on income £2,098 - £12,726 £2,163 - £13,118
Intermediate rate on income £12,727 - £31,092 £13,119 - £31,092
Top rate on income over £150,000 £150,000

Furnished Holiday Letting (‘FHL’) 2021/22 2022/23
Available for letting (days per annum) 210 210
Actually let (days per annum) 105 105
Longer term occupation (continuous days let to same person) 31 31
Longer term occupation total days 155 155
Individual Savings Account 2021/22 2022/23
Investment limit £20,000 £20,000
Junior ISA £9,000 £9,000
Lifetime ISA limit £4,000 £4,000
Pension scheme limits 2021/22 2022/23
Annual allowance £40,000 £40,000
Minimum allowance £4,000 £4,000
Lifetime allowance £1,073,100 £1,073,100
Maximum contribution qualifying for tax relief without earnings £3,600 £3,600

Capital Gains Tax Rates 2021/22 2022/23
Annual exempt amount £12,300 £12,300
CGT rates for individuals
Gains in remaining basic rate band 10%* 10%*
Gains exceeding basic rate band 20%* 20%*
*The rates are 18% (gains in remaining basic rate band) and 28% (gains exceeding basic rate band) where the gain
arises on residential property.
Principal Private Residence (‘PPR’) Exempt Periods 2021/22 and 2022/23
Actual Occupation Deemed Occupation
Any period the property is occupied by owner • Up to three years for any reason*
• Any period working abroad as an employee*
• Up to four years working in the UK either as an
employee or self-employed where the distance
from your place of work prevents you from living
at home*
• Final 9 months of ownership
*In order for these periods to be exempt for CGT PPR purposes, there must be actual occupation before and after
the period of absence (unless re-occupation is not possible as a result of the owner’s employment)
Official Rate of Interest
2021/22 2022/23
Official rate of interest 2.00% 2.00%

Employment Income – Car Benefit rates1
CO2 Emissions Electric range 2021/22 2022/23
0g/km n/a 1% 2%
1-50g/km 130 + miles 1% 2%
1-50g/km 70-129 miles 4% 5%
1-50g/km 40-69 miles 7% 8%
1-50g/km 30-39 miles 11% 12%
1-50g/km <30 miles 13% 14%
51g/km to 54g/km 14% 15%
55g/km 15% 16%
60g/km 16% 17%
65g/km 17% 18%
70g/km 18% 19%
75g/km 19% 20%
80g/km 20% 21%
85g/km 21% 22%
90g/km 22% 23%
95g/km 23% 24%
100g/km 24% 25%
105g/km 25% 26%
110g/km 26% 27%
115g/km 27% 28%
120g/km 28% 29%
125g/km 29% 30%
130g/km 30% 31%
135g/km 31% 32%
140g/km 32% 33%
145g/km 33% 34%
1. Supplement for diesel = 4% (capped at 37%)

CO2 Emissions Electric range 2021/22 2022/23
150g/km 34% 35%
155g/km 35% 36%
160g/km 36% 37%
165g/km or above 37% 37%
Car Fuel Benefits
2021/22 2022/23
Appropriate percentage (per car benefit rates) £24,600 £25,300
Van Benefits
2021/22 2022/23
Private use benefit – CO2 emissions of 0g/km £Nil £Nil
Private use benefit – CO2 emissions >0g/km £3,500 £3,600
Fuel benefit £669 £688

Approved Mileage Rates (AMR)2
The below details relate to both tax years:
Car or van
First 10,000 business miles 45p
Additional business miles 25p
Motorcycles 24p
Bicycles 20p
Carrying passenger on business 5p
2.
From 2011/12 onwards

Schedule 8 TCGA 1992 - Leases
Years Percentage Years Percentage
50 (or more) 100 25 81·100
49 99·657 24 79·622
48 99·289 23 78·055
47 98·902 22 76·399
46 98·490 21 74·635
45 98·059 20 72·770
44 97·595 19 70·791
43 97·107 18 68·697
42 96·593 17 66·470
41 96·041 16 64·116
40 95·457 15 61·617
39 94·842 14 58·971
38 94·189 13 56·167
37 93·497 12 53·191
36 92·761 11 50·038
35 91·981 10 46·695
34 91·156 9 43·154
33 90·280 8 39·399
32 89·354 7 35·414
31 88·371 6 31·195
30 87·330 5 26·722
29 86·226 4 21·983
28 85·053 3 16·959
27 83·816 2 11·629
26 82·496 1 5.983
If the duration of the lease is not an exact number of years, the percentage to be derived from the Table above shall
be the percentage for the whole number of years plus one-twelfth of the difference between that and the percentage
for the next higher number of years for each odd month counting an odd 14 days or more as one month.

National Insurance Rates
2021/22 2022/23
Annual Monthly Weekly Annual Monthly Weekly
Class 1 figures:
Lower earnings limit (LEL) £6,240 £520 £120 £6,396 £533 £123
Primary threshold (PT) £9,568 £797 £184 £12,570* £1,048* £242*
Secondary threshold (ST) £8,840 £737 £170 £9,100 £758 £175
Upper earnings limit (UEL) £50,270 £4,189 £967 £50,270 £4,189 £967
Upper secondary threshold for £50,270 £4,189 £967 £50,270 £4,189 £967
U21s (UST)
Apprentice Upper Secondary £50,270 £4,189 £967 £50,270 £4,189 £967

Threshold for U25s (AUST)
*Please note that the information shown here applies from 1 July 2022 but for the purposes of PoT exam assume it
to hold true for the entire tax year
2021/22 2022/23
Class 1 Primary Contribution Rates Not Contracted Out
Earnings between PT and UEL 12% 13.25%
Earnings above UEL 2% 3.25%
Class 1 Secondary Contribution Rate Not Contracted Out
Earnings above ST 13.8% 15.05%
Employment allowance £4,000 £5,000
Class 1A 13.8% 15.05%
Class 1B 13.8% 15.05%
Class 2 contributions
Normal rate £3.05 pw £3.15 pw
Small profits threshold £6,515 pa £6,725 pa
Class 3 contributions £15.40 pw £15.85 pw

Class 4 contributions 2021/22 2022/23
Annual lower profits limit (LPL) £9,568 £9,880
Annual upper profits limit (UPL) £50,270 £50,270
Percentage rate between LPL and UPL 9% 10.25%
Percentage rate above UPL 2% 3.25%
Inheritance Tax
Nil rate band:
6 April 2007 – 5 April 2008 up to £300,000
6 April 2008 – 5 April 2009 up to £312,000
6 April 2009 – 5 April 2023 up to £325,000
2021/22 2022/23
Residence nil rate band £175,000 £175,000
Rate of tax on death estate 40% 40%
Quick Succession Relief:
Gap between first and second charge Percentage reduction
0 – 1 years 100%
1 – 2 years 80%
2 – 3 years 60%
3 – 4 years 40%
4 – 5 years 20%

Stamp Taxes
Stamp Duty 0.5%
Stamp Duty Reserve Tax
Paperless transfers 0.5%
Stamp Duty Land Tax (land and buildings in England or Northern Ireland)
Residential (excluding first-time buyers)
0% Up to £125,000 (1)
2% Next £125,000 (the portion from £125,001 to £250,000) (1)
5% Next £675,000 (the portion from £250,001 to £925,000) (1) (2)
10% Next £575,000 (the portion from £925,001 to £1,500,000) (1) (2)
12% Over £1,500,000 (1) (2)
(1) If the property purchased is an additional property costing £40,000 or more such that an individual now owns
more than one residential property, there is an additional 3% Stamp Duty Land Tax to be paid on the full value of
the transaction.
(2) If the purchaser is a non-natural person the rate is 15% of the total consideration for acquisitions over £500,000.
Residential purchases by first-time buyers
0% Up to £300,000
5% Next £200,000 (the portion from £300,001 to £500,000)
Above £500,000 - no relief due, the standard rates above apply on full purchase price
Non-residential
0% Up to £150,000
2% Next £100,000 (the portion from £150,001 - £250,000)
5% Over £250,000

Stamp Duty Land Tax on NPV of rent
Net present value of rent
Residential Non-residential or mixed
0% Up to £125,000 Up to £150,000
1% Excess over £125,000 Next £4,850,000 (the portion from £150,001 - £5,000,000)
2% n/a Over £5,000,000
Land and Buildings Transaction Tax (land and buildings in Scotland)
Residential (excluding first-time buyers)
0% Up to £145,000 (1)
12% Over £750,000(1)
(1) If the property purchased is an additional property costing more than or equal to £40,000 such that an individual
now owns more than one residential property, there is an additional 4% Land and Buildings Transaction Tax to
be paid on the full value of the transaction.
Residential purchases by first-time buyers
0% Up to £175,000
Above £250,000 – the standard rates above apply to the excess
Non-residential
0% Up to £150,000
5% Over £250,000

Land and Buildings Transaction Tax on NPV of rent for non-residential leases
0% Up to £150,000
1% Next £1,850,000 (the portion from £150,001 to £2,000,000)
2% Excess over £2,000,000
Land Transaction Tax (land and buildings in Wales)
Residential
0% Up to £180,000(1)
3.5% Next £70,000 (the portion from £180,001 to £250,000)(1)
5% Next £150,000 (the portion from £250,001 to £400,000)(1)
7.5% Next £350,000 (the portion from £400,001 to £750,000)(1)
10% Next £750,000 (the portion from £750,001 to £1,500,000)(1)
12% Over £1,500,000(1)
(1) If the property purchased is an additional property costing £40,000 or more such that an individual now owns
more than one residential property, there is an additional 4% Land Transaction Tax to be paid on the full value of
the transaction.
Non-residential
0% Up to £225,000
5% Next £750,000 (the portion from £250,001 to £1,000,000)
6% Over £1,000,000
Land Transaction Tax on NPV of rent for non-residential leases
0% Up to £150,000
1% Next £1,850,000 (the portion from £150,001 to £2,000,000)
2% Excess over £2,000,000

Environmental Taxes
Climate Change Levy (‘CCL’)
Main rates of CCL From 1 April 2021 From 1 April 2022
Electricity 0.775p/kw hr 0.775p/kw hr
Gas 0.465p/kw hr 0.568p/kw hr
Petroleum Gas 2.175p/kg 2.175p/kg
Other taxable commodity e.g., coal 3.640p/kg 4.449p/kg
Carbon Price Support rates of CCL From 1 April 2021 From 1 April 2022
In Great Britain, gas supplied by a gas utility 0.331p/kw hr 0.331p/kw hr
LPG 5.280p/kg 5.280p/kg
Coal and other solid fossil fuels 154.790 pence per 154.790 pence per
(petroleum coke; lignite; coke and gigajoule on gross gigajoule on gross
semi-coke of coal or lignite) calorific value calorific value
Landfill Tax, Scottish Landfill Tax and From 1 April 2021 From 1 April 2022
Landfill Disposals Tax (Wales)
Standard rate £96.70/tonne £98.60/tonne
Lower rate £3.10/tonne £3.15/tonne
Aggregates Levy From 1 April 2021 From 1 April 2022
Standard rate £2/tonne £2/tonne
Plastic packaging tax From 1 April 2021 Introduced from 1 April 2022
Standard rate N/A £200/tonne

Harmonised Penalty Regime
FA 2007 Sch 24 – Penalties for Errors
A penalty is payable when a loss of tax arises due to a taxpayer making a careless error or mistake in a tax return or
document or a third party supplies false information or deliberately withholds information in connection with another
person’s return or document or when HMRC raises an assessment for tax and the taxpayer fails to notify HMRC that
the assessment is too low.
The penalty is:
a) for careless action, 30% of the potential lost revenue,

b) for deliberate but not concealed action, 70% of the potential lost revenue, and
c) for deliberate and concealed action, 100% of the potential lost revenue.
If a person who would otherwise be liable to a penalty of a percentage shown above has made a disclosure, HMRC
may reduce the standard percentage to one that reflects the quality of the disclosure. The standard percentage may
not be reduced to a percentage that is below the minimum shown for it:
Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure
30% 15% 0%
70% 35% 20%
100% 50% 30%
Disclosure is unprompted if made at a time when the person making it has no reason to believe HMRC have
discovered or are about to discover the inaccuracy.
FA 2008 Sch 41 – Penalties for Failure to Notify Chargeability
A penalty is payable based on the unpaid amount of tax that would have, had the notification not been delayed, been
due on the normal due date (the ‘potential lost revenue’).
The penalty is:
a) for deliberate and concealed failure, 100% of the potential lost revenue,
b) for deliberate but not concealed failure, 70% of the potential lost revenue,
c) for any other case, 30% of the potential lost revenue.

If a person who would otherwise be liable to a penalty of a percentage shown above has made a disclosure, HMRC
may reduce the standard percentage to one that reflects the quality of the disclosure. The standard percentage may
not be reduced to a percentage that is below the minimum shown for it:
Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure
30% Notified within 12 months: 10% Notified within 12 months: 0%
Notified in any other case: 20% Notified in any other case: 10%
70% 35% 20%
100% 50% 30%
Disclosure is unprompted if made at a time when the person making it has no reason to believe HMRC have
discovered or are about to discover the relevant act or failure.
FA 2009 Sch 55 – Penalties for Failure to Make Returns etc.
A penalty is payable where a person fails to make or deliver a return, or to deliver any other document, before the
filing date.
Penalty
£100 Late
£10 daily penalty (90 days max) Three months late
Greater of: 5% of the tax due on return or £300 Six months late
For a return that is more than twelve months late, a tax geared penalty will apply:
• 100% for a deliberate failure to file the return with concealment;

• 70% for a deliberate failure to file the return and with no concealment; or
• 5% for a non-deliberate failure to file the return.
In each case a minimum penalty of £300 applies.
FA 2009 Sch 56 – Penalties for Failure to Make Payments on Time
A penalty is payable where a person fails to pay an amount of tax on or before the ‘penalty date’.
Income tax
Capital gains tax
Stamp duty reserve tax
Stamp duty land tax
Penalty date 30 days after normal payment date
Initial penalty of 5% based on: Any unpaid tax at penalty date
Further penalty of 5% based on: Unpaid tax at 5 months after penalty date
Further penalty of 5% based on: Unpaid tax at 11 months after penalty date

Module 1. Introduction to Taxation
Contents
1.1 Introduction 24
1.2 Learning Outcomes 24
1.3 Overview of Tax in the UK 25
1.3.1 General Theory of Tax 25
1.3.2 Behavioural Aspects of Taxation 27
1.3.3 Main UK National Taxes 28
1.3.4 Devolved and Regional Taxes 28
1.3.5 Fiscal Years 29
1.4 Parliamentary Control & Structure of HMRC 29
1.4.1 The Budget 29
1.4.2 The Treasury 30
1.4.3 HMRC 30
1.5 The Tax Self-Assessment System 31
1.6 Tax Framework of Assessment, Appeals and Enquiries 31
1.6.1 Assessment 31
1.6.2 Making Tax Digital 33
1.6.3 Appeals 34
1.6.4 Enquiries - Commencing an Enquiry 35
1.6.5 Enquiries - Settling the Enquiry 37
1.7 Tax Penalties 37
1.7.1 Filing an incorrect return 38
1.7.2 Failure to notify chargeability to tax 39
1.7.3 Late filing of a tax return 40
1.7.4 Failure to pay on time 41
1.8 Tax Planning, Avoidance and Evasion 42
1.8.1 Tax Evasion 43
1.8.2 Tax Avoidance 44
1.8.3 The General Anti-Abuse Rule and Anti-Avoidance Legislation 44
1.8.4 Disclosure of Tax Avoidance Schemes (‘DOTAS’) 45
1.9 Summary and Review 46
Appendix 1 – Solutions to Module Activities 47
TC – Principles of Tax 2022/23 – Module 1 23

1. Introduction to Taxation
1.1 Introduction
Even though this is the first module of the Principles of Taxation course, as taxpayers, every student should already
have some knowledge of the UK tax system. Completing Workshop Exercise 1 will test your existing knowledge
before you start the course.
An understanding of the reasons for taxation, the powers of the government and the relevant authorities, and the
main processes involved in the tax system underpins the entire tax syllabus. This module provides an introduction
and overview that is built on later in the course and into your later studies.
For some modules, a statutory reference table is attached as an Appendix showing the key pieces of legislation
covered in this module. Most references in this table are to the Taxes Management Act 1970 which governs the
management of income tax. You do not need to learn these statutory references; they are provided as they may be
useful to you in your future studies when you will be provided with tax legislation handbooks.
1.2 Learning Outcomes
On completion of this module, you should be able to:
1. describe the basic structure of the UK tax system;

2. describe the structure and role of HMRC;
3. describe the system of assessment and appeals for income tax;
4. describe the powers of HMRC in relation to the enquiry process;
5. explain the key tax penalties; and
6. describe the differences between tax evasion, avoidance, and planning.
Achieving these learning outcomes will help you to meet the first and second learning outcomes of this course as a
whole per the syllabus.
Notes

1.3 Overview of Tax in the UK
1.3.1 General Theory of Tax
Historically in the UK, taxes were raised to fund the monarchy and to pay for defence in times of war. The main
objective of the UK tax system is still to raise revenue to finance public expenditure.
Taxation is a compulsory levy on income, gains, spending and wealth for which the taxpayer receives no specific
benefit in return. However, taxation is generally justified by the indirect benefits it provides to society such as
government, policing, healthcare, education, and welfare. In addition to these services, the UK has institutions and
systems in place that support businesses in trading and allow a stable economy to thrive. As such, tax can be seen
as a necessary part of a civilised society.
Tax rates and allowances are set by the government of the day with a view to the revenue collected being sufficient
to meet its planned spending. The tax raised will not always be enough to cover spending (known as a budget
deficit). In some years, taxes raised will more than cover spending, resulting in a budget surplus. Where a deficit
arises, the government must seek cash elsewhere, such as from borrowings.
As taxes raised are used to provide public services, the annual process of setting tax rates and reporting on
spending is subject to intense scrutiny in Parliament, and in the media. Many changes in government have come
about over the years partly because of public reaction to tax policy.
In addition to financing public spending, taxes can also be used as a means of:
• Redistributing income or wealth

• The tax system is a means of ensuring the redistribution of income and wealth with the objective of reducing
poverty and promoting social welfare;
• Economic growth and the encouragement of certain sectors of the economy
• The tax system is a means of promoting the growth of the country’s economy and creating a sound
infrastructure for businesses. This can be achieved through offering tax incentives to certain sectors, or
increasing/decreasing taxes in response to changes in the economic climate; and/or
• Encouraging certain behaviour
• This particularly applies to tax rules relating to environmental issues or public health, for example, taxes
to discourage behaviour such as putting waste to landfill (landfill tax) or consuming alcohol, tobacco, and
sugar (specific taxes are in place for each of these). Tax may also be used as a means of encouraging more
environmentally friendly decisions (lower taxes on lower emission cars).
Notes

In the 18th century the economist Adam Smith set up his ‘Canons of Taxation’, outlining the desired characteristics of
a tax system, and these are still used today. They can be expressed as follows:
• Equity – (sometimes referred to as Equality) Taxes should be fair. This could mean different things but is
interpreted as meaning that tax liabilities should be linked to the ability to pay; those who earn more should
pay more tax.
• Certainty – A tax system with certainty allows taxpayers to understand the tax they should be due to pay,
when this needs to be paid by and how it should be paid. A tax system with uncertainty can lead to tax evasion.
Certainty also allows taxpayers and businesses to plan.
• Convenience – The canon of convenience means that it should not cost the taxpayer much to comply with tax
rules. This can translate into the desire for a simple system with a high degree of clarity, where the taxpayer
is not inconvenienced when settling tax affairs. Again, a lack of convenience in a tax system can lead to tax
evasion.
• Efficiency – (sometimes referred to as Economy) When collecting taxes, the costs of doing so should be
minimised, to maximise the revenue being received by the government.
We often see these canons of taxation being referred to in tax policy documents issued by tax authorities, even
today.
Individual rates of tax, and the whole system, are often described as being progressive, regressive, or proportional.
These terms can be explained as follows:
• Progressive – average percentage rate of tax increases as income rises (e.g., income tax). In a progressive
tax system, better off taxpayers pay not only more tax than the less well off, but also more tax as a proportion of
income, gains or wealth;
• Regressive – average percentage rate of tax reduces as income rises. In a regressive system, the less well-off
will suffer a higher tax burden than the better off;
• Proportional – rate of tax remains constant irrespective of the level of income (e.g., value added tax). VAT is
often described as a proportional tax as the rate is set based on the product or service being acquired and will
be the same for all consumers. It could however be argued that this makes VAT a regressive tax as the VAT
burden on a less well-off individual will be higher as a percentage of income than the VAT burden for the same
purchase by a better off individual.
Notes

1.3.2 Behavioural Aspects of Taxation
One of the main considerations in relation to tax behaviours is a taxpayer’s willingness to comply with tax legislation
and pay the right amount of tax, on time.
As was discussed above, a system that is seen as fair, certain, and convenient can help with increasing taxpayer
compliance. Avoiding too much complexity in the tax system has been shown to increase compliance. The
government introduced the Office for Tax Simplification several years ago, which is an independent body which looks
at ways of simplifying our tax system.
Another consideration is how the application of a tax may change a taxpayer’s behaviour regarding their financial
affairs. Often taxpayers will change their behaviour in ways to avoid paying a particular tax thus resulting in a lower
overall tax liability. This has been shown to happen historically when the top rates of income tax were increased.
However, the resultant increase in overall tax income to the government was lower than expected as taxpayers
started to reorganise their affairs to reduce their personal liabilities.
Such changes in behaviour are sometimes the intention of the tax imposition. Take, for example, the Soft Drinks
Industry Levy, or the ‘Sugar Tax’ as it is known. Soft drinks producers are taxed based on the sugar content of their
products. The levy was introduced in 2018 and was earmarked to fund sport in primary schools to help with the
problem of childhood obesity.
The levy immediately led to many soft drinks’ producers cutting the sugar content of their drinks, thus reducing the
tax payable on their products. This, of course, meant that the fund available for primary school sports was less than
it would otherwise have been but the cut in the sugar content of the drinks still met the policy aim of the tax.
HMRC also use deterrence as a way of trying to influence taxpayer behaviour. There are tax penalties for non-
compliance which are covered later in this module (Section 1.7). These penalties are generally linked to taxpayer
behaviour with the penalties for careless errors, non-reporting or late filing being significantly less than those for
deliberate acts.
Notes

1.3.3 Main UK National Taxes
HMRC administers the UK national tax system. Each tax can be referred to as being direct or indirect.
Direct taxes are charged on income (i.e., when money is earned):
Tax: Suffered by:
Income tax Individuals
Corporation tax Companies
Capital gains tax Individuals
Inheritance tax Individuals
Petroleum revenue tax Oil companies
Indirect taxes are charged on expenditure (i.e., when money is spent):
Tax: Suffered by:
Value added tax Consumers
Stamp tax Purchasers
Insurance premium tax Purchaser of insurance policy
Airport passenger tax Travellers
Soft drinks industry levy (‘sugar tax’) Consumers of sugary drinks
1.3.4 Devolved and Regional Taxes
Over the past few years, a number of tax raising powers have been devolved from the UK Parliament to the
devolved administrations in Scotland, Wales and Northern Ireland.
The Scotland Act 2012 fully devolved the power to raise taxes on land transactions and on waste disposal to landfill
which has led to the creation of Scottish Landfill Tax and Land & Buildings Transaction Tax which have been
charged since April 2015.
The Scotland Act 2016 gave the Scottish Parliament the power to set its own rates and bands of income tax which
have applied to ‘Scottish taxpayers’ since April 2016. You will learn more about this in Module 2.
The Wales Act 2014 gave the National Assembly for Wales the powers to introduce a Land Transaction Tax and
Landfill Disposals Tax from April 2018. Since April 2019, powers to vary income tax rates for Welsh taxpayers have
also been introduced, though for 2022/23 they are the same rates as the rest of the UK.
The Corporation Tax (Northern Ireland) Act 2015 provides for the devolution of corporation tax powers to the
Northern Ireland Assembly; however, the implementation of this measure has been delayed.

In addition to the national taxes mentioned above, there are several taxes that are administered by local government
on a regional basis. These include council tax, local business rates and water rates. The level of council tax and
business rates are set at a local level and the income is used to provide householders and businesses in the area
with services.
Further detail of regional taxes is outside the scope of this course.
1.3.5 Fiscal Years
Individuals pay various taxes including income tax, capital gains tax, VAT, and inheritance tax. Individuals pay taxes
for the ‘fiscal year’ (sometimes referred to as the ‘tax year’). This runs from 6 April to 5 April. Fiscal year 2022/23
runs from 6 April 2022 to 5 April 2023.
The taxation of companies is not covered in the TC course but will be covered in later studies.
You should now be able to meet learning outcome number one.
1.4 Parliamentary Control & Structure of HMRC
It is the UK government which creates the tax legislation used to set tax rates and allowances. HM Treasury is the
government department which is responsible for setting tax policy which results in our tax legislation. This legislation
comes about as the result of a process which generally starts with a budget announcement in Parliament followed by
the introduction of a Finance Bill. Several parliamentary processes are followed to scrutinise and amend the bill and
finally the process ends with the passing of a Finance Act.
Once the tax rules have been enacted, it is the job of Her Majesty’s Revenue and Customs (‘HMRC’) to administer
the system and ensure that the right amount of tax is collected each year.
1.4.1 The Budget
In the Budget, the government determines its budget requirements (i.e., spending) for the coming financial year
and how it will finance the expenditure (through tax revenue).
The Finance Bill is released on budget day. This is the draft legislation which then undergoes several parliamentary
processes, including being scrutinised by the opposition parties, before becoming the Finance Act which is the
binding legislation. There is further discussion of the budget process in Module 14.
Notes

1.4.2 The Treasury
Along with several responsibilities that encompass public spending and ensuring the economic growth of the UK,
HM Treasury (often referred to as the Treasury) has responsibility for the strategic oversight of the UK tax system.
The management of the Treasury is the responsibility of the Chancellor of the Exchequer.
1.4.3 HMRC
HMRC is the non-ministerial department of the government which administers most UK taxes by implementing and
maintaining the policies created by the Treasury. A non-ministerial department is one where there is no direct political
oversight, instead the organisation is headed up by senior civil servants.
The Board of HMRC consists of both Non-Executive and Executive members and is tasked with overseeing HMRC
strategy and providing challenge, advice, and assurance to the executive team.
HMRC has four operational groups: personal tax, benefits and credits, business tax and customer compliance. The
responsibilities of HMRC have increased over recent years and now include the collection and administration of
national insurance contributions, the enforcement of the Minimum and National Living Wages, the collection of
student loan repayments and the administration of tax credits and child benefit.
HMRC offices range from general centres to specialist offices. The general offices perform the day-to-day work on
Pay As You Earn (‘PAYE’) codes and the routine checking and computation of ‘self-assessments’ for taxpayers. In
addition, they conduct compliance work such as enquiries into selected business accounts, PAYE audits and follow
up collection work. Most general enquiries from taxpayers are now dealt with through the HMRC website or by
phone or email.
HMRC also have ‘mobile’ advisers who can visit taxpayers who need extra help with their taxes. Recently, HMRC
have introduced a web chat service that can help taxpayers looking online for information. The telephone service,
web chat and mobile advisers have replaced the old system of walk-in enquiry centres across the UK.
The specialist offices within HMRC deal with certain issues where a degree of specialism or expertise is required
such as the:
• Capital Taxes Office (Trusts and Estates);

• Research and Development Unit;
• Shares Valuation Division;
• Charities office;
• Employees Shares and Securities Unit; and
• Pension Schemes Services.
You should now be able to meet learning outcome number two.

1.5 The Tax Self-Assessment System
The UK has a self-assessment system of taxation (first introduced in the 1990’s) which means that taxpayers are
responsible for working out their own tax liabilities, notifying HMRC that these need reporting and reporting and
paying the tax due by the relevant deadlines.
The reporting of tax liabilities is normally done via a self-assessment tax return, for example the personal tax return
or the company tax return. The return will show the tax due and include the necessary information requested to back
up the figures. Taxpayers are also expected to make prompt payment without necessarily receiving reminders of the
due dates of payment.
This involves significant amounts of publicity to educate the individual taxpayer, using television/newspaper adverts,
website publicity and additional booklets for taxpayers. With changes to the way in which some taxes were reported
during recent years you may have seen some of this publicity under the banner of ‘Making Tax Digital’.
The self-assessment system for individuals is discussed in greater detail in Module 7.
1.6 Tax Framework of Assessment, Appeals and Enquiries
There are three key areas in this framework:
• Assessment - the means by which taxpayers are assessed to pay tax;

• Appeals - allowing taxpayers to appeal HMRC assessments and decisions; and
• Enquiries - the power of HMRC to seek further information on a taxpayer’s affairs.
When we refer to taxpayers, we mean both individuals and companies, however you will not cover corporation tax
self-assessment until later studies.
1.6.1 Assessment
Under tax self-assessment, the taxpayer is responsible for calculating the correct legal tax charge and paying this
to HMRC on time. One of the main advantages of this approach for HMRC is that it can focus its resources on
checking the accuracy of self-assessments and pinpointing ‘risk’ areas. Such work is known as compliance and is
increasingly carried out using technology to gather and check data. HMRC’s ‘Connect’ software system draws on
information from a variety of sources with the aim of detecting potential tax evasion or inaccuracies in tax returns.
Notes

The tax return should contain all the information needed to calculate the taxpayer’s total taxable income (from all
sources) and any chargeable gains.
The personal self-assessment tax return should be filed with HMRC by:
• 31 January after the end of the fiscal year if the return is filed online (31 January 2024 for 2022/23); or
• 31 October after the end of the fiscal year if a paper return is used (31 October 2023 for 2022/23).
HMRC can calculate the tax liability on behalf of the taxpayer if all necessary information is provided (on paper or
online) by the 31 October deadline. Most personal self-assessment tax returns are filed online.
Whichever filing method is used, the individual’s tax liability must be paid by 31 January following the fiscal
year (i.e., 31 January 2024 for 2022/23). We will see in later modules that most individuals will suffer some tax
throughout the fiscal year. This could be via the PAYE system on employment income or instalments of tax paid by
self-employed individuals. The payment due by 31 January is therefore often the difference between the tax liability
for the year and the tax already suffered at source.
Not all individuals are required to fill in a tax return – many have all their tax dealt with at source through the PAYE
system and therefore have no obligation to complete a return.
Once a self-assessment return has been submitted, the taxpayer or HMRC may make amendments or corrections to
the return. The time limits for these are covered in more detail later in the course.
Although rare, officers of HMRC may issue an assessment for tax payable. This could occur in instances where an
element of income has been omitted from a return, in which case the officer is permitted to make an assessment to
recover the tax which would otherwise be lost. Where the loss of tax is due to taxpayer carelessness, the time limit
for such assessments is 6 years from the end of the tax year; where deliberate action led to the loss, the time limit is
extended to 20 years.
Notes

1.6.2 Making Tax Digital
“Making Tax Digital” (‘MTD’) is an ongoing project for HMRC and represents a significant change to the UK tax
system linked to digital record-keeping and online submissions.
HMRC already holds a lot of the information required to complete a personal self-assessment tax return as it
receives this information from other sources (such as employers). UK taxpayers now have this information shown
on their online ‘Personal Tax Account’, access via the HMRC website, allowing them to check and validate the
information rather than populate a tax return themselves. Individuals or businesses in receipt of income or suffering
tax deductible expenses which HMRC are not already aware of, will have to provide this information. However, this
can be done during the tax year rather than as in the current system which involves retrospectively filing a self-
assessment return.
As a UK taxpayer, you have a Personal Tax Account which you can activate and log into using the HMRC website.
MTD will eventually replace the system of filing one annual return and instead require accounting records to be
stored digitally and quarterly returns to be submitted to HMRC during the tax year directly from accounting
software. Taxpayers will have access to an estimate of their tax bills based on these submissions and will be able to
pay their bill as they go if they wish. A final, ‘washup’, return will be required after the end of the year to finalise the
position.
Only businesses and landlords with annual turnover above the VAT registration threshold (currently £85,000) will
have to keep digital records.
This system is intended to be mandated as follows:
VAT registered businesses with taxable turnover Since April 2022 (some VAT registered businesses
above the VAT threshold from April 2019)
Income tax Required to use from 6 April 2024, where business/

property income exceeds £10,000
Corporation tax Not mandated before 2026
Notes

1.6.3 Appeals
Under the self-assessment system taxpayers can appeal against:
• HMRC generated assessments;

• HMRC amendments to self-assessments; and
• disallowance by HMRC of any claim made in a return.
The appeal will initially be made to HMRC within 30 days of the amendment or assessment. The notice of appeal
must state the grounds of the appeal. If the appeal cannot be settled by negotiation with HMRC, it can be taken to
the independent tax tribunal, a two-tier system. For most appeals, it will be the First-tier tribunal that will hear the
initial case.
The Upper Tribunal will hear cases which have been appealed from the ‘First-tier’ on points of law. A point of law
involves the interpretation of a legal principle as distinct from a question of fact which involves interrogating the facts
of a scenario. The Upper Tribunal will also hear complex cases in the first instance.
An appeal from the Upper Tribunal to the courts can again only be made on a point of law rather than a re-
examination of the facts of the case.
In Scotland, the appeal will be heard by the Court of Session. In England and Wales, an appeal will move from
the Upper Tribunal to the Court of Appeal.
In both situations, appeals will then move finally to the Supreme Court.
HMRC also offers an Alternative Dispute Resolution (‘ADR’) programme, using arbitrators known as ‘facilitators’
to work to reach an agreement between the taxpayer and HMRC in the case of a dispute. The facilitator will work as
an independent, third-party mediator focussing on areas to be resolved and help re-establish communication.
This programme is available to individual taxpayers and to small and medium enterprises (‘SME’) on application
to HMRC. ADR can be used for disputes relating to both direct taxes and VAT, which could arise where there are
disagreements on the facts of a case, or where the taxpayer does not understand why HMRC is requesting specific
information.
If the dispute is not resolved, the tribunal route remains open for use. The taxpayer does not need to use the ADR
process and may use the traditional tribunal process.
You should now be able to meet learning outcome number three.
Notes

1.6.4 Enquiries - Commencing an Enquiry
HMRC will correct obvious errors in a taxpayer’s return (e.g., arithmetical errors) but most returns will simply be
processed as submitted.
Once the processing is complete, HMRC can look further into the return and, if it wishes, begin an enquiry. An
enquiry could range from a straightforward request for more information on a specific point to a full review of all
relevant books and records.
Where HMRC is investigating one particular area of a taxpayer’s return this will be known as an aspect enquiry. An
alternative would be a full enquiry where HMRC will look at all the information in a return.
The primary legislation covering the enquiry process is s9A TMA 1970. This legislation dictates what items an officer
may enquire into. In addition, the section governs the time limit for the opening of the enquiry. With regard to a
personal self-assessment tax return written notice of the intention to enquire must be given by:
• the end of the period of 12 months after the actual receipt of a return by HMRC for a return filed on time, that
is, for an online return made for 2022/23, filed on 24 November 2023, notice must be given by 24 November
2024; or
• if the return was filed after the due filing date (or in the case of an amendment), the quarter day following the
first anniversary of the actual filing date or the date the amendment was made (quarter days are 31 January,
30 April, 31 July, and 31 October) s9A.
Notes

Activity 1 – Opening an Enquiry
Sam files his 2022/23 personal tax return on 22 May 2024. By what date may HMRC open an enquiry into his
return?
Solution to Activity 1
Enquiries may also be made into claims.
Solution
It is not possible to appeal against an enquiry notice issued s9A. Alongside the enquiry process, the taxpayer may
also be required to produce documents, accounts, or other information para 1, Sch 36 FA2008. This request does
not have to be part of a formal enquiry. It is possible to appeal against this request for information if it is perceived
to be onerous (unless documents form part of the statutory records). In addition, taxpayers who, for any reason,
believe an enquiry is invalid (e.g., started after the cut-off date) should use this power to appeal. There is a penalty
for failure to comply with the request para 39, Sch 36 FA2008.
HMRC also has the power para 2, Sch 36 FA2008 to call for documents of other persons, for example, the
taxpayer’s accountant. HMRC has been given statutory powers to inspect business premises and to inspect
documents on these premises.
Notes

HMRC does not have to justify the reason for the commencement of the enquiry. In theory, all enquiry cases
could be chosen on a random selection basis. However, in practice, most cases are chosen by reference to the
information in the return and any other information in HMRC’s possession. The enquiry may examine areas
such as gross profit margin, unexpected changes in trends and differences between actual and expected ratios for a
particular industry.
1.6.5 Enquiries - Settling the Enquiry
Generally, an enquiry will be carried out through correspondence and meetings between HMRC and the taxpayer
(often represented by their agent). In most cases, settlement is by agreement between the parties and an
amendment will be made to the self-assessment to reflect the adjustments agreed.
Once the officer has completed the enquiry, they must issue a notice (a ‘closure notice’) that the enquiries are
complete and a statement of the amount of any additional tax that they consider should be included in the tax return
s28A TMA 1970.
Where agreement cannot be reached between the officer and the taxpayer, the appeals process will then be
followed.
At any time during the enquiry, the taxpayer may apply to HMRC to require the officer to notify the taxpayer within a
specified period that the enquiries are complete, unless the officer can demonstrate that he has reasonable grounds
for continuing the enquiry. This provides the taxpayer with a safeguard against enquiries dragging on unnecessarily.
You should now be able to meet learning outcome number four.
1.7 Tax Penalties
There are four key penalties that are used for several taxes. Unless otherwise stated in later modules, you should
assume that these apply to all taxes on the course.
It is important to make the distinction between the submission of a tax return and the payment of any tax due.
There are seperate deadlines for these two events and separate penalties apply for any non-compliance.
The four key penalties covered in this module are:
• Filing an incorrect return (Section 1.7.1);

• Failure to notify chargeability to tax (Section 1.7.2);
• Late filing of a tax return (Section 1.7.3); and
• Failure to pay on time (Section 1.7.4).
Notes

The main details of each penalty are included in your rates sheet, however it is important that you gain an
appreciation of how the penalties are applied.
1.7.1 Filing an incorrect return
There is a unified penalty regime for the filing of incorrect returns across all taxes. The entire basis of the regime is
to forgive or reward good behaviour but to punish bad behaviour which HMRC discovers.
If the taxpayer filed a return that contains a mistake, HMRC will charge a penalty if:
• the error is because the taxpayer failed to take reasonable care;

• the error is deliberate, that is the taxpayer knowingly and intentionally sent an incorrect document, but they did
not take active steps to hide the error; or
• the error is deliberate and concealed, that is the taxpayer knowingly and intentionally sent a false document in
support of the inaccurate figure and took active steps to hide the error.
The penalty is based on a percentage of the ‘potential lost revenue’ i.e., the tax that has not been collected by
HMRC due to the error made in the tax return. It is also dependent on the behaviour of the taxpayer and can be
summarised as follows:
• 30% for careless action, that is, failing to take reasonable care;
• 70% for deliberate action without concealment; and
• 100% for deliberate action with concealment.
Reasonable care must be interpreted with a degree of common sense and a realistic estimate of the capability and
risks involved.
If there is a very large capital gain or a complex transaction, reasonable care would suggest it is advisable to obtain
advice. HMRC accepts that the test of what is reasonable care is subjective.
In one VAT case, the Tribunal noted that ‘for an action to be careless, a taxpayer must have reasonable belief that
the information they are providing is accurate.’ By not checking the accuracy of the information the taxpayer was not
merely being careless; their action, or inaction in this case, amounted to a deliberate failure.
The Tribunal went on further to note that ‘engaging an accountant does not automatically ensure accuracy, and so
such engagement cannot on its own amount to taking adequate steps to ensure accuracy’.
HMRC has made it clear that there is no obligation to employ an agent to avoid penalties. Published guidance on the
HMRC website explains that taxpayers in doubt can ask HMRC for advice.
The penalty for filing an incorrect return can be reduced for full disclosure, co-operation with HMRC and unprompted
Notes

disclosure. The reductions are shown below:
Standard penalty Minimum penalty for Minimum penalty for

prompted disclosure unprompted disclosure
Careless action 30% 15% 0%
Deliberate action without 70% 35% 20%

concealment
Deliberate action with 100% 50% 30%

concealment
Disclosure is ‘unprompted’ if the taxpayer has no reason to believe HMRC have discovered or are about to discover
the failure.
1.7.2 Failure to notify chargeability to tax
It is the taxpayer’s responsibility to notify HMRC when they have not received a notice to file a tax return and they
have income/capital gains which is chargeable to tax.
If the taxpayer fails to notify HMRC of the chargeable income/capital gains, a tax-geared penalty is imposed.
Again, the penalties can be reduced for full disclosure, co-operation with HMRC and unprompted disclosure. The
reductions are shown below:
Standard penalty Minimum penalty for Minimum penalty for

prompted disclosure unprompted disclosure
Careless action 30% 10% if within 12 months 0% if within 12 months
20% if after 12 months 10% if after 12 months
Deliberate action without 70% 35% 20%

concealment
Deliberate action with 100% 50% 30%

concealment
Notes

The penalty is based on the tax outstanding at the following date:
Tax outstanding date
Income tax/capital gains tax 31 January following the relevant fiscal year.
1.7.3 Late filing of a tax return
The relevant deadlines for filing the main tax returns can be found in the following modules:
Module
Income tax 7
Capital gains tax 9
Stamp duty reserve tax 11
Stamp duty land tax 11
Penalty
£100 Late
£10 daily penalty (90 days max) Three months late
Greater of: 5% of the tax due on return or £300 Six months late
For a return that is more than twelve months late, the tax geared penalty is:
• 100% for a deliberate failure to file the return with concealment;

• 70% for a deliberate failure to file the return and with no concealment; or
• 5% for a non-deliberate failure to file the return.
In the case of each tax geared penalty a minimum penalty of £300 applies.
These penalties are cumulative; a return that is eight months late will be charged an initial £100, plus the £10 daily
penalties, in addition to the £300/5% penalty.
Notes

Once again, the tax-geared parts of the penalties can be reduced if the taxpayer discloses any of the following
information to HMRC:
• Telling HMRC about the failure to file the return;

• Giving HMRC reasonable help in quantifying any tax unpaid by reason of its having been withheld; or
• Allowing HMRC access to records for the purpose of checking how much tax is unpaid.
Stamp duty, as distinct from stamp duty reserve tax and stamp duty land tax, retains its own penalty regime for late
filing.
Activity 2 – Late filing
Sam, from Activity 1, was late filing his 2022/23 personal tax return as he submitted it electronically to HMRC
on 22 May 2024.
Calculate the penalty due for this late filing.
Solution
1.7.4 Failure to pay on time
Penalties are imposed in respect of any payments of tax made late. The penalty will be based on the ‘penalty date’
which may vary per tax. Again, stamp duty retains its own penalty regime, but the other main taxes covered on this
course use the common penalties.
Notes

The normal payment dates for each tax can be found in the following modules:
Module
Income tax 7
Capital gains tax 9
Stamp duty reserve tax 11
Stamp duty land tax 11
The penalties can be summarised as follows:
Penalty date 30 days after normal payment date
Initial penalty of 5% based on: Any tax not paid on or before the penalty date (i.e., 31 days late)
Further penalty on 5% based on: Any tax not paid on or before 5 months after the penalty date
Further penalty of 5% based on Any tax not paid on or before 11 months after the penalty date
You should now be able to meet learning outcome number five.
1.8 Tax Planning, Avoidance and Evasion
The areas of tax planning, avoidance and evasion are often confused and in recent times have become a hot topic
both within the world of tax and in the wider media.
The famous quote by Lord Clyde in the Ayrshire Pullman case summed up the previously accepted attitude to tax
avoidance:
‘No man in the country is under the smallest obligation, moral or other, so as to arrange his legal relations
to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his
stores’ (Ayrshire Pullman v CIR)
In more recent times, the phrase ‘tax planning’ has been substituted for what we might term ‘acceptable’ tax
avoidance. This would include straightforward, legal measures that many taxpayers may enter into, such as
deciding to invest in an ISA to reduce income tax liabilities or transferring assets between spouses and civil partners
to make capital gains tax savings.
Notes

Public Trust & Ethics
This shift towards ‘acceptable’ tax planning creates a grey area of tax avoidance which sits between tax
planning and tax evasion. Evasion and avoidance are discussed in more detail below along with a summary of
some of the measures taken by the government to try to counteract perceived ‘unacceptable’ tax avoidance.
1.8.1 Tax Evasion
Tax evasion is where a taxpayer breaks the law to reduce tax payable. There are several ways in which taxpayers
can evade paying tax. These include understating income, overstating expenses or making false claims or
allowances.
The majority of evaded taxes in the UK are thought to be attributed to undeclared income. This is commonly where
people work for cash-in-hand and do not declare the income for tax purposes in any tax returns.
It is difficult to measure the extent of tax evasion in the UK. However, HMRC publish a report every year measuring
the “tax gap”, the difference between the tax which should, in theory, be collected and the tax actually collected by
HMRC. The most recent figures published in relation to 2019/20 (published in September 2021 and corrected in
February 2022) measured this gap at £35bn, or 5.3% of tax liabilities.
Tax evasion, criminal attacks, and the hidden economy account for approximately £13.7bn, or 38%, of the gap as
calculated by HMRC.
Tax evasion is illegal and is a criminal offence. The authorities will usually only resort to criminal prosecution where
there are substantial amounts of lost revenue involved. Minor cases are often settled out of court.
The Criminal Finances Act 2017 created corporate criminal offences of failing to prevent the facilitation of
UK and foreign tax evasion. The Act made it a criminal offence for companies, partnerships, and other corporate
bodies to fail to prevent a person associated with it from criminally facilitating tax evasion.
If an ‘associated person’ facilitates tax evasion whilst acting for one of these corporate bodies, the corporation will be
liable unless it can prove that it had reasonable prevention procedures in place. An associated person includes an
employee, an agent and any other person who performs services for or on behalf of the body.
If a corporate body is guilty of an offence under the new Act it can face criminal prosecution and unlimited fines.
Notes

1.8.2 Tax Avoidance
Tax avoidance has traditionally been seen as taking advantage of opportunities written into legislation, for example,
choosing to make tax-efficient savings and investments. Such actions are now described as tax planning.
There are also loopholes in the legislation which create unintended opportunities for tax avoidance. Some of
these loopholes may be used without a great deal of effort on the part of the taxpayer, however often tax avoidance
will involve some form of contrived, or artificial, arrangement the purpose of which is to produce a tax advantage
rather than any other commercial consideration.
HMRC will usually introduce what is termed ‘anti-avoidance legislation’ to close a loophole once it becomes
apparent. This additional anti-avoidance legislation makes the tax system more complicated and, somewhat
inadvertently, can offer the opportunity to create further elaborate tax avoidance schemes.
When considering potential tax avoidance/evasion the courts will often follow a ‘substance over form’ approach.
This means that the aim of any scheme of transactions will be considered, rather than the individual legal steps
simply being considered. This is sometimes referred to as ‘looking through’ the transaction.
Despite the significant publicity around tax avoidance, it only accounts for £1.5bn, or 4% of the previously mentioned
tax gap. The remainder of the gap is made up of failure to take reasonable care (£6.7bn), differences in legal
interpretation (£5.8bn), non-payment (£4bn), errors (£3.7bn) and the previously mentioned £13.7bn of evasions,
criminal attacks, non-payment, and the hidden economy.
1.8.3 The General Anti-Abuse Rule and Anti-Avoidance Legislation
The General Anti-Abuse Rule (‘GAAR’) provides for the counteraction of tax advantages arising from tax
arrangements that are ‘abusive’. The guidance on the GAAR states that ‘taxation is not to be treated as a game
where taxpayers can indulge in any ingenious scheme to eliminate or reduce their tax liability’ and goes so far as to
state that Parliament has now rejected previous statements like the one from Lord Clyde above.
The GAAR involves a ‘double reasonableness’ test, asking whether the arrangements put in place by a taxpayer
go beyond anything which could reasonably be regarded as a reasonable course of action. The GAAR applies to
income tax, National Insurance contributions, corporation tax, capital gains tax, inheritance tax, petroleum revenue
tax and stamp duty land tax.
Some anti-avoidance rules are built into new legislation when it is issued whilst others are created as a reaction to
many taxpayers using certain avoidance schemes. These rules are to stop these schemes working in future.
Notes

An example of this was the introduction of the ‘disguised remuneration’ rules to remove many of the tax advantages
available to employers paying their employees via Employment Benefit Trusts (‘EBTs’) and gold bullion. These
remuneration schemes were put in place using a complex range of transactions to avoid the normal employment
income rules. The anti-avoidance legislation stopped this practice and removed the tax advantages of such
schemes.
1.8.4 Disclosure of Tax Avoidance Schemes (‘DOTAS’)
Tax advisers are required to register with HMRC any tax avoidance schemes they promote to clients. A tax
avoidance scheme would be one where the main benefit of the transaction or arrangement proposed would be the
obtaining of a tax advantage.
Where a taxpayer makes use of such a scheme, the reference number of it (which will be provided by HMRC upon
its disclosure) must be quoted on their tax return, or full details of the scheme should be provided. This applies to
both direct and indirect taxes.
These rules mean that HMRC receives notice of planning schemes. It does not mean they are issuing approval of
them.
The scheme must be disclosed to HMRC (generally by the scheme promoter) within five days of it being made
available. Disclosure is required where:
• the scheme will, or might be expected to, enable any person to obtain a tax advantage;
• that tax advantage is, or might be expected to be, the main benefit (or one of the main benefits) of the
arrangements; and
• it is a ‘hallmarked’ scheme per the regulations. The hallmarks depend on the type of scheme but include loss
schemes, pension benefits, etc.
Promoters of schemes can be required to provide HMRC with the names and addresses of clients who have
implemented the scheme.
The Professional Conduct in Relation to Taxation guidelines make it clear that a member must not create,
encourage, or promote tax planning arrangements that set out to achieve results that are contrary to the clear
intention of Parliament in enacting relevant legislation and/or are highly artificial or highly contrived and seek to
exploit shortcomings within the relevant legislation.
This guidance is discussed further in Module 13.
You should now be able to meet learning outcome number six.

1.9 Summary and Review
Students should now be aware of:
• A brief general background to tax in the UK and the aims of a tax system.
• The canons of taxation: equity, certainty, convenience, and efficiency.
• The difference between a direct tax (charged on income) and an indirect tax (charged on spending).
• How tax may affect taxpayer behaviour.
• The dates of the fiscal year for individuals (6 April – 5 April).
• Parliamentary control of tax and the role of HMRC:
• The Budget
• Finance Bill to Finance Act
• The Treasury and Chancellor of the Exchequer
• HMRC offices (general and specialist)
• The self-assessment process creating a legal charge to tax:
• Assessments – key deadlines for self-assessment (below), MTD
• Appeals – process for appeals to HMRC, Tribunals, Courts (below)
• Enquiries – deadlines for opening an enquiry (below)
• The key income tax filing payment dates for 2022/23:
• 31 October 2023 filing of paper return or any return if HMRC is to calculate tax;
• 31 January 2024 filing of online returns; and
• 31 January 2024 final payment date.
• Direct tax (and VAT) appeal processes to HMRC (30 days), the independent tax tribunal (two-tier system) and
beyond, on a point of law only, to the courts.
• Enquiries
• raised by 12 months following receipt of return if filed on time
• raised by quarter date following the first anniversary of actual filing date if not filed on time
• full enquiry or aspect
• HMRC will call for documents
• cannot appeal enquiry, can appeal call for documents
• Tax-geared penalties for filing an incorrect return, failing to notify chargeability to tax or late payment of
tax.
• Fixed rate penalties and tax geared penalties on late filing of a tax return.
• The difference between tax evasion, tax avoidance and tax planning.
You should now be able to meet all the learning outcomes for this module. Should you not be able to do so, go back
and read the relevant section(s).
Notes

Appendix 1 – Solutions to Module Activities
Sam’s return was filed late (it was due by 31 January 2024). HMRC may open an enquiry at any point up
to the quarter date after the first anniversary of the filing. The return was filed on 22 May 2024, the first
anniversary being 22 May 2025. The next quarter date (31 January, 30 April, 31 July, 31 October) is 31 July
2025. The enquiry deadline is therefore 31 July 2025.
Back to Activity
Sam’s return was filed late (it was due by 31 January 2024). Sam will receive an initial penalty of £100 on 1
February 2024. No further penalty will be due until the return is more than 3 months late (after 30 April 2024).
As of 1 May 2024, £10 daily penalties will start to accrue for each day that the failure to file continues until the
return is filed on 22 May 2024 (22 days of penalties). The total penalty due will be £320 (£100 + [22 x £10]).
Back to Activity
Notes

Module 2. The Income Tax
Computation
Contents
2.1 Introduction 49
2.3 Income Tax 49
2.4 The Income Tax System 50
2.5 Calculating Taxable Income 51
2.5.1 Categorising Income 51
2.5.2 Trading Income 52
2.5.3 Employment Income and Pension Income 52
2.5.4 Property Income 53
2.5.5 Savings Income 53
2.5.6 Dividend Income 55
2.5.7 Exempt Income 55
2.5.8 Deductions from Income 55
2.6 Computation of Taxable Income – Pro Forma 57
2.7 Calculating Income Tax 59
2.7.1 Bands of Income Tax 59
2.7.2 Rates of Income Tax – non-savings income 61
2.7.3 Rates of Income Tax – savings income 61
2.7.4 The starting rate for savings income 61
2.7.5 The Savings Allowance 65
2.7.6 Rates of Income Tax – dividend income 67
2.8 The Complete Income Tax Computation 68
2.8.1 Allocation of the personal allowance 73
2.8.2 Refund of Overpaid Income Tax 74
2.9 Devolved Income Tax 74
2.9.1 Scottish and Welsh Taxpayers 74
2.9.2 Scottish Bands and Rates 75

2. The Income Tax Computation
A panel discussion is available on myCABLE
2.1 Introduction
The first tax to be introduced in Principles of Taxation is income tax, a tax applicable to individuals.
There are many different types of income we may receive that can be taxed by the government (e.g., employment
income, self-employment income, rental income, bank interest and dividends). The tax legislation splits these
different types of income into separate categories, with each category being calculated and taxed differently.
The taxable income figure, from which the income tax liability is calculated, includes all these different income types.
The main purpose of this module is to enable you to calculate the total income figure, complete a basic income tax
computation and to calculate the tax due. This is the foundation for later modules, and later tax courses.
On completion of this module you should be able to:
1. apply income to each income category, distinguishing between items subject to income tax and items subject to
other taxes, and prepare a basic income tax computation to reach a figure of taxable income;
2. calculate the income tax due by/ (repayable) to an individual with a variety of different sources of income; and
3. calculate the income tax due by/ (repayable) to a Scottish taxpayer with a variety of different sources of income.
Achieving these learning outcomes will help you to meet the third learning outcome of the syllabus as a whole.
2.3 Income Tax
Some types of receipts and payments an individual receives will be taxed under the income tax regime, and others
will be subject to other taxes covered later in the course. Some receipts may even be exempt from tax. Income tax
is obviously designed to tax income received by individuals.
There are other systems in place to tax capital assets and their growth in value. We often think of income as being
ongoing, but this does not necessarily need to be the case. A one-off receipt could be income depending on the
source of the receipt.
Notes

The main types of receipts which are subject to income tax are:
• income from self-employment (such as that received by a sole trader or a partner in a partnership);
• income from employment or pension;
• income received on rented property or land; and
• income received on capital invested (e.g., bank/building society interest, share dividends).
By contrast, the following may be liable to other taxes:
• a gain made on the sale of an asset, for example, selling shares for more than the price that was paid (capital
gains tax);
• an insurance receipt on the loss of an asset (capital gains tax); and
• receipt of an inheritance when a person dies (inheritance tax).
Some other receipts (e.g., gifts or lottery wins) are exempt from tax.
2.4 The Income Tax System
The tax legislation splits income into different categories, such as employment income, property income, trading
income and savings or dividends. The income from each of the categories is calculated separately using different
rules applicable to that type of income.
Employment, social security, and pension income is dealt with in the Income Tax (Earnings and Pensions) Act
2003 ITEPA 2003. All other income is dealt with in the Income Tax (Trading and Other Income) Act 2005 ITTOIA
2005. The income tax computation rules can be found in the Income Tax Act 2007 ITA 2007 and the key rates are
on your rates sheet.
The rules in each Act will spell out how income is to be determined, what deductions may be allowed against the
income and how relief may be given for losses. For example, some types of income will be taxed based on the
income actually received in the year, whereas others will tax the income receivable in the tax year (i.e., using the
accruals basis). The rules regarding allowable deductions from income also differ from category to category, with
traders allowed more generous deductions under the trading income rules than employees are allowed under the
employment income rules.
Notes

In this module we will provide you with the various sources of income to allow you to calculate the income tax liability
however you will then go on to learn how each source of income is calculated in later modules:
• Savings and dividend income (this module);

• Property income (Module 4);
• Employment income (Module 5); and
• Trading profits or losses (TPS Business Taxation).
2.5 Calculating Taxable Income
Individuals are always subject to income tax for a fiscal (or tax) year. This runs from 6 April to 5 April and is
expressed by referring to the years it covers. For example, 2022/23 refers to the tax year beginning on 6 April 2022
and ending on 5 April 2023.
Some of an individual’s income will be received net (i.e., after tax), as income tax has been deducted at source prior
to the income being paid out to the individual. For example, salaries have tax deducted via Pay As You Earn (‘PAYE’)
so tax is deducted by employers at source before a net salary is paid to the employee. Other forms of income may
only be taxed when included in the tax computation, for example trading income or property income.
All income of an individual for a tax year must be shown gross (i.e., before tax is deducted) in the tax
computation, even if tax has already been paid. This is because UK tax rates are dependent on an individual’s total
income. Any tax already suffered at source will be considered later in the computation to ensure that tax is not paid
twice on the same income.
Reaching the total income figure is, therefore, a case of adding up gross income received by an individual from
each different source using the rules applicable to that category of income.
2.5.1 Categorising Income
Income is listed separately in the computation according to the category it falls in, for example employment or
property income. It is possible that an individual may have income from many categories.
In addition to this, we separate savings income and dividend income from all our other income as they suffer
different rates of tax. We may therefore have three separate broad groups of income: non-savings (or general);
savings and dividends. As a result, our computation of taxable income relies heavily on using a properly
constructed pro forma, as shown below at Section 2.6.
Notes

Finally, we also categorise income as ‘earned’ and ‘unearned’ income for the purposes of calculating tax relievable
pension contributions (covered in Module 8). It is common practice to list earned income first in the computation.
Earned income includes:
• trade income;
• employment income; and
• income from Furnished Holiday Lets (covered in Module 4).
We will now briefly consider each type of income that you will meet on this course.
2.5.2 Trading Income
An individual will have trading income if they run a business, either on their own (known as a ‘sole trader’) or working
with other individuals (when they will be a partner in a partnership). An individual with trading income will be taxed on
the ‘taxable trading profits’ allocated to a fiscal year. Taxable trading profits are based on accounting profit, after
adjustments for tax purposes, and their calculation and allocation to fiscal years will be covered in TPS Business
Taxation.
Trading income forms part of the non-savings category and is classed as earned income.
2.5.3 Employment Income and Pension Income
Both employment income and pension income are taxed in most cases. An individual’s employment income for a
fiscal year is made up as follows:
Salary and bonus X
Benefits in kind (e.g., company car) X
Expenses related to employment (X)
Employment income X
This computation is covered in more detail in Module 5.
When an individual is paid a salary or bonus, they will receive it after deduction of tax through PAYE. PAYE is
the system that collects income tax from employees each week or month as they are paid and will be covered in
Module 6.
Notes

Consider an individual earning £24,000 and paying £2,800 of income tax through the PAYE system, taking home
£21,200 net income. The ‘gross salary’ of £24,000 is recorded in the income tax computation. The £2,800 tax will
also be shown in the computation as a deduction from the total tax due. Where a salary is given in a question,
this will be gross unless clearly stated otherwise.
Benefits in kind are sometimes known as ‘perks’ and are often non-cash payments. These non-cash payments
must be given a cash value, and this is done by following the rules laid out in the legislation ITEPA 2003. PAYE is
applied to the cash value of benefits via the employer’s administration systems and the tax due on these benefits is
deducted from cash earnings.
Employment and pension income is categorised as non-savings and earned income.
2.5.4 Property Income
If an individual rents out property or land, they will be taxed on the rental receipts less any expenses they had to
incur to rent the property/land, which is deemed to be the rental profit. This will be considered in Module 4 and is
categorised as non-savings and unearned income.
2.5.5 Savings Income
Banks and building societies pay interest to individuals without deduction of tax at source (i.e., gross interest).
Interest is unearned income.
If you are given a figure for bank or building society interest this should be entered in the tax computation under the
heading ‘savings income’.
You may also encounter interest received from National Savings & Investment (“NS&I”) accounts. NS&I is a state-
owned savings bank, and interest income received from NS&I products is taxable at the same rates as interest
from other banks.
Joint Accounts
Where couples operate joint accounts, they will be deemed to receive half of the interest each, regardless of how
much each person deposits into the account. Each individual is taxed separately.
Notes

National Savings Certificate and Individual Savings Accounts
Any income received from a National Savings Certificate (“NSC”) or an Individual Savings Account (“ISA”) is
completely exempt from tax and need not be included in the computation.
These products are offered to encourage and incentivise investors to save, as the interest income received is tax-free.
Activity 1 – Bank Interest
Jimmy has received interest from several sources during 2022/23. He received £80 in his Royal Bank of
Scotland current account, £112 in his Santander ISA and £82 in his NSC account. He also holds a joint
account at TSB with his wife and he recently received a certificate from TSB advising that the account had
earned £120 gross interest in the year.
Jimmy wishes to know what savings income figure to put in his income tax computation for 2022/23.
Gross interest
RBS
Santander
NSC
TSB
Jimmy will include savings income of £ _________ in his tax computation.
Solution
Notes

2.5.6 Dividend Income
Individuals may receive another form of income from investments – dividend income. Shareholders may receive
dividends as a return on their investment in a company. Individuals receive dividends from UK resident companies
without any deduction of income tax at source (i.e., gross dividends). Dividends are paid out of post-tax profits by the
company and are classified as unearned income for the taxpayer.
Dividend income should be shown in the tax computation under a separate heading from both ‘non-savings’
and ‘savings’ income as it is subject to different rates of tax. It is entered into the computation under the heading
‘dividend income’.
2.5.7 Exempt Income
Several types of income are exempt from income tax. The main sources of exempt income are:
• Winnings from betting and gaming;

• The receipt of a gift, including an inheritance;
• Income from certain investments, being:
• Individual Savings Accounts (ISAs)
• National Savings Certificates
• Premium Bonds
• Save As You Earn (SAYE) interest
• Venture Capital Trust dividends
2.5.8 Deductions from Income
Within the different categories of income, certain deductions can be taken from income to arrive at the taxable
amount. For example, the trading income rules allow a trader tax relief for common costs such as rent, heat and
light, repairs or employee costs.
There is one main deduction that all UK resident individuals may be entitled to, irrespective of the source of their
income, namely the personal allowance. This belongs to the individual themselves rather than their income and is
therefore deducted from total income rather than from one specified type of income.
Notes

The following information appears on your rates sheet
The basic personal allowance for an individual in 2022/23 is £12,570 (2021/22 - £12,570). This figure is provided on
your tax rates sheet and, on this course, we will assume all individuals are UK resident unless specifically stated otherwise.
The personal allowance will be reduced by £1 for every £2 of income in excess of £100,000. The allowance cannot
be negative. If an individual has income for the fiscal year 2022/23 in excess of £125,140 (£125,140 for
2021/22), no personal allowance will be available. The income being considered here is before the deduction
of the personal allowance and includes the sum of all three columns (non-savings, savings and dividends) in the
computation.
Activity 2 – Personal Allowance Restriction
Luke has total income in 2022/23 of £50,000.
Rory has total income in 2022/23 of £107,000.
Lorelai has total income in 2022/23 of £127,000.
Each individual is UK resident. Calculate the personal allowance available to each of these three individuals
for 2022/23.
Luke Rory Lorelai
£ £ £
Total income 50,000 107,000 127,000
Maximum allowances 12,570 12,570 12,570
Reduction:
Final allowance
Solution

2.6 Computation of Taxable Income – Pro Forma
The following example provides a pro forma for calculating taxable income. Section 2.7 will examine how this
figure is used to calculate the income tax liability. The pro forma shows that income must be split into three
categories – non-savings (or general) income, savings income, and dividend income. Non-savings income is
everything excluding bank/building society interest and dividends.
For just now we will work across the pro forma allocating the personal allowance from left to right, against non-
savings income first. If there is insufficient non-savings income to set it against, the rest of the allowance may be
used against savings income and then dividend income. Later in the module we will consider circumstances when
working left to right may not be the most tax-efficient way to use the allowance.
The personal allowance will be lost if not used in the fiscal year. It cannot be carried forward or back or given to
another individual.
Activity 3 – Showing Taxable Income
Suzanne has several sources of income for 2022/23:
• She has her own small business and tax-adjusted trading profits are £34,370.
• She supplements this income with a part-time job in Asda where she earned £3,100 (and had tax
deducted via PAYE of £620).
• She lets out a flat and receives taxable rental income of £5,400.
• She receives interest of £120 from her savings account.
• She receives cash dividends of £5,600.
Complete the pro forma below for Suzanne:
Notes

Non-savings income Savings income Dividend income Tax suffered
£ £ £ £
Earned income
Trading income
Employment income
Unearned income
Property income
Bank interest
Dividend income
Total income
Personal allowance
Taxable income
Solution
You will see from the pro forma that the three types of income (non-savings, savings, and dividends) should be kept
separate. This will assist in calculating the tax (see 2.7).
Notes

2.7 Calculating Income Tax
Now that we have calculated taxable income for the fiscal year, income tax rates can be applied to reach the
income tax liability of the individual. Some of this liability may already have been paid at source (e.g., via PAYE on
employment or pension income) and some may remain payable.
2.7.1 Bands of Income Tax
Income tax in the UK is progressive – this means that the rates of tax increase as earnings increase. There are
three main bands of UK income tax for 2022/23 and these are based on taxable income, that is, after the deduction
of the personal allowance. The bands are set in each budget and then enacted in the annual Finance Act. Within
each band, there may be different rates applied depending on the types of income as detailed below.
There are different bands for Scottish Income Tax (SIT). The following sections cover the UK rate only, with the SIT
bands covered at Section 2.9.
2022/23 2021/22
Basic rate band £0 to £37,700 £0 to £37,700
Higher rate band £37,701 to £150,000 £37,701 to £150,000
Additional rate band £150,001 upwards £150,001 upwards
These bands apply to taxable income (i.e., after personal allowance) across all three columns. Non-savings
income is treated as being taxed first and will therefore be allocated to the basic rate band, higher rate band or
additional rate band in priority to savings or dividend income.
Savings income is then allocated to the bands in accordance with the amounts remaining following the allocation of
non-savings income.
Finally, dividend income is allocated to the bands based on the unused amounts after both non-savings and savings
income have been allocated. Dividend income is often referred to as the ‘top slice’ of income.
Notes

Activity 4 – Bands of Income Tax
Denise has several sources of income for 2022/23:
• She is a TV presenter and earned £145,000 (with tax paid via PAYE of £45,432).
• She lets out a house and receives taxable rental income of £3,000.
• She receives interest of £2,450 from her savings account.
Complete the pro forma for Denise and allocate the income to the relevant bands:
Non-savings income Savings income Tax suffered
£ £ £
Employment income
Property income
Bank interest
Total income
Personal allowance
Taxable income
Allocation of income to bands:
Basic rate income
Higher rate income
Additional rate income
Solution
Notes

2.7.2 Rates of Income Tax – non-savings income
Income tax is charged at the basic rate of 20% on taxable non-savings income that falls within the basic rate band
of £37,700.
If taxable non-savings income exceeds £37,700 it will fall in the higher rate band. Non-savings income in the higher
rate band is taxed at 40% until the income reaches the additional rate band of £150,000 at which point the excess
is taxable at 45%.
For 2022/23 the maximum amount of non-savings income that can be charged at 40% is, therefore, £112,300, being
the difference between the higher and additional rate limits.
2.7.3 Rates of Income Tax – savings income
Savings income falling within the basic rate band is taxed at 20%, in the higher rate band at 40% and in the
additional rate band at 45%. However, we tax non-savings income first, so the rates which are applicable to savings
income will depend on the level of non-savings income.
In addition to the above, there are also two scenarios in which a taxpayer may pay tax at 0% on savings income:
• The starting rate for savings income taxes the first £5,000 of savings income at 0% (also £5,000 at 0% in
2021/22). The starting rate for savings income is only available to taxpayers with relatively low levels of ‘non-
savings’ income (see 2.7.4 below).
• The savings allowance, which taxes either £1,000, £500 or £nil of savings income at 0% depending on the
level of income a taxpayer receives in the year (see 2.7.5 below).
2.7.4 The starting rate for savings income
The starting rate for savings income is not available in every instance. The rate was introduced to help reduce the
income tax burden on savings income received by individuals who do not receive large amounts of non-savings
income. The starting rate only applies to those with taxable non-savings income of less than £5,000.
The available starting rate for savings is reduced by £1 for each £1 of taxable non-savings income an individual
receives until the starting rate is no longer available when taxable non-savings income reaches £5,000.
Notes

If a taxpayer has £4,000 of taxable non-savings income and £3,000 of taxable savings income, the first £1,000
of savings income is taxed at 0% and the remaining £2,000 of taxable savings income is taxed at 20%. This is
illustrated below:
£2,000 @ 20%
£5.000
£1,000 @ 0%
£4,000 @ 20%
£4,000 £3,000 £0
Non-savings Savings Dividends
Taxable income (after the PA)
Available £5,000
starting rate
for savings £4,000
income only
£3,000
£2,000
£1,000
£0
£1,000 £2,000 £3,000 £4,000 £5,000
Taxable non-savings income (after the PA)
Income being taxed at the starting rate still counts as taxable income. The starting rate for savings income is a part
of the basic rate band. Therefore, it is the sum of the starting and basic bands that end at £37,700 when considering
savings income.
For example, a taxpayer with no taxable non-savings income will pay 0% tax on the first £5,000 of savings income.
They will have £32,700 of basic rate band remaining (£37,700 - £5,000) when considering any further savings
income and any dividend income.
Notes

Illustration of tax rates on income of £160,000 (all savings)
£150,000
£10,000 @ 45%
£112,300 @ 40%
£37,700
£32,700 @ 20%
£5.000
£5,000 @ 0%
£0 £160,000 £0
Non-savings Savings Dividends
Note: No personal allowance would be available in this illustration as income exceeds £125,140.
Example 1 – The Starting Rate Band
Jennifer is hugely wealthy and lives off the interest earned on her various savings accounts. During 2022/23
she receives £200,000 of interest income. She also receives £1,000 of rental income for a small horse
paddock that she lets to a local stable.
Calculate the amount of Jennifer’s income that falls into each of the bands of income tax for 2022/23.
Notes

Solution to Example 1
Jennifer’s net income of £201,000 exceeds £125,140 therefore she will not be entitled to a personal allowance.
Jennifer has £1,000 of taxable non-savings income and will therefore be entitled to £4,000 of starting rate for
savings income.
Non-savings Savings
income income
£ £
Rental income 1,000
Interest income - 200,000
Net income 1,000 200,000
Personal allowance - -
Taxable income 1,000 200,000
Basic rate non-savings income 1,000 -
Starting rate for savings income (part of basic rate band) - 4,000 *
Basic rate savings income (remaining basic rate band) - 32,700 **
Higher rate savings income - 112,300 ***
Additional rate savings income - 51,000 ****
1,000 200,000
* available starting rate = £5,000 - £1,000 = £4,000

** remaining basic rate band = £37,700 - £4,000 - £1,000 = £32,700
*** higher rate income = £150,000 - £32,700 - £4,000 - £1,000 = £112,300
**** additional rate income = £201,000 - £112,300 - £32,700 - £4,000 - £1,000 = £51,000
Notes

2.7.5 The Savings Allowance
There is a second nil rate band of tax available for taxable savings income. This band is known as the savings
allowance (‘SA’) and is a fixed amount of either £1,000, £500 or zero. Despite its name the savings allowance
does not reduce taxable income, instead it taxes a portion of the income at 0% (much like the starting rate for
savings income).
The availability of the SA is based on the level of an individual’s taxable income.
Income Tax Act 2007 states that, if any of an individual’s income for the year is additional-rate income (or would be
additional-rate income but for the savings allowance), the savings allowance is nil.
If any of the individual’s income for the year is higher-rate income and none of the individual’s income is additional-
rate income (again, ignoring the effect of the savings allowance), the savings allowance is £500.
If none of the individual’s income for the year is higher-rate income (or would be higher-rate income but for the
savings allowance), the savings allowance is £1,000.
Therefore, for 2022/23 an individual with income in excess of £150,000 is not entitled to a SA.
An individual with taxable income (income after deduction of the personal allowance) exceeding £37,700 but not
exceeding £150,000 will be entitled to a SA of £500.
An individual with taxable income (income after deduction of the personal allowance) of £37,700 or less will be
entitled to a SA of £1,000.
The basic and higher rate limits in 2021/22 were £37,700 and £150,000 respectively and the SA entitlement for
2021/22 is based on these income limits.
You should first work out if an individual is entitled to the starting rate band for savings income before considering
whether they are eligible for the savings allowance.
If you return to Example 5 you will see that Jennifer is not entitled to the savings allowance as some of her income is
taxed in the additional rate band, meaning that she is a UK additional-rate taxpayer.
Notes

Activity 5 – The Starting Rate Band and the Savings Allowance
Charlie and David are brothers. Both have significant amounts of interest income from large inheritances they
received when their granny passed away last year. For 2022/23 Charlie received £52,000 of interest income
in his building society account and David received £22,500. David used part of his inheritance to start his own
business during the year earning £13,700 of trading income. Neither brother has any other income in the year.
Calculate the amount of each of the brother’s income that falls into each of the bands of income tax for 2022/23.
Charlie Non-savings income Savings income
£ £
Interest income
Total income
Personal allowance
Taxable income
David Non-savings income Savings income
£ £
Trading income
Interest income
Total income
Personal allowance
Taxable income
Solution
As you will see from these examples, it is possible for a taxpayer to have up to £6,000 of savings income taxed at
0% if they are entitled to both the starting rate and the full savings allowance.
Generally speaking, a taxpayer with total income of between £1 and £18,570, some of which is savings income, will
not pay tax on their savings income. This is because they will benefit from the personal allowance (£12,570), the
savings allowance (£1,000) and the starting rate band for savings (£5,000).

2.7.6 Rates of Income Tax – dividend income
In a similar manner to savings income, dividend income has an allowance, or nil rate band. However, the dividend
allowance is available to all taxpayers regardless of the level of their income. This allowance entitles every taxpayer
to £2,000 of dividend income to be taxed at 0% (also £2,000 in 2021/22).
Dividends in excess of the dividend allowance are taxed at 8.75% to the extent that they fall within the basic rate
band, 33.75% in the higher rate band and 39.35% on any excess.
Once again, dividends falling within the dividend allowance count towards income levels for the purposes of
calculating the remaining basic and higher rate bands for any dividends received in excess of the allowance.
As all taxpayers are entitled to the dividend allowance, it is possible that an individual may benefit from the zero rate
on the first £2,000 of their dividends and may be taxed on any excess at the additional rate, dependant on their other
income, as illustrated using £152,000 of taxable income below:
£2,000 @ 39.35%
£150,000
£112,300 @ 33.75%
£37,700
£28,700 @ 8.75%
£2,000 @ 0%
£2,000 @ 20%
£5.000
£1,000** @ 0%
£4,000 @ 20%
£4,000 £3,000 £145,000

Non-savings Savings* Dividends
*No PSA as taxable income of £152,000 exceeds £150,000

**£1,000 is taxed at 0% due to the starting rate for savings income

Activity 6 – The Dividend Allowance
Claire is employed and earns £147,000 per annum. Claire’s bank interest income for 2022/23 was £2,500 and
she also has some shares from which she received dividends of £8,000 in the tax year.
Calculate the amount of Claire’s income that falls into each of the bands of income tax for 2022/23.
Non-savings income Savings income Dividend income
£ £ £
Employment income
Interest income
Dividend income
Total income
Personal allowance
Taxable income
Solution
2.8 The Complete Income Tax Computation
Now that we have seen how income is added to the tax computation, deductions are taken to reach taxable income
and the bands of income tax are applied across the three columns of the computation, we are ready to complete the
computation by calculating the income tax liability for the year.
As discussed above, some of an individual’s income, normally employment income, will be received net (i.e., after
tax) as tax has been paid at source. Any tax already suffered at source must be recorded in the computation and
deducted from the final tax liability to ensure that tax is not paid twice on the same income.
Notes

A step-by-step guide to the income tax computation is listed below:
1. Quantify all forms of taxable income using the rules laid out in the Taxes Acts (covered in this Module as well as
Modules 3, 4 and 5).
2. Lay out a clear pro forma using the three-column approach with headings ‘non-savings’, ‘savings’ and ‘dividend’
income. A fourth column can be used to record tax deducted at source. Adding up the first three columns here
gives ‘total income’.
3. Consider the availability of the personal allowance based on the level of the individual’s total income across all
three columns. If available, deduct the personal allowance from income starting with non-savings income and
working left to right across the pro forma. Adding up the figures here gives ‘taxable income’.
4. Allocate the non-savings income into the relevant basic, higher, and additional rate bands and tax the figures by
considering the level of availability of these bands.
5. Consider the availability of the starting rate for savings income by referring to the level of taxable non-savings
income.
6. Consider the availability of the savings allowance by referring to the level of taxable income across all three
columns (used at step 3 above) i.e., is the individual a basic, higher, or additional-rate taxpayer?
7. Apply tax to savings income using the starting rate and savings allowance, if relevant, and by then considering
the remaining basic rate and higher rate bands taking account of all taxable non-savings and savings income so
far (including income taxed at the zero rate).
8. Apply tax to dividend income using the dividend allowance and by then considering the remaining basic rate
and higher rate bands taking account of all taxable non-savings, savings, and dividend income so far (including
income taxed at the zero rate).
9. Add together the tax due on all forms of taxable income. This step equals the tax liability for the year.
10. Deduct any tax already suffered at source. The final figure represents the tax due/repayable for the year.
When carrying out tax calculations, income should be rounded down to the nearest pound, any expenses, or
deductions (covered in later modules) should be rounded up to the nearest pound and tax should be shown to the
nearest penny, as HMRC uses this format.
Notes

Activity 7 – The Complete Income Tax Computation
Fiona has several sources of income in 2022/23:
• She is self-employed and has tax-adjusted trading profits of £120,976 for the year.
• She also has a job and earns £22,811 during the year, paying tax via PAYE of £2,048.20.
• She has rental income of £3,413.
• She receives interest of £4,000 on her savings account.
• She receives cash dividends of £6,500.
Calculate the tax that Fiona will pay for 2022/23.
First, set out the pro-forma showing income under the relevant categories:
£ £ £ £
Trade income
Employment income
Rental income
Bank interest
Dividend income
Total income
Personal allowance
Taxable income
Solution
Notes

If we consider the income tax rates further, we will see the following:
• Individuals with straightforward tax affairs comprising employment income and modest levels of savings and
dividend income should find that they have very little tax due or repayable via the income tax computation. The
aim of the PAYE system is to have employers collect the majority of the tax liability at source and pay this to
HMRC throughout the year resulting in little or no balance being due at the year-end (see Module 6).
• Individuals with savings or dividend income in excess of the tax-free limits or nil rate bands will have a balance
of tax to pay after the tax year end although this balance can be reduced by adjusting an individual’s PAYE code
to collect any tax due on savings or dividend income from the individual’s employment income. (see Module 6).
To summarise, the bands of income tax and rates for 2022/23 and 2021/22 are as follows:
2021/22 2022/23
Starting rate for savings income £5,000 £5,000
Savings allowance:
Taxable income less than or equal to the basic rate tax band £1,000 £1,000
Taxable income above the basic rate band but less than or £500 £500
equal to £150,000
Basic rate of 20% on income up to £37,500 £37,700
Higher rate of 40% on income £37,501 - £150,000 £37,701 - £150,000
Additional rate of 45% on income over £150,000
Dividend income in excess of the allowance for:
Basic rate taxpayers 7.5% 8.75%
Higher rate taxpayers 32.5% 33.75%
Additional rate taxpayers 38.1% 39.35%
Notes

Activity 8 – Allowances and Bands
The following activity is useful to illustrate the various allowances and bands that may be available to a
taxpayer in 2022/23.
Note that in this example we have referred to ‘total income’ rather than ‘taxable income’. You should always pay
close attention to whether you are given total income (before deduction of the personal allowance) or taxable
income (after deduction of the personal allowance) and be prepared to convert from one figure to the other.
You should identify the allowances available in the following circumstances:
Personal allowance Savings allowance Dividend allowance
Total income: £0 - £50,270
Total income: £50,271 - £100,000
Total income: £100,001 - £125,140
Total income: £125,141 - £150,000
Note - a taxpayer may also benefit from the starting rate for savings income where taxable non-savings income
does not exceed £5,000.
Solution
Notes

2.8.1 Allocation of the personal allowance
Thus far we have allocated the personal allowance to the pro forma working left to right across the columns. This
approach works in most cases however the legislation permits the taxpayer to allocate the allowance to different
types of income in the most tax-efficient order. The personal allowance should be set off as follows:
1. Non-savings income first; then

2. Savings income, but only to bring savings income down to the amount of the starting rate and savings allowance
available to that individual; then
3. Dividend income
Activity 9 – Personal allowance
Mike is a self-employed eBay trader living in Huddersfield, England. In 2022/23 he has trading income from
online sales of £6,800. He also has building society interest of £8,000 and dividend income of £10,500.
Calculate Mike’s income tax liability for 2022/23.
Solution

2.8.2 Refund of Overpaid Income Tax
Where an individual has a very low level of income, or where some of their income is ultimately taxed at a lower rate
than the amount deducted at source, they may be eligible to claim a tax refund.
Activity 10 – Refund of Income Tax
Will has a total tax liability of £29,000 but his computation shows £32,000 tax suffered at source. The £32,000
is made up of tax deducted via PAYE from his employment income by his employer. What income tax refund
is Will due?
Solution
2.9 Devolved Income Tax
From 6 April 2019, taxpayers in Wales began paying Welsh rates of income tax on some of their income. The way
the tax is structured is such that a Welsh taxpayer will pay the same overall amount of tax as an equivalent taxpayer
in England or Northern Ireland, however 10p in every pound of the tax goes directly to the Welsh Administration with
the rest going to the UK Treasury. This rate is the same regardless of what tax band the taxpayer is in.
Scottish Income Tax (“SIT”) is a devolved tax payable by Scottish taxpayers and is structured in the same way as in
Wales with 10p in every pound of the tax going directly to the Scottish Government and the rest to the UK Treasury.
SIT has five bands (compared to just three in the rest of the UK) and income within these bands is taxed at rates of
19%, 20%, 21%, 41% and 46%.
SIT is payable by Scottish taxpayers on their non-savings income only; the UK rates and bands continue to apply
to savings and dividend income.
In either case the tax is still collected and administered by HMRC.
2.9.1 Scottish and Welsh Taxpayers
There are legislative provisions which are used to determine whether a taxpayer is a Scottish or Welsh taxpayer.
The principal determinant is where the taxpayer lives (as opposed to where they work) however, the detail of the
provisions is beyond the scope of this course.
You will either be told that the individual is a Scottish or Welsh taxpayer, or you will be told that they have their main
home in Scotland or Wales. If a question is silent on the taxpayer’s residence status you should assume that they
are a UK taxpayer, not subject to SIT or the Welsh rates of income tax.
2.9.2 Scottish Bands and Rates
There are five bands of Scottish Income Tax:
2021/22 2022/23
Additional rate on income over £150,000 £150,000
The rates of tax in both years are: Starter rate 19%

Basic 20%
Intermediate rate 21%
Higher rate 41%
Top rate 46%
As noted previously, SIT only applies to non-savings income therefore the UK rates and bands must still be used
for the purposes of working out the level of the savings allowance, the rates of tax on savings and dividend
income and the rates of capital gains tax (covered in Module 9).
This means that when dealing with a Scottish taxpayer’s computation you may need to complete parallel income tax
computations applying the SIT bands to non-savings income and then reassessing the available bands and rates
when dealing with savings and dividend income.
The interaction of SIT and the UK rates and bands can give rise to some unexpected consequences within the
tax computation. At Principles of Tax you will not be tested on these unusual circumstances; however, you will be
expected to apply the SIT to computations such as Hamish’s shown below.

Example 2 – The Scottish Rate of Income Tax
Hamish is a Scottish taxpayer. He earns £55,350 in 2022/23 from his employment with the Forestry
Commission. £11,185.77 of tax is deducted via PAYE from this income during the year. Hamish also receives
£3,000 rental profit from a holiday home he owns, £800 of bank interest and £450 of dividend income.
Calculate Hamish’s income tax due/(repayable) for 2022/23.
Non-savings Savings income Dividend income Tax suffered

income
£ £ £ £
Employment income 55,350 11,185.77
Rental income 3,000 -
Bank interest 800 -
Dividend income 450 -
Total income 58,350 800 450 11,185.77
Personal allowance (12,570)
Taxable income 45,780 800 450 11,185.77
Notes

The calculation of tax is as shown below:
Non-savings income (SIT rates) £
£2,162 @ 19% 410.78
£10,956 @ 20% 2,191.20
£17,974 @ 21% 3,774.54
£14,688 @ 41% 6,022.08
Savings income (UK Rates)
£500 @ 0% (SA) 0.00
@ 20%
£300 @ 40% 120.00
@ 45%
Dividend income (UK Rates)
£450 @ 0% 0.00
@ 8.75%
@ 33.75%
@ 39.35%
Total tax liability 12,518.60
Tax already suffered (11,185.77)
Tax remaining due 1,332.83
Note – when considering the rates payable on the savings and dividend income the UK bands must be applied
to taxable income. With taxable income of £47,030 (£45,780 + £800 + £450), Hamish is a UK higher-rate
taxpayer. He is entitled to a PSA of £500. His UK basic rate band has been utilised by his non-savings income
(£45,780).
If Hamish were not a Scottish taxpayer his UK tax liability would be £10,892 resulting in a tax refund of £293.77.

The key points of this module are summarised below:
• The main types of receipt subject to income tax are income from self-employment, employment income, rental
income, and investment income (bank interest and dividends).
• Tax computations are drawn up for a fiscal year (6 April to 5 April).
• A UK resident individual is entitled to a personal allowance of £12,570 subject to a restriction (of £1 for every
£2) if their net income exceeds £100,000.
• Tax computations always record total income and tax suffered.
• Income is listed as non-savings, savings and dividends.
• Bank, building society and NS&I interest is received gross and is taxable as savings income.
• Dividends are also received gross and are taxable as dividend income.
• The pro forma at 2.8 should be memorised to assist with calculations. The bands are provided on your rates
sheet.
• The tax rates are:
• Non-savings income – 20%, 40%, 45%
• Savings income – 0%, 20%, 40%, 45%
• Dividend income – 0%, 8.75%, 33.75%, 39.35%
Notes

Income is always taxed in this order, with dividend income being the top slice of income.
2021/22 2022/23
Starting rate of 0% on savings income up to £5,000 £5,000
Savings allowance:
Taxable income less than or equal to the basic rate tax band £1,000 £1,000
Taxable income above the basic rate band but less than or equal £500 £500
to £150,000
Basic rate of 20% on income up to £37,700 £37,700
Higher rate of 40% on income £37,701 - £150,000 £37,701 - £150,000
Additional rate of 45% on income over £150,000
Dividend income in excess of the allowance for:
Basic rate taxpayers 7.5% 8.75%
Higher rate taxpayers 32.5% 33.75%
Additional rate taxpayers 38.1% 39.35%
Notes

Scottish income tax bands (non-savings income only)
2021/22 2022/23
Additional rate on income over £150,000 £150,000
Notes

The savings income to be shown in the computation is as follows:
Gross income
Bank interest:
Royal Bank of Scotland 80
Santander - ISA is exempt -
NSC - exempt -
TSB (half share) 60
140
Jimmy will be taxed on savings income of £140.
Back to Activity
Notes

Luke Rory Lorelai
£ £ £
Net income 50,000 107,000 127,000
Maximum allowances 12,570 12,570 12,570
Reduction:
Does not exceed £100k 0
½ (£107,000 - £100,000) (3,500)
½ (£127,000 - £100,000) (13,500)
Reduced allowance 12,570 9,070 nil
Back to Activity
Notes

Suzanne
Income Tax Computation
Year to 5 April 2023
Non-savings Income Savings Income Dividend Income Tax

Suffered
£ £ £ £
Earned income
Trading income 34,370
Employment income 3,100 620.00
Unearned income
Property income 5,400
Bank interest 120
Dividend income 5,600
Total income 42,870 120 5,600
Personal allowance* (12,570)
Taxable income 30,300 120 5,600 620.00
* Suzanne’s personal allowance does not need to be restricted. Her total income is £48,590 (£42,870 + £120 +
£5,600), and therefore does not exceed £100,000.
Suzanne will be taxed on a total of £36,020 (being the total of non-savings income, savings income, and dividend
income). The tax suffered of £620 will be deducted from her final tax liability.
Back to Activity
Notes

Denise
Income Tax Computation
Year to 5 April 2023
Non-savings Savings Dividend Tax

income income income suffered
£ £ £ £
Property income 3,000 -
Bank interest 2,450 -
Total income 148,000 2,450 45,432.00
Personal allowance Nil
Taxable income 148,000 2,450 45,432.00
Basic rate income 37,700
Higher rate income 110,300 2,000
Additional rate income 450
148,000 2,450
Denise receives no personal allowance as her total income of £150,450 exceeds £125,140.
Back to Activity
Notes

Charlie Non-savings income Savings income
£ £
Interest income 52,000
Total income 52,000
Taxable income 39,430
Tax:
Non-savings income
@ 20.00%
@ 40.00%
@ 45.00%
Savings income
*5,000 @ 0.00%
**500 @ 0.00%
***32,200 @ 20.00%
1,730 @ 40.00%
@ 45.00%
Taxable income
39,430
*As Charlie has no non-savings income, he is entitled to £5,000 starting rate.
**As his taxable income exceeds £37,700, but does not exceed £150,000, he is entitled to a savings allowance
of £500.
*** Basic rate remaining = £37,700 - £5,500 = £32,200

David Non-savings income Savings income
£ £
Total income 13,700 22,500
Taxable income 1,130 22,500
Tax:
Non-savings income
1,130 @ 20.00%
@ 40.00%
@ 45.00%
Savings income
*3,870 @ 0.00%
**1,000 @ 0.00%
***17,630 @ 20.00%
@ 40.00%
@ 45.00%
Taxable income
23,630
*As David has £1,130 taxable non-savings income he is entitled to £3,870 starting rate.
**As his taxable income is less than £37,700 (i.e., he is a basic rate taxpayer) he is entitled to a savings
allowance of £1,000.
** Basic rate remaining = £37,700 - £1,130 - £3,870 - £1,000 = £31,700, so all taxed at 20%.
Back to Activity

£ £ £
Employment income 147,000
Total income 147,000 2,500 8,000
Personal allowance* -
Taxable income 147,000 2,500 8,000
Tax:
Non-savings income
37,700 @ 20.00%
109,300 @ 40.00%
@ 45.00%
Savings income
- @ 0.00%
- @ 20.00%
2,500 @ 40.00%
@ 45.00%
Dividend income**
2,000 @ 0.00%
- @ 8.75%
- @ 33.75%
6,000 @ 39.35%

* Claire is not entitled to a personal allowance as her income exceeds £125,140 (£147,000 + £2,500 + £8,000).
Claire is also not entitled to a savings allowance as her taxable income exceeds £150,000, i.e., she is a UK
additional rate taxpayer.
** Claire’s dividend income is taxed at 0% within the dividend allowance and 39.35% on the excess as her basic and
higher rate bands are used by non-savings income (£147,000), savings income (£2,500) and the dividend income
falling with the dividend allowance (£2,000).
Back to Activity

First, set out the pro-forma showing income under the relevant categories:
£ £ £ £
Trade income 120,976
Rental income 3,413
Bank interest 4,000 0.00
Dividend income 6,500 0.00
Total income 147,200 4,000 6,500
Personal allowance (0)
Taxable income 147,200 4,000 6,500 2,048.20
Tax is then calculated as follows:
Tax
Non-savings income
£37,700 @ 20% 7,540.00
£109,500 @ 40% 43,800.00
Savings income
£2,800 @ 40% 1,120.00
£1,200 @ 45% 540.00
Dividend income
£2,000 @ 0% 0.00
£4,500 @ 39.35% 1,770.75
Total tax liability 54,770.75
Tax already suffered (2,048.20)
Tax remaining due 52,722.55
Back to Activity

Personal Allowance Savings allowance Dividend allowance
Total income: £0 - £50,270 £12,570 £1,000 £2,000
Total income: £50,271 - £100,000 £12,570 £500 £2,000
Total income: £100,001 - £125,140 From £12,570 to £0 £500 £2,000
Total income: £125,141 - £150,000 Nil £500 £2,000
Total income: Exceeds £150,000 Nil Nil £2,000
Note - a taxpayer may also benefit from the starting rate for savings income.
Back to Activity
Income tax computation 2022/23 - Mike
£ £ £
Building society interest 8,000
Total income 6,800 8,000 10,500
Personal allowance (6,800) (2,000) (3,770)
Taxable income 0 6,000 6,730
Savings income £
£5,000 @ 0% (Starting rate) 0
£1,000 @ 0% (PSA) 0
Dividend income
£2,000 @ 0% (Div allowance) 0
£4,730 @ 8.75% 413.88
413.88
You can see from the alternative computation below that any other order of set off would result in a higher liability.

£ £ £
Building society interest 8,000
Total income 6,800 8,000 10,500
Personal allowance (6,800) (5,770)
Taxable income 0 2,230 10,500
Savings income £
£2,230 @ 0% (Starting rate) 0.00
Dividend income
£2,000 @ 0% (Div allowance) 0.00
£8,500 @ 8.75% 743.75
743.75
Back to Activity
Will
Tax liability 29,000
Tax suffered at source (32,000)
Refund (3,000)
Back to Activity

Module 3. Other Income,
Allowances and Deductions
Contents
3.1 Introduction 93
3.3 Residence, Domicile and Overseas Income 93
3.3.1 Residence 94
3.3.2 Domicile 94
3.3.3 Implications of residence and domicile status 94
3.3.4 Overseas income 95
3.3.5 Double tax treaties 97
3.4 Allowances 97
3.4.1 Blind person’s allowance 97
3.4.2 The marriage allowance 98
3.5 Deductions from income 99
3.5.1 Eligible interest payments 100
3.5.2 Gifts of shares/ land to charity 101
3.6 Charitable giving 101
3.6.1 Gifts of listed shares or land and buildings 101
3.6.2 Gift aid 102
3.6.3 Payroll giving 104
3.7 Summary 105

3. Other Income, Allowances and Deductions
3.1 Introduction
In Module 2 we introduced the income tax computation and some of the common forms of income and deductions
that you may encounter within the computation. In this module we will build on that knowledge, introducing the
concept of residence and domicile status, some additional forms of income, some specific allowances and other
deductions that may be available to an individual taxpayer.
1. explain the concepts and implications of residence and domicile for an individual
2. calculate the taxable overseas income for an individual
3. apply the various allowances available to individuals to reduce their taxable income and/ or income tax liability
4. identify payments which qualify as ‘deductions from income’ and apply these in the income tax computation
5. identify and explain the different ways to make tax-efficient payments to charity and illustrate how these affect
the tax computation
Achieving these module learning outcomes will help you to meet the third syllabus learning outcome.
3.3 Residence, Domicile and Overseas Income
The UK income tax liability of an individual is based on the degree of connection they have to the UK. The main
determinants of this connection are the concepts of residence and domicile. The closer the link to the UK, the more
ability the UK government has to tax that individual.
If an individual was born in the UK and has never left the UK, then they will, almost certainly, be both resident and
domiciled in the UK.
However, there may be instances where an individual may not be treated as satisfying both of these concepts, which
will affect their UK tax liability.
Notes

3.3.1 Residence
There is a statutory residence test to determine whether an individual is resident in the UK. HMRC will look at the
pattern of an individual’s life and the number of, and reasons for, visits to the UK. An individual’s residence status
can change year on year depending on their visits to the UK and other connections with the UK. A taxpayer cannot
be classed as a Scottish taxpayer without first being resident in the UK.
Further detail is beyond the scope of the syllabus for this course.
3.3.2 Domicile
An individual is domiciled in the UK if they have a permanent home in the UK. You are only capable of having one
domicile at a time, and you cannot be without a domicile. There are four main measures of an individual’s domicile:
i) Domicile of origin at birth an individual automatically acquires the domicile of their father (or
mother if the parents were not then married).
ii) Domicile of dependency the domicile of origin can be displaced up to the age of 16 to reflect the
changes in the domicile of the person on whom they are legally dependent
(usually the father).
iii) Domicile of choice the above can be displaced if the individual shows that:
(a) they are resident in another country; and
(b) they intend to reside in this country permanently.
iv) Deemed domicile individuals who have been resident in the UK for at least 15 of the previous
20 tax years will be ‘deemed domiciled’ in the UK. Also, an individual will be
deemed domiciled if they had a UK domicile at birth, subsequently lost this and
then began to be UK resident once again.
It is much more difficult for an individual to prove a change of domicile than a change of residence status. Domicile is
often said to be more ‘adhesive’ in nature.
3.3.3 Implications of residence and domicile status
An individual who is UK resident and domiciled will be subject to UK tax on any income, no matter where it
is earned in the world. It is possible that another government may also have the right to tax some of the income
in another country. If this is the case, we will see in Section 3.3.4 that ‘double tax relief’ will be available to the
individual.
Notes

Where an individual is UK resident but is not domiciled in the UK, they will be taxed in one of two ways:
• If no action is taken, worldwide income will be taxed, and a UK personal allowance is given; or
• If a ‘remittance basis claim’ is made, overseas income will only be taxed if remitted to the UK, but no UK
personal allowance is given. All UK income will be taxed.
The decision about whether to make a remittance basis claim is outside the scope of this course.
Where an individual is non-UK resident and not domiciled in the UK, they will only be taxed on income arising in
the UK. You should assume that non-UK resident individuals do not receive a UK personal allowance.
Unless a PoT question states otherwise, you should assume that individuals are UK resident and domiciled.
UK income Overseas income
UK resident and domiciled Taxable in the UK Taxable in the UK
UK resident but non-domiciled Taxable in the UK Taxable in the UK or claim remittance basis
Non-resident Taxable in the UK Not taxable in the UK
3.3.4 Overseas income
UK resident individuals are usually taxed on overseas income unless a double tax treaty makes this
unnecessary (see Section 3.3.5). The charge to income tax on overseas income follows the same rules as similar
UK income.
The personal savings allowance and dividend allowance can apply even if the income comes from a foreign source.
The gross amount of overseas income is taxable. Where overseas tax has already been deducted from the income,
this will need to be added back on to the income received to reach a figure of ‘gross income’. For example, a
taxpayer who has received an £8,500 dividend after deduction of an overseas tax charge of 15% must ‘gross up’ the
income by multiplying it by 100/(100-15) = 100/85 i.e., £8,500 x 100/85 = £10,000.
Where an individual has paid tax overseas and is also liable to UK tax on the same source of income, a system of
double tax relief (DTR) prevents the same income being taxed twice. In many cases relief is available because the
UK has many double tax treaties with other countries (see Section 3.3.5).
Notes

If there is no tax treaty in place, UK legislation provides for an amount to be set off against the UK tax. This amount
will be equal to the lower of the overseas tax paid on that income and the UK tax paid on that income, assuming
the foreign income is treated as the top slice of income.
UK tax on overseas income X
Less DTR = lower of:
UK tax on overseas income; and (X)

Overseas tax paid on overseas income
UK tax payable on overseas income X
Double tax relief is deducted from the overall tax liability of the taxpayer.
Activity 1
Richard is resident in Newcastle, England and earns an annual salary of £200,000. He owns a property in the
country of Essos and receives annual property income of £4,000 after the deduction of tax in Essos of £4,000.
Assuming that there are no tax treaties in place between the UK and Essos, calculate Richard’s 2022/23
taxable income and the UK income tax liability.
Solution
Notes

3.3.5 Double tax treaties
Most developed countries have arranged double taxation treaties with other countries around the world. These
agreements will ensure, whenever possible, that a particular source of income will only be taxed in one country,
thereby removing the need for double tax relief to be given as noted in Section 3.3.4. In an exam question, you will
be told if a double taxation treaty exists.
3.4 Allowances
3.4.1 Blind person’s allowance
A person who is registered as blind is entitled to a further allowance of £2,600 (£2,520 in 2021/22). This is added to
the personal allowance. If an individual cannot use their full blind person’s allowance it may be transferred to their
spouse or civil partner, irrespective of whether or not the spouse/civil partner is blind.
Activity 2
Mr and Mrs Taylor have total income of £13,365 and £22,000, respectively. Mr Taylor is registered blind. They
are both resident in Scotland.
Calculate their taxable income for 2022/23.
Solution
Notes

3.4.2 The marriage allowance
The marriage allowance is available for married couples and those in a civil partnership. Where one spouse has
income of less than £12,570 (£12,570 for 2021/22) and cannot use all their personal allowance, they can elect to
transfer £1,260 (£1,260 for 2021/22) of their personal allowance to the other spouse or civil partner if they are a
basic rate taxpayer. This is 10% of the personal allowance rounded up to the nearest £10. The marriage allowance
is shown on the tax tables.
Only £1,260 (£1,260 for 2021/22) can be transferred, this is an all or nothing election. It is not possible to transfer a
lower amount. Should one spouse have less than £1,260 unused, the couple can choose to transfer the full £1,260,
leaving an amount taxable on the other spouse.
The election is not allowed where the potential recipient of the allowance pays tax at the higher or additional
rate. For Scottish taxpayers, the £1,260 can be transferred to the recipient if they pay tax at the starter, basic or
intermediate tax rates (19/20/21%).
The £1,260 is deducted as a tax reducer at 20% from the income tax liability for the tax year – i.e., £252 is deducted
from the final income tax liability of the recipient. It is not deducted from the income itself in the same way as the
standard personal allowance.
Activity 3
Ben has an annual salary of £35,700. His wife Rachel has annual rental income of £8,500. These are their
only sources of income. They both live in Yorkshire, England.
Assuming a marriage allowance election is made, calculate the final income tax liability by Ben in 2022/23.
Solution

3.5 Deductions from income
These are specific payments made by an individual which are eligible for tax relief.
There are the two types of ‘deductions from income’ which will be examined in this module:
• Eligible interest payments

• Gift of shares/land/buildings to charity
Because the payments are not linked to any particular source of income in the income tax computation, they are
deducted from total income to arrive at net income, as can be seen in the proforma below. These can be contrasted
with other payments which specifically reduce a particular source of income, such as the payment of a professional
subscription by an employee which would be allowed to reduce their employment income (see Module 5).
NSI SI DI
£ £ £
Employment income X
Building society interest X
Dividend income X
Total income X X X
Less deductions (X) (X) (X)
Net income X X X
Personal allowance (X) (X) (X)
Taxable income X X X
Notes

3.5.1 Eligible interest payments
When an individual pays interest on a loan which falls into one of the following categories, they will be permitted to
deduct the amount of interest actually paid in a tax year from their total income for that year, rather than deducting
the interest from a specific source of income such as trading profits or employment income.
• Loan to purchase plant and machinery (assets used in a trade by a partner in a partnership)
• Loan to purchase an interest in a ‘close company’ (a close company is broadly a company controlled by five or
fewer shareholders, often a small family-owned business)
• Loan to purchase an interest in a partnership
This is not an exhaustive list, and other examples of deductions will exist.
‘Close companies’ are discussed further in TPS Business Taxation.
Activity 4
Mark is 42 and joined a partnership on 1 June 2022. He had to contribute capital and borrowed £100,000 to
do so. He paid interest of £6,000 in 2022/23. His trading income from the partnership was £80,000. Prior to
this he had a job and earned £6,500 a month (until leaving on 31 May 2022).
Calculate Mark’s taxable income for 2022/23.
Solution
Notes

3.5.2 Gifts of shares/ land to charity
The other deduction from income covered in this course involves a taxpayer donating listed shares, land, or
buildings to a charity. This is covered under charitable giving below.
3.6 Charitable giving
If an individual puts cash into a charity collecting tin, that cash is coming from their post-tax income. However, there
are several more tax-efficient ways of making donations to registered charities which either decrease the cost of
making the donation to the donor, and/ or increase the amount received by the charity:
1. Gifts of listed shares or land and buildings;

2. Gift aid; and
3. Payroll giving.
3.6.1 Gifts of listed shares or land and buildings
If an individual gifts listed shares or land and buildings to a charity, this will be given tax relief as a deduction from
income (as referred to at 3.5 above). The deduction will normally be based on the market value of the assets gifted
on the date of the gift. The charity must provide the individual with a certificate before the relief can be claimed.
Activity 5
Alan is 36 and earns £68,000 a year from his job. He lives in Clitheroe, England. He gives 100 listed shares to
Age UK, a UK-registered charity, on 28 July 2022. The market value of one share at that date is £2.65.
Calculate Alan’s taxable income in 2022/23.
Solution
Notes

3.6.2 Gift aid
Under the gift aid scheme, a taxpayer is treated as if they had made a payment to the charity net of basic rate
income tax. If a taxpayer wishes a charity to receive £100, they need only pay cash of £80 (being £100 less basic
rate income tax of £20). The charity will recover the other £20 from HMRC, provided the taxpayer has paid at least
that amount in UK income tax and capital gains tax in the tax year.
The individual is therefore getting 20% relief at source.
A higher or additional rate taxpayer is entitled to even more relief (an extra 20/25%). They achieve this by extending
their income tax rate bands by the gross donation (net × 100/80).
• The basic rate limit becomes £37,700 + gross donation.

• The higher rate limit becomes £150,000 + gross donation.
By doing this, income up to the amount of the gross donation which would previously have been above the basic
rate limit is now below it and is therefore taxed at 20% instead of 40%. Likewise, income which would previously
have been above the higher rate limit is now below it and is therefore taxed at 40% instead of 45%.
Basic rate taxpayers therefore receive tax relief at 20% at source, higher rate taxpayers receive 40% tax relief (20%
at source and 20% via the tax computation) and additional rate taxpayers receive 45% tax relief (20% at source and
20% + 5% via the tax computation).
There are several conditions which need to be satisfied:
• The gift must be irrevocable and a true gift.

• The taxpayer should have paid sufficient UK tax to cover the 20% top up paid to the charity by HMRC (If they
have not, HMRC will raise an assessment for the shortfall on the taxpayer).
Notes

Activity 6
Laurel lives in London, England and earns £25,000 a year. He gives £500 cash to charity in 2022/23 under the
gift aid scheme. Explain how this will be treated for tax purposes in 2022/23.
Solution
Activity 7
Hardy also lives in London, earning an annual salary of £55,000. He gives £500 cash to Oxfam in 2022/23
under the Gift Aid scheme.
Calculate Hardy’s income tax liability:
a) Ignoring the gift aid payment; and

b) Taking into account the gift aid payment.
Solution
Under certain conditions charities can claim gift aid on collecting tin donations under the gift aid small donations scheme.

3.6.3 Payroll giving
An employer can choose to run a payroll giving scheme. This is sometimes known as give as you earn or GAYE.
Employees choosing to take part have their donations deducted from their gross wages before their tax liability is
calculated. The employee will receive tax relief at their marginal rate (i.e., the highest rate paid on their income).
There is no minimum donation, and the employer must have HMRC’s approval to pass the sums to a charity or a
charity agency who will distribute them.
Activity 8
Martha earns £20,000 per annum and contributes £100 a month to the GAYE scheme operated by her
employer. She lives in Nottingham, England.
Explain how this will affect her income tax liability for 2022/23.
Solution
You should now be able to meet learning outcome numbers four and five.
Notes

3.7 Summary
The key points covered in this module were:
• There is a statutory residence test to determine residence based on time spent in the UK. Domicile is more
permanent, and can be measured by origin, dependency, choice and deemed domicile
• Taxable amounts will depend on residence and domicile:
a) Resident and domiciled – taxed on worldwide income
b) Resident and non-domiciled – taxed on UK income. Taxed on overseas income unless opt for the
remittance basis (lose PA)
c) Non-resident – taxed on UK income only
• Where overseas income is subject to UK tax, double tax relief allows the lower of overseas tax and UK tax to
be set off against UK tax. A double tax treaty may allow income to only be taxed in one country
• Additional blind person’s allowance of £2,600 is available. This can be wholly or partly transferred to spouse/
civil partner
• The marriage allowance allows £1,260 of unused personal allowance to be transferred to a basic rate-paying
spouse/civil partner
• Eligible interest payments on certain loans and gifts of listed shares or land and buildings can be deducted
from total income to reach net income in the income tax computation
• Gift aid allows 20% relief at source, and an additional 20%/25% relief for higher/additional rate taxpayers by
extending the basic and higher rate limits by the gross donation
• Give as you earn allows an employee to have a charitable donation deducted from their gross wages before
tax, allowing for relief at their marginal rate
Notes

Non-savings income
Overseas property income (4,000 + 4,000) 8,000
Personal allowance (reduced to nil) –
£37,700 × 20% 7,540
£112,300 × 40% 44,920
£58,000 × 45% 26,100
78,560
Less DTR = lower of:
UK tax on overseas income = £8,000 × 45% = £3,600 (3,600)

Foreign tax on overseas income = £4,000
Income tax payable 74,960
Property income
The taxable amount is the amount before the deduction of foreign tax, that is, £8,000. This will suffer UK tax at 45%
= £3,600.
Tax relief will be given on the lower of the foreign tax suffered (£4,000) and the UK tax (£3,600) on the income (i.e.,
£3,600).
Therefore, there is no additional UK tax to pay on the overseas property income.
Back to Activity
Notes

Mr Taylor Mrs Taylor
£ £
Total income 13,365 22,000
Personal allowance (12,570) (12,570)
Blind person’s allowance – part (795)
Blind person’s allowance – remainder 1,805
Taxable income nil 7,625
Back to Activity
Rachel will be wasting £4,070 of her personal allowance (£12,570 – £8,500).
She can elect to transfer £1,260 of her personal allowance to Ben; the remainder of her personal allowance will be
wasted. The election will be valid as Ben is a basic rate taxpayer.
Ben’s income tax payable:
Total income 35,700
Less personal allowance (12,570)
£23,130 × 20% 4,626
Less marriage allowance (20% × £1,260) (252)
Final income tax payable 4,374
Back to Activity
Notes

Partnership (trading) income 80,000
Employment income (2 × £6,500) 13,000
Total income 93,000
Deduction – interest (6,000)
Net income 87,000
Back to Activity
Total income 68,000
Less deductions from income (100 × £2.65) (265)
Net income 67,735
Back to Activity
Notes

Cash payment to charity (80%) 500
HMRC payment to charity (20%) 125
Gross donation (100%) 625
Laurel need do nothing to claim relief as this has been done at source. He has donated £625 to the charity, and this
has only cost him £500. The donation will not appear in his tax computation.
Back to Activity
Notes

a) Ignoring gift aid
£37,700 @ 20% 7,540
£4,730 @ 40% 1,892
£42,430 9,432
b) Taking account of Gift Aid
Hardy’s cash donation of £500 is deemed to be net of 20% tax so the gross donation is £500 × 100/80 = £625.
His basic rate limit increases to £37,700 + £625 = £38,325.
£38,325 @ 20% 7,665
£4,105 @ 40% 1,642
£42,430 9,307
As a higher rate taxpayer Hardy should be getting 40% relief for his donation.
Cash paid £500 instead of £625 £125 saving
Reduced tax bill (£9,307 – £9,432) £125 saving
£250 saving
£250 saving on a gross donation of £625 = 40%
Back to Activity

Martha’s employment income will be £20,000 less the donations of £1,200 for the year; that is, £18,800. Assuming
this is her only income, she will pay tax of £1,246 after deduction of the personal allowance [(£18,800 - £12,570) x
20%]. Had she not made the donation she would have paid £1,486 [(£20,000 - £12,570) x 20%]
She will have saved tax at her marginal rate (20% in this case) – a saving of £240.
To pay the same amount to charity by paying into collection tins throughout the year would cost her an extra £240 as
she would not benefit from the tax savings.
Back to Activity
Notes

Module 4. Property Income
Contents
4.1 Introduction 113
4.3 Principles of Property Income 113
4.3.1 Introduction 113
4.3.2 Calculation of profits 114
4.3.3 Cash basis 114
4.3.4 Accruals Basis 115
4.3.5 Allowable expenses 117
4.3.6 Mortgage interest relief 117
4.3.7 Property Not Being Let Out 120
4.3.8 Property Income Allowance 122
4.4 Capital Expenditure 123
4.4.2 Cash basis 123
4.4.3 Accruals basis 123
4.4.4 Replacement of Domestic Items Relief 124
4.5 Furnished Holiday Letting (‘FHL’) 128
4.6 The Rent-a-Room Scheme 130
4.7 Premiums on Leases 131
4.8 Property Losses 134
4.8.1 Individuals 134
4.8.2 Non-Commercial Rent 134

4. Property Income
4.1 Introduction
We have seen that individuals record each type of income separately before calculating the total income subject to
income tax. One type of income that individuals frequently have is property income. This would include receiving
income from renting out land and property or from the use of land in some way. For instance, selling fishing
permits to anglers is deriving income from the ownership of land and therefore is classed as property income.
1. calculate property income for an individual, including relief for capital expenditure;
2. calculate the taxable property income for an individual from furnished holiday lettings or renting out a room in
their own home;
3. calculate property income in respect of lease premiums; and
4. calculate and apply property losses of an individual.
Achieving these learning outcomes will help you to meet the fourth learning outcome of the course as a whole.
4.3 Principles of Property Income
4.3.1 Introduction
When dealing with property income for individuals, income and losses should be separately recorded for:
• UK property; and
• Overseas property.
Although the principles of calculating the income/(losses) are the same for both UK and overseas property, there
are rules on how losses may be offset and, so, each type should be separately recorded. All the income from UK
properties is treated as being from a single rental business and, likewise, for overseas property.
Notes

4.3.2 Calculation of profits
Individuals will be assessed on their profits from their property business for the fiscal year (6 April to 5 April).
Property income profits for individuals are calculated using the ‘cash basis’ where the gross property income does
not exceed £150,000 for the fiscal year s271A ITTOIA 2005. If property income profits are more than £150,000, the
profits must be calculated using the accruals basis. If the property rental is only carried on for part of the year, the
limit will be reduced accordingly.
4.3.3 Cash basis
Under the cash basis, income and allowable expenses are recognised when money is received or paid.
Activity 1 – Calculation of profits
It is April 2023. Rohan started to rent out a retail unit on 1 October 2022. The gross property profits for the six
months to 31 March 2023 is £80,000.
On what basis will the taxable property income be calculated in 2022/23?
Solution
Notes

Activity 2 – Cash basis
Throughout 2022/23, James rents out a flat in Edinburgh to two students for £1,500 a month. The tenants are
late paying their rent for March 2023. The rent is paid on 7 April 2023.
Calculate the property income on which James will be assessed for the fiscal year 2022/23.
Solution
The cash basis is the default position where gross property income does not exceed £150,000. A taxpayer can elect
to use the accruals basis. This could be helpful if the accruals basis has been used in previous years. The election
must be made on or before the first anniversary of 31 January following the fiscal year for which the election is
made. For 2022/23, the election must be made by 31 January 2025. This would need to be considered annually or
the cash basis would become the default again in future years.
4.3.4 Accruals Basis
The accruals basis means that income is taxed when it is receivable, not just when it is received s270 ITTOIA 2005.
Similarly, when we deduct allowable expenses, we deduct the expenses payable in respect of the period.
For exam purposes you should perform calculations to the nearest month. If the taxpayer believes it is reasonable to
use a basis other than time apportionment then they may do so, provided the basis is applied consistently.
Notes

Activity 3 – Accruals Basis
Thandie rents out a number of commercial units with monthly rental income totalling £20,000 per month. One
tenant is late in paying the rent for March 2023 and Thandie does not receive this until mid-April 2023 (£5,000
of rent).
Thandie paid insurance on the units on 1 April 2022. She paid the full year’s bill in advance on that date at a
total cost of £4,800.
Calculate Thandie’s property profits for 2022/23.
Solution
Where there is a change between the cash basis and the accruals basis in two fiscal years, adjustments must be
made to ensure that income is not taxed twice or not at all and that expenses are not relieved twice or not at all.
Notes

4.3.5 Allowable expenses
For both the cash and the accruals basis, expenses can be deducted from property income where they are incurred
wholly and exclusively for the purposes of the property business.
The following items of expenditure are some of the general items that you would expect to see in a letting business
which are likely to be deductible:
• Advertising;
• Cleaning;
• Maintenance;
• Insurance;
• Council tax/water rates;
• Letting agent fees;
• Repairs of items (but not improvements);
• Accounting costs;
• Bad debts (if all reasonable steps taken to recover); and
• Mortgage interest (see below).
4.3.6 Mortgage interest relief
Individuals receive tax relief on interest paid on a mortgage (but not on the capital repayment element). Historically,
interest costs relating to residential rental properties were fully deductible in calculating property income. However,
individuals with residential rental properties are now no longer able to deduct all of their finance costs from their
property income to arrive at their property profits.
The relief is given as the lower of:
• The mortgage interest cost at 20%

• The property business profits at 20%
This relief is then given as an income tax reducer in the individual’s income tax computation.
If the property business profits are used to calculate the tax reduction rather than the mortgage interest costs, the
difference between the figure used and the mortgage interest costs can be carried forward to calculate the basic rate
tax reduction in the following year.
The tax reduction cannot create a negative tax liability.
Notes

Example 1
Winston has rental income of £20,000 from a flat, mortgage interest costs of £1,000 and other allowable rental
expenses of £4,000.
Calculate Winston’s income tax liability for 2022/23.
Winston will be entitled to a basic rate tax reduction of £200 being the lower of the mortgage interest cost at
20% (£1,000 x 20%) and the property business profit at 20% (£16,000 x 20%). The tax reduction is deducted
in arriving at Winston’s tax liability for the year.
Winston will be entitled to a basic rate tax reducer of £200* being the lower of the mortgage interest cost at
20% (£1,000 x 20%) and the property business profit at 20% (£16,000 x 20%). The tax reduction is deducted
in arriving at Winston’s tax liability for the year.
Assuming Winston has no other sources of income, his computation for 2022/23 will look like this:
Property Income
Rental income 20,000
Allowable expenses (4,000)
Property business profit 16,000
Tax Computation
Taxable profits 3,430
£3,430 x 20% 686
Income tax reducer* (200)
Income tax payable 486
If the property business profits are used to calculate the tax reduction rather than the mortgage interest costs,
the difference between the figure used and the mortgage interest costs can be carried forward to calculate the
basic rate tax reduction in the following year.
The tax reduction cannot create a negative tax liability.

Activity 4 – Mortgage interest
Stephen has residential rental income received of £16,000 in 2022/23. His only expenses in relation to this are
advertising of £2,000 and loan interest of £1,000. Stephen is employed and receives employment income of
£60,000 in the year.
Calculate Stephen’s property income and income tax payable for 2022/23.
Solution
The restriction applies equally to UK and overseas residential property businesses. Interest costs relating to
non-residential (commercial) properties continue to be deductible in full.
Notes

4.3.7 Property Not Being Let Out
There are two potential reasons why a property may not have tenants in it. Firstly, the property may be empty whilst
the landlord searches for tenants or items are repaired. Secondly, the landlord may be using the property for
themselves for a period. Expenses incurred during these two potential situations are treated differently.
Where the property is empty, any expenses of running the property continue to be deductible in computing the
property income as the property is available for letting. However, where the landlord is occupying the property,
no deductions can be allowed for the proportion of expenses, (e.g., interest, insurance, council tax etc.) that relate
to the owner’s occupation. Any expenses that wholly relate to the rental of the property (e.g., advertising for tenants
etc.) can be deducted in full.
For example, if HMRC accepted that letting took place throughout the year and that the property was occupied by
the owner for 4 weeks, by tenants for 30 weeks and stood empty for 18 weeks, 48/52 of the expenses would be
allowed. Expenses specific to the letting, such as advertising, would be allowed in full.
Notes

Example 2 – Expenses when property not let
Jeremy owns a residential rental property in Wigan, England. During 2022/23 he manages to let it for 35
weeks of the year. The property is empty while Jeremy searches for a tenant for 10 weeks and, for the
remaining 7 weeks, Jeremy uses the property himself as his employer sent him to work in London.
Jeremy receives rental income of £8,750 during 2022/23 and pays the following expenses; £3,000 of
mortgage interest, £500 advertising for new tenants, £2,000 in property maintenance fees and £300 in
cleaners’ fees whilst the property is let to the tenants.
The income of £8,750 does not need to be apportioned.
The expenses that relate wholly to the period of letting, i.e., the advertising and the cleaning, also do not need to
be apportioned.
The property maintenance fees must be apportioned as they relate to the whole year. They should be
apportioned into the allowable element (45/52ths) and the disallowable element (7/52ths).
£ £
Rental income 8,750
Expenses (no apportionment)
Advertising (500)
Cleaning (300)
Property maintenance fees (2,000)
(2,000)
Apportioned – £2,000 x 45/52 (1,731)
Property business profits 6,219
Jeremy will also be entitled to a tax reduction in his income tax computation of £3,000 x 45/52 @ 20% = £519.23.

4.3.8 Property Income Allowance
An individual receiving less than £1,000 of property income (before deducting expenses) does not have to declare or
pay tax on this income.
Where property income is less than £1,000 a landlord may wish to elect for the property income allowance not to
apply. This may be beneficial where allowable expenses are such that a property loss would arise.
If an individual has property income exceeding the £1,000 allowance they can choose to either:
• deduct the actual expenses incurred from income received (the normal basis); or
• elect to deduct the allowance from income received (the alternative).
It may be more beneficial to opt for the alternative treatment if expenses for the year are less than £1,000. This
would permit the taxpayer the deduct the £1,000 allowance instead, reducing the overall tax liability.
The election for the property income allowance can be made on a year-by-year basis.
Notes

4.4 Capital Expenditure
4.4.1 Introduction
When calculating taxable property income, it is important to distinguish between capital and revenue expenditure.
There is no single test of what constitutes capital expenditure, however it can be described as money spent
on acquiring or maintaining fixed (non-current) assets of the business such as property, plant and equipment.
Revenue expenditure, on the other hand, is money spent on general running costs or consumables such as repairs,
insurance, heat and light.
Expenditure on purchasing and extending a rental property is capital expenditure. Likewise, initial repairs to a
property bought in a run-down condition are examples of capital expenditure. These cannot be deducted from
property income.
Expenditure on assets provided in a rental property is also capital expenditure. Generally, a landlord cannot make
any deductions for capital expenditure in calculating property income. HMRC has stated that the cost of replacing
free-standing white goods such as washing machines, fridges or cookers will also be treated as capital expenditure.
However, the cost of repairing or replacing fixtures such as a fitted kitchen or a bathroom suite will be treated as a
repair to the building. This can be deducted from property income.
4.4.2 Cash basis
Under the cash basis, some capital expenditure may become tax deductible. The cost of furniture and fixtures in a
commercial property can be deducted from property income as the expense is incurred.
In a residential property let, such costs cannot be deducted as incurred but instead replacement of domestic items
relief (see below) may be available for the replacement of furnishings.
4.4.3 Accruals basis
Under the accruals basis, relief is not generally available as a deduction from property income for any capital
expenditure incurred.
Alongside replacement of domestic items relief, individuals may also be able to claim capital allowances.
Notes

Capital allowances are a form of tax deduction for capital expenditure and will be covered in more detail in your later
tax studies. They are allowed as a deduction against profits and are calculated as a fixed percentage of the value
of qualifying capital expenditure (rates range from 6% to 130% depending on the type of asset and the timing of the
expenditure). We might think of this as “tax depreciation”.
Capital allowances are available for expenditure on plant and machinery used in running the business. These
include assets like vehicles, tools, ladders, computers, business furniture, lifts, central heating and air conditioning.
Capital allowances will also be available on qualifying furnishings provided by the landlord within a commercial
property.
Capital allowances are specifically not allowed on plant and machinery used in residential accommodation, i.e.,
furniture and fittings provided within a residential property. Instead, a landlord of a furnished residential property may
claim a deduction for replacement of domestic items relief.
4.4.4 Replacement of Domestic Items Relief
Replacement of domestic items relief is relevant to residential landlords under either the cash basis or the accruals
basis s311A ITTOIA 2005.
Replacement of domestic items relief operates by giving tax relief against rental income for unfurnished, part-
furnished or furnished properties. The deduction that can be taken is calculated as follows:
• The cost of the new replacement item,

• Less the cost of any element of improvement compared to the old item (beyond the nearest modern equivalent),
• Less any proceeds of sale of the old item,
• Plus any costs of disposing of the old item.
No relief is available for the initial purchase of an item, only for its subsequent replacement.
The relief is available on “domestic items” and this includes:
• Moveable furniture such as beds and free-standing wardrobes,

• Furnishings such as carpets, curtains and linen,
• Household appliances such as fridges, freezers and televisions,
• Kitchenware such as cutlery and crockery.
The items in question must be provided solely for the use of the tenant in the residential property. Therefore, if there
is any period of occupation by the landlord in the year of replacement, the replacement of domestic items relief
expense will need to be apportioned to take account of the private use.
Notes

Replacement of domestic items relief will not apply to Furnished Holiday Letting businesses (covered at Section 4.5)
or to the letting of commercial properties (as these types of business receive relief by way of capital allowances
under the accruals basis) or by deduction of the cost directly from income (under the cash basis).
Activity 5 – Replacement of Domestic Items Relief
Jake has rented out a furnished residential property since January 2017. In 2016/17 he purchased a double
bed for £270. He replaces this by buying a new double bed in 2022/23. The cost of the new bed is £1,550 as it
includes a built-in TV and games console at the foot of the bed. An equivalent bed without the TV and games
console would cost £550. Jake sells the old bed for £50.
What amount can he claim as a deduction against property income in relation to the beds and in which tax
years is relief claimed?
Solution
Notes

Activity 6 – Property Income Calculation
Fiona owns a small bungalow and lets it out as furnished property. The house is let for 40 weeks of fiscal
year 2022/23 and is empty for two weeks. Fiona stays in the house herself for the remaining 10 weeks. The
following income and expenditure was received and paid in 2022/23:
Rent (per week) 195
Expenses:
Council tax 820
Water rates 450
Small repairs 125
Advertising 39
Cleaning (only when let to tenants) 620
Painting and decorating 400
Buildings insurance premium (note) 300
Cost of replacing bathroom suite 2,520
Note: The building insurance premium was for an annual policy paid in advance on 1 October 2022.
Calculate Fiona’s property income assessment for 2022/23.
Notes

£ £
Rental income
Expenses (to be apportioned)
Apportioned
Property income assessment
Solution
Notes

4.5 Furnished Holiday Letting (‘FHL’)
Special rules apply when a landlord lets out furnished holiday accommodation in the European Economic Area
(‘EEA’), defined as European Union countries, plus Iceland, Liechtenstein and Norway. Income from FHLs is taxed
as property income in the normal way, but there are some extra tax advantages for taxpayers who provide this
specific category of accommodation s322-328 ITTOIA 2005.
The main advantages which apply specifically to FHL income (but not to other types of property income) are:
1. Profits from FHLs are treated as ‘earned income’ and qualify as UK earnings for pension purposes (see
Modules 2 and 8)
2. Plant and machinery capital allowances are available on the furnishings and fixtures used within the property
(instead of replacement of domestic items relief)
3. A number of valuable capital gains tax reliefs are available when the property is bought or sold (see Module 9 for
capital gains tax computations; reliefs are covered in your later tax studies)
Profits and losses from a UK and a EEA FHL businesses must be kept separate and losses from one can only be set
off against profits from the same business.
The accommodation must be furnished and let on a commercial basis with a view to profit. There are three
occupancy conditions which must be met, as follows:
1. The availability condition: during the ‘relevant period’, the accommodation must be available for commercial
letting as holiday accommodation to the public for at least 210 days.
2. The letting condition: the property must be commercially let as holiday accommodation for at least 105 days in
the ‘relevant period’.
3. The pattern of occupation condition: during the ‘relevant period’, no more than 155 days fall during periods of
longer-term occupation. If they do, then these periods do not count as letting for FHLs purposes. Longer-term
occupation is a continuous period of more than 31 days which the accommodation is in the same occupation.
The ‘relevant period’ is generally the tax year unless the letting has commenced during the year or has ceased
during the year. In either of these cases, the ‘relevant period’ is either the first 12 months or last 12 months of renting
respectively.
Where a landlord has a number of furnished holiday lettings and one or more of them does not meet the 105 day
rule, the landlord is permitted to average the periods for which all the properties are let. The averaging must be
carried out separately for UK and EEA properties.

Activity 7 – Furnished Holiday Letting
Howard owns two furnished holiday homes in the UK, one in England and one in Scotland.
His property in England is available to let all year except for 42 days when Howard’s family take their holidays
there. In 2022/23 the property was let for 140 days throughout much of the summer and school holidays.
His property in Scotland had one tenant spending four months there over the winter (Sep – Dec) but was
available to let for the rest of the year. It was actually let for 90 days to short-term tenants in 2022/23.
Explain which (if any) of the two holiday homes will satisfy the conditions to be classified as a furnished
holiday letting.
Solution
Notes

4.6 The Rent-a-Room Scheme
The Rent-a-Room Scheme applies where an individual lets out furnished accommodation in their own home in which
they live s309 ITTOIA 2005. This can include the provision of meals, cleaning or laundry.
Under the rent-a-room scheme, £7,500 of income can be tax free. This limit is per house, not per individual, so if two
homeowners share a house and receive rent-a-room receipts from a third, each of them will have to halve their limit
to £3,750.
It is not possible to claim both the property income allowance (£1,000) and rent-a-room relief on the same rental
income. Generally, the rent-a-room scheme will provide more generous relief than the property income allowance.
The rent-a-room scheme applies in different ways according to the level of receipts, as illustrated in the diagram
below:
Gross receipts
≤ £7,500 > £7,500
Automatic unless Elect to disapply Automatic unless Elect to apply R-a-R

Income = exempt R-a-R (Normal Basis) limit
(Alternative Basis)
Calculate: Calculate: Calculate:
Income X Income X Income X
Exps (X) Exps (X) Exps (7,500)
X X X
i.e. do this if i.e. do this if
loss-making expenses < £7,500
Elect to disapply Election remains

every year in force until
(by one year from withdrawn
filing date)
Notes

Activity 8 – Rent-a-room scheme
Michael lets out a room in his home for £150 a week throughout the entirety of 2022/23. He receives £300 in
the year towards cleaning and meals. He has rental expenses of £2,600.
Calculate Michael’s property income for 2022/23, assuming Michael makes any beneficial claims.
Solution
4.7 Premiums on Leases
A lease is a right to use an asset (in this case land or property) for a specified period of time. There are two main
types of transaction in respect of leases:
• Grant – when the landlord originally creates the lease with the tenant; and
• Assignment (or assignation) – when the tenant sells or transfers an existing lease to someone else.
In addition to the payment of ongoing rent, a tenant may also pay a one-off up-front lump sum to a landlord when the
landlord first grants a lease. This lump sum is called a lease premium.
If a lease that has been granted is a long lease (more than 50 years), the entire premium received is treated as a
capital receipt in the hands of the landlord and the capital gains tax rules apply to the receipt.
If a landlord receives a premium for the grant of a short lease (less than 50 years), part of the premium is treated
as rental income and part of the premium is treated as a capital receipt per s277 ITTOIA 2005. Any amount
treated as rental will be taxable in full on the landlord in the year of receipt in their income or corporation tax
computation.
The amount to be taxed as property income of the landlord is expressed as:
50 – Y
Px
50
Where P = premium
and Y = complete years of lease – 1 year

The amount of the premium that is treated as rental income of the landlord is deemed to be rent paid by the tenant
and is taxed as such. If the tenant is in business, they should, therefore, be able to claim a deduction when
calculating their tax-adjusted trading profits for the element of the premium treated as rent.
Even though the landlord has an immediate charge to income/corporation tax on the receipt of this amount of
rental income, the tenant’s deduction for this same amount is spread over the life of the lease, meaning that it may
take the tenant several years to obtain the full deduction.
The ongoing rent paid for the lease will be treated as property income of the landlord.
The above rules do not apply on the assignment of a lease (when an existing lease is sold or transferred to
someone else, rather than granted) – see Module 9 for the rules on sale of leases.
Activity 9 – Premium on Grant of Lease
Mr Owner owns a small shop which he is prepared to lease to Ms Trader for a rent of £600 per calendar
month (payable at the end of each month) over a period of 12 years. In order to secure the lease, Ms Trader
pays a lease premium of £30,000 on 1 January 2023. The lease starts on this date and Ms Trader uses the
property in her trade. She draws up accounts to 30 June each year.
What amount(s) will Mr Owner be assessed on during 2022/23?
What deductions can Ms Trader claim in her accounts to 30 June 2023?
Notes

Mr Owner’s property income – 2022/23
Ms Trader’s deductions (30 June 2023)
Solution
Notes

4.8 Property Losses
4.8.1 Individuals
In reaching the total income/(loss) for UK property, the landlord will pool the results of all UK property together. If
three properties are profitable and one is loss-making, the four results are pooled to reach a net UK profit or loss.
The same approach will be followed for all overseas properties which must be kept separately from the UK property
s269 ITTOIA 2005.
A UK property loss cannot be set against overseas property income and vice versa.
Property losses are carried forward to offset against future property income from the same jurisdiction (i.e., UK or
overseas).
4.8.2 Non-Commercial Rent
Where a property is let under non-commercial terms, (e.g., to a relative at a ‘peppercorn’ rent) expenses will
only be allowed up to the amount of the rent. Therefore if income is less than costs incurred during the year, a loss
cannot be created.
These non-commercial terms are often charged to relatives or close friends, but this does not mean that all rents
to relatives or close friends should be treated as being on non-commercial terms. You should compare the rent
received to a full market value rent to decide if the let is commercial or not (the market value rent will be apparent
from the question).
Notes

Activity 10 – Property Losses
Muhammed owns four UK properties which he rents out. In 2022/23 his property income and expenses were
as follows:
Property 1 Property 2 Property 3 Property 4
£ £ £ £
Income 9,600 3,000 8,400 1,000
Allowable expenses 2,400 5,600 3,000 2,800
Property 4 is rented to Muhammed’s aunt at approximately one-quarter of the open market rent.
Calculate Muhammed’s property income for 2022/23.
Solution
Notes

Rental income
• UK and overseas income/(losses) are kept separate from one another.

• Property income for individuals is automatically calculated on a cash basis when gross property income is less
than or equal to £150,000 for the fiscal year.
• If the £150,000 limit is exceeded, the accruals basis must be used.
• An individual with property income of <£150,000 can elect to use the accruals basis.
• Expenses are allowed if they are wholly and exclusively for the ‘business’ of letting. This includes periods
where the property is empty.
• Mortgage interest relief for individuals is restricted. An income tax reducer is available at 20% of the
mortgage interest costs.
• Expenses are not deductible if the owner is occupying the property.
• Landlords generally cannot make any deductions for capital expenditure in calculating their taxable profit.
• If property income is calculated on the cash basis:
• replacement of domestic items relief can be claimed for residential properties
• the cost of furnishings and fixtures can be deducted for commercial properties.
If property income is calculated on an accruals basis, the landlord may be able to claim:
• capital allowances for commercial properties and for plant and machinery used in conjunction with the
property business – ie tools, vans etc; and
• replacement of domestic items relief for residential property.
• Income from a Furnished Holiday Letting (FHL) is treated differently to other rental income:
• Treated as earned income for pension contribution purposes
• Capital allowances available on furniture and fittings
• Capital gains tax reliefs available on sale of the property.
• Qualifying conditions for FHLs shown on tax tables.
• Rent-a-Room scheme available to exempt up to £7,500 of rental receipts from letting out a room in the
taxpayer’s own home.
• If a landlord receives a premium for the grant of a short lease, part of the premium is treated as rental income
and part of the premium is treated as a capital receipt. The tenant has a deduction for the rental amount spread
over the life of the lease.
50 – Y = rental income
Px
50
• UK property losses may not be set against overseas property income and vice versa.
• Where property is let on non-commercial terms the expenses are restricted to the amount of the income.
You should now be able to meet all of the learning outcomes for this module. Should you not be able to do so, go
back and read the relevant section(s).

The property business has been carried on for six months in the fiscal year. The cash basis limit is £150,000/2 =
£75,000. Rohan must calculate his property income using the accruals basis.
Back to Activity
James has received 11 months of income in 2022/23. He will be assessed on £16,500 (11 x £1,500). The remaining
£1,500 will be taxed as part of the 2023/24 property income as it was received in the 2023/24 fiscal year.
Back to Activity
Due to the level of income being received over the year (12 x £20,000 = £240,000), the accruals basis must be used.
The rent that is not received at the end of the tax year is accrued into the rental accounts such that income totals
£240,000. The income receivable is used for the computation, as opposed to the income received.
The insurance is paid in tax year 2021/22 but relates to the year commencing 1 April 2022 and ending 31 March
2023. Therefore, it should be shown as an expense for 2022/23.
So, in 2022/23 Thandie will have property business profits of:
Rental income 240,000
Less: insurance costs (4,800)
Back to Activity
Notes

Property Income £
Rental income £ 16,000
Expenses:
Advertising (2,000)
Tax Computation
Total income 74,000
Taxable profits 61,430
£37,700 x 20% 7,540
£23,730 x 40% 9,492
Income tax liability 17,032
20% tax reduction* (200) (£1,000 x 20%)
Income tax payable 16,832
* The tax reduction is the lower of the mortgage interest cost at 20% (£200) and the property business profit at 20%
(£14,000 x 20% = £2,800).
Had Steven’s property income been covered by his personal allowance (such that no tax was due) the tax reduction
could not be used to create a repayment.
Back to Activity
Notes

There is no tax relief for the initial purchase of the bed in 2016/17.
However, Jake can claim a deduction for the cost of the new bed less the proceeds from the disposal of the old bed
in the year of replacement. As an equivalent new bed would only cost £550 he can claim £500 (£1,550 - £1,000 -
£50) as a deduction against his property income in 2022/23.
The TV and games console constitute an improvement and, therefore, the cost of this element would not be
deductible in 2022/23.
Back to Activity
£ £
Rental income (40 x £195) 7,800
Advertising (39)
Cleaning (620)
Expenses (to be apportioned)
Council tax (820)
Water rates (450)
Small repairs (125)
Painting and decorating (400)
Building insurance premium (note) (300)
Replacement bathroom suite - repair (2,520)
4,615
Apportioned – 42/52 (3,728)
Property income assessment 3,413
Note - Fiona will calculate her property on a cash basis as her property income for the fiscal year does not exceed
£150,000. It is not beneficial for Fiona to claim the property income allowance as this would result in a property
income assessment of £6,800 (£7,800 - £1,000). For Fiona’s income tax computation, see Module 2.
Back to Activity

Available ≥ 210 days Actually let ≥ 105 days
England 323 – yes 140 – yes
Scotland 243 – yes 90 – no
The house in England will qualify as FHL as it is available and actually let for the required amount of time.
The house in Scotland is also available for letting for over 210 days. The longer-term occupation of the house
amounts to 122 days. None of these days counts as letting for FHL purposes but as the total does not exceed 155
days, the longer-term occupation does not prevent the property from qualifying as an FHL. For it to qualify as an
FHL, the other conditions must be met. The house in Scotland does not qualify on its own as it was only let for 90
days in 2022/23.
However, as the average let over both properties is (140 + 90)/2 = 115 days; this is more than 105 days and,
therefore, Howard can apply to treat them both as FHLs.
Back to Activity
Rent (£150 x 52 weeks) 7,800
Bills 300
Gross rent 8,100
As gross receipts > £7,500 use normal basis:
Gross rent 8,100
Expenses (2,600)
5,500
Alternative basis (£8,100 – £7,500) 600
Michael will be better off if he is charged to tax under the alternative basis. Thus, he should elect to apply the
‘alternative’ basis and the election will continue in force until withdrawn.
Back to Activity

Mr Owner’s property income – 2022/23 £
Lease premium:
P x [(50 - Y) / 50]
= 30,000 x [(50 - 11)/50]
= 30,000 x 39/50 23,400
Ongoing rent:
1 January 2023 - 5 April 2023
3 x £600 1,800
25,200
Ms Trader’s deductions (30 June 2023) £
Lease premium:
Relief for £23,400 spread over lease
In this period, lease running for 6 months
£23,400 x [6 / (12 years x 12 months)]
= £23,400 x 6/144 975
Ongoing rent:
1 January 2023 - 30 June 2023
6 x £600 3,600
4,575
For the remainder of the lease, Miss Trader can take a deduction of £23,400/12 = £1,950 per annum in relation to
the lease premium, along with a deduction for each period’s rent payable as it falls due.
Back to Activity

Muhammed’s income/(losses) on the four UK properties will be combined. For property 4, the expenses are
restricted to £1,000 to match the income. No loss can arise as it is let at a non-commercial rent:
Property 1 income (£9,600 - £2,400) 7,200
Property 2 loss (£3,000 - £5,600) (2,600)
Property 3 income (£8,400 - £3,000) 5,400
Property 4 income (£1,000 - £1,000) 0
Total UK property income 10,000
Back to Activity

Module 5. Employment Income
Contents
5.2 Learning outcomes 144
5.3 Timing of the charge 145
5.4 The employment income calculation 146
5.4.1 Items included in employment income 146
5.4.2 Employment income proforma 146
5.5 The benefits code 146
5.5.1 Benefits that are not taxable 147
5.5.2 Benefits that are taxable 148
5.5.3 Use of company assets 148
5.5.4 Company cars 149
5.5.5 Company car fuel 153
5.5.6 Company vans 154
5.5.7 Environmentally friendly transport 154
5.5.8 Beneficial loan arrangements 155
5.6 Deductions 157
5.6.1 Necessary expenses 157
5.6.2 Travelling expenses 157
5.6.3 Approved mileage allowance payments 158
5.7 Employment income calculation 160
5.8 Payments on termination of employment 162
5.8.1 Types of termination of employment 162
5.8.2 Ex-gratia lump sum 162
5.9 Employment income: NIC and PAYE 164
5.9.1 NIC on benefits 164
5.9.2 The PAYE system 164
5.9.3 Payroll taxable benefits 164
5.9.4 PAYE audits 165
5.10 Summary and review 166

5. Employment Income
A podcast is available on myCABLE
5.1 Introduction
Most working individuals in the UK (approximately 85% of the labour force) are classed as employees. They
will need to understand how they are taxed on both their cash pay and any benefits they receive as part of their
remuneration package. The employer has the responsibility for the deduction of the relevant taxes from their
employees’ pay and it is vital that this is done correctly to avoid incurring penalties.
This module outlines the timing and amounts of assessable employment income, including benefits, and looks at
how the tax is paid via the pay-as-you-earn (PAYE) system.
As explained in Module 2, every source of income is calculated separately and then included in the income tax
computation. Income from employment is calculated and assessed under the rules of employment income.
The primary source of legislation for employment income is the Income Tax (Earnings and Pensions) Act
ITEPA 2003
5.2 Learning outcomes
1. explain the timing of an employment income charge;

2. identify the types of income assessable as employment income;
3. state the common non-taxable benefits;
4. calculate the employment income charge for common benefits;
5. identify the deductions and expenses which may reduce employment income;
6. calculate an individual’s employment income tax charge;
7. calculate the extent to which a termination payment will be charged to employment income;
8. explain the PAYE system used for employment income.
Achieving these learning outcomes will help you to meet the fifth learning outcome of the syllabus as a whole.
Notes

5.3 Timing of the charge
Employment income is assessed for each tax year (e.g., 2022/23 = 6 April 2022 to 5 April 2023). The income which
will be assessed in each year is generally the income received in the year.
The legislation sets out the rules for when income is deemed to be received and, hence, when tax should be
deducted by the employer through PAYE.
The earnings are received on the earliest of the following dates:
1. The time when payment is made, or

2. The time when a person becomes entitled to payment.
Activity 1 – Timing of the charge
Pauline is an employee of Venues Ltd, a company which provides meeting rooms. Her bonus for the year to
31 December 2022 is paid on 7 July 2023, in accordance with the bonus scheme rules.
State when the bonus is deemed to be received and therefore in which tax year it will be taxed:
Solution
Notes

5.4 The employment income calculation
5.4.1 Items included in employment income
Employment income includes all salary and wage payments from an employment together with benefits. It will also
include any deemed employment payments and termination payments. This is covered later in this module.
Employment income taxes amounts received (whether from an employer or a third party) which relate to services
provided in the employment.
If amounts received do not relate to services provided, they are not taxable as employment income.
Golden hellos and golden goodbyes (bonuses paid when an employee takes or leaves a job) are taxable as
employment income.
5.4.2 Employment income proforma
The following proforma can be used to calculate an individual’s employment income:
Salary, fees, bonus (i.e., cash receipts) X
Benefits (generally non-cash e.g., company car) X
Less deductions and expenses (X)
Taxable employment income X
5.5 The benefits code
Broadly speaking, benefits fall into two categories:
• Those that are not taxable; and

• Those that are taxable and increase taxable employment income.
Notes

5.5.1 Benefits that are not taxable
There are various benefits which may be provided by an employer which are not taxable under employment income.
These include:
• Payments to employees for use of own car for work purposes (see Section 5.6.3)
• Provision of a parking space at or near employee’s place of work
• Provision of work-related training
• Sport or recreational facilities, provided they are not available to the public; note that payments of membership
fees to a sports club are taxable
• Provision of one mobile telephone for employee’s use
• Awards (amount depending on the suggestion) for suggestions made through a staff suggestion scheme
• Certain types of employer-provided environmentally friendly transport (see Section 5.5.7)
There are other benefits which may be non-taxable subject to certain limits and requirements, and some of these are
considered below:
Annual staff function
The provision of an annual event, such as a Christmas party, where the cost to the employer is no more than £150
per employee is an exempt benefit.
• This cost includes VAT, travel and accommodation and is averaged across all attendees, which may include
employees and their partners and families.
• More than one event per year may be taken into account in considering the £150 limit (choosing the best
combination, that is, not necessarily chronological) but as soon as the limit is breached, the whole cost of the
function breaching the limit will be taxable on employees.
Home working
Payments to employees to cover the additional household costs of working some or all the time at home are not
taxable. No record-keeping is required for payments up to £6 per week. Payments above this figure require evidence
of the additional costs incurred.
Canteen provision
Free or subsidised meals in a staff canteen are exempt if available to all employees; that is, not just directors or
certain grades of staff.
Notes

Tax-free childcare
An employee can open an account and make parental contributions of up to £8,000 per child per year up to the age
of 12. HMRC tops up the account with the basic rate tax suffered, giving relief of up to £2,000 a year per child. The
money can be used to pay for qualifying childcare, including childminders, nurseries and after school clubs.
Trivial benefits
The rules exempt benefits which are individually valued at not more than £50. There is no restriction on the number
benefits which can be included in the exemption for the tax year.
Cash cannot be included as a trivial benefit. An example of a trivial benefit would be the provision of the seasonal flu
jab.
It should be remembered that the legislation above does not give the employee the right to receive such payments
from their employer; it simply exempts such amounts from tax if they are received.
5.5.2 Benefits that are taxable
The general rule is that the value of a taxable benefit is the cost to the employer. An example of this would be the
provision of medical insurance to an employee. The cost of the medical insurance to the employer would be added
to the employee’s employment income in the income tax computation.
The following taxable benefits are covered by specific rules which we will look at below:
• Use of company assets

• Company cars
• Beneficial loans
5.5.3 Use of company assets
Where an employee has the use (not the ownership) of an asset they will be assessed each year on 20% of the
market value of the asset when first provided. This is an ongoing benefit and, therefore, taxed each year.
If the asset is only provided for part of the tax year, then the value of the benefit should be pro-rated.
Notes

5.5.4 Company cars
The basic charge is calculated as:
(Price of car x appropriate %) - any available reductions
The ‘appropriate percentage’ is based on the CO2 emissions of the car.
Price of car
List price (price actually paid is irrelevant) X
All initial accessories and any later accessories costing > £100 X
Employee capital contributions (max £5,000 reduction) (X)
Price for benefit calculation X
The list price of a car is the manufacturer’s published price for the model of car. If a car meets all the following
conditions, it is treated as a classic car and the market value of the car at the end of the tax year will be used as the
“price for benefit” calculation:
• 15 years old
• worth > £15,000
• more than ‘normal’ list price
Notes

Activity 2 – List price of car
Alan’s employers provided him with a Ford Focus with a list price of £16,300 (including a satnav worth £250
which is standard in this model). Alan’s employers managed to get hold of the car for £15,600. Car mats are
added at a cost of £50 at purchase and, a month later, Alan’s employers add air conditioning (cost £1,000).
Alan has to pay a capital contribution of £5,700 towards the cost of the car.
Calculate the price of the car on which Alan will be assessed as a benefit.
Solution
CO2 percentage
• The normal percentage range is from 2% to 37%. The CO2 percentages can be found on the rates sheet.
• The CO2 figure should always be rounded down to a figure divisible by 5 g/km.
• A 4% supplement will be added if the car runs on diesel. This cannot take the percentage above the 37%
maximum.
Reducing the basic charge
The basic charge can be reduced for periods of unavailability that exceed 30 days in the tax year and any ongoing
contributions which the employee is required to make towards the running costs of the car.
Notes

The reduction for employee contributions to the ongoing running costs will be the last deduction to be made in the
calculation of benefit and allows any such contribution to be netted against the benefit to reduce it.
The benefit can be summarised as:
Basic benefit
Price for benefit calculation × appropriate percentage X
Less periods of unavailability (X)
Less ongoing contributions to running costs (X)
Chargeable benefit X
Where a company car is shared between two or more employees both the car benefit and the fuel benefit (below)
will be apportioned on a ‘just and reasonable’ basis.
Activity 3 – List price of car
Rainbow Ltd has three employees to whom it provides a company car:
1. Mr Red
Mr Red has a petrol car with a list price of £15,000 and accessories costing £500 fitted at delivery.
The CO2 emissions are 98 g/km and the car is available for the full tax year. Mr Red pays £15 a month
towards the running costs.
2. Ms Green
Ms Green has a diesel car with a list price of £24,000 first provided on 6 August 2022 when Ms Green
made a one-off payment of £2,000. The CO2 figure is 163 g/km.
3. Mr Yellow
Mr Yellow has a 50-year-old sports car. The petrol engine has a CO2 emission level of 128 g/km. The list
price is £1,200 and the current market value is £28,000. Mr Yellow returns the car to the company when
he leaves on 5 January 2023. Until that point, he contributed £50 per month.
Calculate the chargeable benefit for each employee for 2022/23.

Solution
Notes

5.5.5 Company car fuel
Where an employer provides fuel for a company car which is used for private mileage, a benefit charge arises
(irrespective of the level of private mileage). This charge only applies where there is already a company car charge.
The taxable benefit is calculated as:
Fuel benefit = CO2% x £25,300 (£24,600 for 2021/22)
The percentage used is the same percentage as is used to calculate the car benefit.
• Reduce benefit for periods where the car is not available to the employee and/or where a car is shared.
• There is no assessable benefit if the employee reimburses the employer with the full cost of private fuel for the
year; however, there is no reduction in the benefit for partial reimbursement.
Activity 4 – Fuel benefit
Ralf is provided with private fuel for his company car which has CO2 emissions of 120g/km and was first
provided on 6 October 2022.
Calculate the fuel benefit for 2022/23.
Solution
Notes

Fuel provided for personal vehicles
Where the employer provides private fuel for a personal vehicle (and, therefore, there is no company car charge)
there cannot be a fuel scale charge. Instead, the employee will be taxed on the actual cost of the private fuel, using
the general ‘cost to employer’ rule.
5.5.6 Company vans
Where a company van is provided for an employee’s use there may be a tax charge on the benefit. A chargeable
benefit will arise unless the van is only used for business travel and commuting and any personal use is
‘insignificant’ (for example, taking rubbish to a tip once or twice a year, or carrying out a personal errand on a work
journey would be considered insignificant).
If the benefit is chargeable, the benefit will amount to £3,600 for 2022/23 (£3,500 2021/22). For wholly electric vans,
the benefit is reduced to £Nil for 2022/23 (£Nil in 2021/22). Where a van is shared, the benefit will be split between
employees.
There is a taxable benefit where fuel provided for company vans is used for private mileage, provided:
1. There is a company van charge; and

2. The employee uses the van privately with employer-provided fuel.
The value of the taxable benefit is £688 for 2022/23 (£669 2021/22) unless the employee fully reimburses the
employer with the full cost of the private fuel for the year. The charge will be reduced proportionately where the
benefit is not available for a full tax year, or the van is shared between employees.
5.5.7 Environmentally friendly transport
Several measures are in place to encourage more environmentally friendly travel. The following items will not be
taxable:
1. Pool cars – a vehicle made available to, and used by, more than one employee. It should not normally be kept
near the home of an employee and should not be used by one person to the exclusion of others. Any private use
should be incidental.
2. Bicycles and cycling safety equipment made available to employees to get between home and work. This is
often referred to as the Cycle to Work Scheme.
Notes

5.5.8 Beneficial loan arrangements
Where an employee receives a cheap or interest-free loan from their employer there will be a taxable benefit.
The value of the benefit is the difference between the actual interest paid and the official rate of interest. This is
currently 2% for 2022/23 (2% 2021/22).
If the loan does not exceed £10,000 for the entire tax year, this is a tax-free benefit.
There are two ways to calculate the benefit and either the taxpayer or HMRC may opt for the ‘alternative method’.
HMRC will only insist on the alternative method if it gives a significantly distorted different result leading to the
taxpayer paying materially less tax.
Normal method Alternative method
Simple average Weighted average
Loan at 6/4 or Loan at 5/4 or Loan balance 1 x n1/12

+
when made when repaid Loan balance 2 x n2/12, etc
x n/12
2
Multiply by ORI for the tax year X
Less employee contributions (X)
Taxable benefit X
n = number of months loan balance was outstanding during tax year
Notes

Activity 5 – Beneficial loan
Jeremy is employed by Millionaire Ltd and earns £50,000 per annum. His employer loans him £12,000 on
6 January 2022 at a reduced interest rate. This is repayable on the following schedule:
6 July 2022 – Repay £2,000
6 January 2023 – Repay £5,000
6 July 2023 – Clear loan
Jeremy pays his employer £50 of interest during 2022/23.
Calculate Jeremy’s taxable benefit for 2022/23 in relation to this loan, assuming an official rate of interest of
2% throughout the year.
Solution
Notes

5.6 Deductions
The following can be deducted in the employment income calculation:
1. Contributions to an approved occupational pension scheme (see Module 8);

2. Necessary expenses and travel expenses;
3. Fees and subscriptions to professional bodies;
4. Payments to charity under a payroll giving scheme run by the employer (see Module 3).
5.6.1 Necessary expenses
A deduction from employment income is allowed for an amount if:
a) The employee is obliged to incur and pay it as holder of the employment; and
b) The amount is incurred wholly, exclusively, and necessarily in the performance of the duties of the employment.
‘Wholly and exclusively’ means that expenses should have no ‘duality of purpose’, that is, expenditure partly incurred
for employment purposes and partly for non-employment will not be deductible.
‘Necessarily’ means that these are expenses which ‘each and every occupant of the particular office is necessarily
obliged to incur in the performance of their duties’.
‘In the performance of the duties of the employment’ means expenses incurred purely in carrying out the
employment itself.
5.6.2 Travelling expenses
The cost of home to work travel is not allowable – this is not a part of performing duties, merely putting the employee
in a position to start performing the duties.
Where there are two places of work, travel between the two will be allowable.
Where an employee works at a temporary location (e.g., at a client as a trainee CA) the costs which exceed normal
home to work travel will be allowable.
Notes

5.6.3 Approved mileage allowance payments
Where an employee uses their own car for business travel, they are incurring costs – the petrol, vehicle excise duty,
insurance and wear and tear. An employee in this situation should calculate the approved mileage allowance figure
for the tax year using the rates found on the rates sheet:
First 10,000 business miles Remaining business miles
Car or van 45p 25p
Motorcycle 24p 24p
Bicycle 20p 20p
Amounts reimbursed in excess of these limits are taxable. If the amount reimbursed by the employer is below these
limits, a deduction can be taken for the difference.
An extra 5p per mile is allowed to be reimbursed if the employee is carrying a passenger in their car or van who
is also on business travel for the employer. Again, amounts in excess of this limit are taxable but, in this case, no
deduction is allowed for a shortfall.
Notes

Activity 6 – Approved mileage allowance
Chris travelled 12,000 business miles in his Ford Focus. He carried a passenger (who was also on business)
for 1,500 of these miles. His employers reimbursed him a flat rate of 35p per mile. No additional amount was
paid for the passenger.
Calculate the adjustment to Chris’s employment income for the tax year.
Solution
Notes

5.7 Employment income calculation
Activity 7 – Employment income calculation
Paige works for an IT consultancy. She has the following salary and employment benefits for 2022/23:
• An annual basic salary of £36,000.

• She received a bonus of £10,000 in September 2022 based on her performance in the consultancy’s
year-ended 31 December 2021.
• Paige pays 10% of her annual basic salary into her employer’s approved occupational pension scheme.
• UK private medical insurance at an annual cost to the company of £850. A similar policy would cost Paige
£1,100 if she was to pay for this personally.
• She is entitled to a car parking space at her employer’s workplace which her employer could generate
annual income of £2,500 if this was rented out to another company which shares the same building.
• Paige has the use of VW Golf (petrol) with a list price of £17,000 and CO2 emissions of 98g/km.
Calculate Paige’s employment income for 2022/23.
Notes

Solution
Notes

5.8 Payments on termination of employment
5.8.1 Types of termination of employment
When an individual leaves employment there are several different payments, they may receive:
• Payment into an approved pension scheme (lump sum contribution) – exempt from tax
• Statutory redundancy payment – exempt from tax
• Payment in lieu of notice (‘PILON’) – this is taxable as employment incom
• Ex-gratia lump sum – see below
5.8.2 Ex-gratia lump sum
Where an employee has a contractual right or expectation (based on past practice of the employer) to receive such
a payment, this will be taxable under employment income. These payments can also include the transfer of assets,
such as company cars.
However, if the payment is unrelated to past service or a contract, the first £30,000 will be tax free.
To meet the requirements of the legislation the employer should consider the following:
• No mention of past service may be made in awarding the sum

• Employers must not include a right to such payments in contracts
• Paying sums to all employees would result in an expectation of a payment, therefore making it implicit in the
contract
• Statutory redundancy payments use up the first part of the £30,000 limit
Notes

Activity 8 – Termination payment calculation
Debbie is made redundant by her employer on 15 December 2022.
Her annual salary was £60,000. Her redundancy package consists of the following:
• Four months’ salary in lieu of notice, as per her employment contract

• Statutory redundancy pay of £4,500
• A non-contractual ex-gratia payment of £28,000
• Her employer allowed her to keep her company car which had a market value of £9,500 on
15 December 2022. She had no contractual entitlement to this.
Calculate the amount of employment income and the taxable element of the termination payment arising as a
result of Debbie’s redundancy.
Solution
You should now be able to meet learning outcome number seven.
Notes

5.9 Employment income: NIC and PAYE
5.9.1 NIC on benefits
Employers are responsible for NIC contributions on salary and ‘earnings’. The legislation defining ‘earnings’ now
includes most benefits which are chargeable to tax. Employer’s class 1 contributions are at a rate of 15.05% in
2022/23 (13.8% 2021/22) which is an amount which cannot be ignored and must be factored into any calculations of
the employer’s cost of providing benefits.
Employer’s class 1 NIC is payable (subject to the secondary earnings threshold) on the value of an employee’s cash
earnings (salary and bonus). In addition, class 1A NIC is payable at 15.05% in 2022/23 (13.8% 2021/22) by the
employer on the value of ‘benefits’ provided to its employees. This class 1A NIC is payable to HMRC in one lump
sum by 22 July following the tax year, where the payment is made electronically (otherwise, by 19 July).
There is no NIC payable by the employee on the value of ‘non-cash benefits’ which they receive.
5.9.2 The PAYE system
The PAYE system is covered in Module 6 and is particularly important within the area of employment income
reporting and tax collection. Each individual has a tax code which will inform the employer of how much income may
be received tax free and, hence, where the 20%, 40% and 45% rates of tax will apply (or the appropriate Scottish
rates of income tax where the individual is a Scottish taxpayer).
This code is designed to take account of not only the individual’s personal allowances but also their last reported
employment benefits – this allows income tax on benefits to be collected by the employer over the tax year.
5.9.3 Payroll taxable benefits
It is possible to include the value of taxable benefits (except beneficial loans) as part of an employee’s taxable pay
during the tax year for the tax to be collected through the PAYE system. The value of these benefits would not then
be adjusted through the employee’s tax code as discussed in Module 6.
Notes

The value of the benefits would be added onto the employee’s pay for the period that they are provided, and PAYE
calculated on this higher value, thus increasing the tax deducted.
If an employer does not include the benefits as part of an employee’s taxable pay during the tax year, the benefits
should be reported to HMRC separately on Form P11D by 6 July following the end of the tax year. A separate Form
P11D is needed for each employee. The form P11D lists the value of all the benefits and expense reimbursements
made to the employee for the year.
The beneficial loan benefit cannot, currently, be included in the payroll system and a P11D must still be prepared for
this benefit, if provided. It is likely that this benefit will be included in the employee’s tax code having been reported
to HMRC.
Form P11D(b) is used by employers to report the total value of all benefits and expenses provided to the whole
workforce. It includes a calculation of class 1A NIC and must still be reported to HMRC whether the benefits have
been included in payroll or through the P11D system. This form must be submitted to HMRC by 6 July following the
end of the tax year.
5.9.4 PAYE audits
HMRC conducts periodic PAYE audits – some random, some as a result of information gathered. These review
PAYE compliance. Where PAYE has not been correctly withheld, PAYE and NIC on behalf of the employee is due by
the employer (whose responsibility it was to correctly account for these). Interest is due on any PAYE not settled by
the due date each month.
Penalties of up to 100% of the tax unpaid may be charged by HMRC but this will be reduced based on the severity
of the default, co-operation with HMRC and the level of disclosure.
You should now be able to meet learning outcome number eight.
Notes

5.10 Summary and review
This module has covered the following key points:
• Employment income is taxed on a receipts basis on the earlier of the actual receipt or entitlement
• Employment income includes salary, bonuses, taxable benefits and termination payments
• Benefits can be taxable or non-taxable
Non-taxable benefits include:
• Payments to employees for use of own car for work purposes

• Provision of parking space at an employee’s place of work
• Provision of work-related training
• Sport facilities
• Mobile phone
Taxable benefits include:
• The general rule is the benefit is calculated by reference to the cost to the employer
• There are special rules for vehicles and beneficial loans
• Company car = list price x %
• Fuel = £25,300 x % for 2022/23
• Vans
• Loans – average value x ORI
• Deduct employee contribution from benefit received (except fuel)
• Pro-rate for availability
Deductions
• Wholly, exclusively, and necessarily for the purpose of the employment

• Use of own car – HMRC approved mileage rates
• Professional subscriptions
NIC
• Class 1 on salary – primary employee; secondary employer

• Class 1A on taxable benefits – employer only
• Benefits can be payrolled, except beneficial loans
• Or reported on Form P11D
You should now be able to meet all the learning outcomes of this module. Should you not be able to do so, please
go back and read the relevant section(s).
Notes

The year that the bonus relates to is not relevant. The bonus will be taxable on the earliest of:
1. The date of payment – 7 July 2023

2. Entitlement date – 7 July 2023
The bonus will be taxable on 7 July 2023, therefore will be taxed in 2023/24.
Back to activity
List price 16,300
Accessories added at purchase 50
Accessories added after purchase 1,000
Less capital contribution (max £5,000) (5,000)
12,350
Back to activity
Notes

1. Mr Red
98g/km – round down to 95g/km = 24%

List price = £15,000 + £500 = £15,500
Basic benefit = £15,500 x 24% 3,720
Reduction for unavailability (0)
Ongoing contribution – £15 x 12 (180)
Chargeable benefit 3,540
2. Ms Green

Add 4% supplement for diesel but cap at 37%
List price = £24,000 - £2,000 = £22,000
Basic benefit = £22,000 x 37% 8,140
Reduction for unavailability – 4/12 (2,713)
5,427
Ongoing contribution (0)
3. Mr Yellow
List price not relevant, use MV of £28,000
Basic benefit = £28,000 x 30% 8,400
Reduction for unavailability – 3/12 (2,100)
6,300
Ongoing contribution – £50 x 9m (450)
Back to activity

The CO2 emissions of 120 g/km give a percentage of 29%. The car and fuel are only available for six months of the
tax year.
Benefit = £25,300 x 29% x 6/12 = £3,669
Back to activity
Normal method
Average loan = [(loan at 6 April 2022 + loan at 5 April 2023)/2] = [(12,000 + 5,000)/2] = £8,500
Calculation of benefit = Average loan x ORI x n/12 = £8,500 x 2% x 12/12 = £170
As £50 interest was paid, the benefit is reduced to £120.
Alternative method
This method relies on tracking the loan outstanding for each month of the year.
6 April 2022 – 5 July 2022 = £12,000 Three months
6 July 2022 – 5 January 2023 = £10,000 Six months
6 January 2023 – 5 April 2023 = £5,000 Three months
The calculation is therefore:
2% [(£12,000 x 3/12) + (£10,000 x 6/12) + (£5,000 x 3/12)] = £185 less £50 paid = £135.
HMRC may choose to apply the alternative method, but this is unlikely given the small difference in benefit and,
hence, tax. The taxpayer would not want to opt for the alternative method as this would give rise to a higher taxable
benefit.
Back to activity

Reimbursements from employer = 12,000 x 35p = £4,200
AMR = (10,000 x 45p) + (2,000 x 25p) = £5,000
The difference between these amounts is £800. Chris may claim £800 as a deduction from his employment income.
He is not paid any amount for the passenger; therefore, this may not be claimed as a tax deduction from HMRC.
Back to activity
Paige’s employment income for 2021/22:
Notes £
Salary 36,000
Bonus 1 10,000
Pension (10% of salary) (3,600)
Medical insurance 2 850
Car parking space – exempt 0
Company car £17,000 x 24% 4,080
Notes:
1. The bonus is taxable on the earliest of entitlement (September 2022) or payment, i.e., September 2022. Hence,
the bonus will be taxable in 2022/23.
2. Medical insurance is taxable on Paige based on the cost to her employer rather than the cost to her if she paid
for it personally.
Back to activity
Notes

Employment income £ £
Salary in lieu of notice (4/12 x £60,000) 20,000
Taxable element of termination package
Ex-gratia cash payment 28,000
Car (MV) 9,500
Less exemption (£30,000 - £4,500) (25,500)
12,000
Taxable 32,000
Back to activity
Notes

Module 6. PAYE and NIC
Contents
6.3 Pay As You Earn 174
6.3.1 Emoluments 174
6.3.2 Deduction of Tax 174
6.3.3 PAYE Codes 175
6.3.4 Adjustments to the PAYE Code 175
6.3.5 Administration of the PAYE Code 176
6.3.6 Cumulative Nature of PAYE 179
6.3.7 PAYE Administration 181
6.3.8 PAYE Forms 182
6.4 National Insurance Contributions (‘NICs’) 182
6.4.1 Administration 182
6.4.2 NICs – An Overview 182
6.4.3 Class 1 Contributions 183
6.4.4 Class 3 Contributions 186
6.5 Apprenticeship Levy 187
Appendix 1 – Operation of PAYE code 985L by employer 189
Appendix 2 – Limit on deductions via a ‘K’ code 190

6. PAYE and NIC
A module guide is available on myCABLE
6.1 Introduction
Employment income is subject to both income tax and national insurance. However, rather than the taxpayer having
to calculate these taxes, the burden of responsibility lies primarily with the employer.
This module considers the collection of tax on salary and benefits through the Pay As You Earn (PAYE) system.
Given that national insurance contributions (NICs) are collected via the payroll for employees, these are also
considered here. Other deductions, such as student loan repayments, are outside the scope of the course syllabus.
PAYE is a system of collecting tax from salaries, wages etc., of employees. The term PAYE refers only to the
collection system, PAYE is not a tax – it is the way that income tax and NIC on employment income are collected.
The legislation begins in ITEPA 2003, s682 and provides details on the collection and assessment of income tax
in relation to employment income. Further details can be found in SI 2003/2682 the Income Tax (Pay As You Earn)
Regulations 2003.
National insurance contributions are a form of taxation on the employed and self-employed. The main
statutes in question are the Social Security Contributions and Benefits Act (‘SSCBA’) 1992 and the Social Security
Administration Act 1992. In certain circumstances, payment of contributions gives entitlement to benefits, for
example, Jobseeker’s Allowance and the state pension on retirement.
In this module we will cover NIC due on employment income. NIC due on self-employment income will be covered in
TPS Business Taxation.
Notes

1. identify the relevant PAYE code for an individual’s employment income;

2. calculate a liability under the PAYE system;
3. identify the main PAYE administrative responsibilities and forms for an employer;
4. describe the classes of NIC due on employment income; and
5. calculate an NIC liability.
Achieving these learning outcomes will help you to meet the second and third learning outcomes of the syllabus as a
whole.
6.3 Pay As You Earn
6.3.1 Emoluments
All payments of ‘PAYE income’ are subject to deduction of tax under the PAYE system. PAYE income includes
employment income, pension income and social security income. The majority of employees have relatively
straightforward tax liabilities and their full tax liability will be accounted for through the PAYE system.
If an underpayment of less than £3,000 SI 2003/2682 reg 186 arises, the taxpayer will be informed of the
reason and the tax position can be corrected either by making a repayment or by adjusting a future PAYE code
(see Section 6.3.4). Adjustments exceeding this level are possible via the PAYE system but only under limited
circumstances which are outside the scope of this course. In the majority of instances, adjustments exceeding this
level will require the taxpayer or HMRC to settle the amount due through the self-assessment system.
6.3.2 Deduction of Tax
The PAYE system is designed to ensure that, as far as possible, tax deducted during the year via the PAYE scheme
equals the taxpayer’s liability for the year as calculated in accordance with the rules covered in Module 2.
All employers making payments of salaries, wages, bonuses, commissions and so on to their employees, which
exceed the individual’s tax-free allowance, as determined by the individual’s PAYE tax code, are required to deduct
the appropriate amount of tax from each payment (or repay over-deductions). This is done by reference to the PAYE
code and PAYE tax tables. In addition, employers are also required to deduct national insurance contributions at
the same time as accounting for PAYE.
Notes

The PAYE tax tables are designed so that the tax deducted by the employer approximates to the total tax liability
due from the recipient on the earnings for the year. The tax tables apply in relation to a tax code which provides
information about the taxpayer in an alphanumeric format.
The vast majority of employers calculate the tax using software or web-based packages designed for that purpose.
HMRC operate a system of real time information (RTI) reporting, requiring employers to provide information to
HMRC electronically every time tax is deducted from an employee. PAYE administration is covered below at 6.3.7.
6.3.3 PAYE Codes
A tax code (or PAYE code) is an alphanumeric code which tells the employer how much cash the individual can
earn tax-free. Amounts that are not tax-free will be taxed at 20%, 40% or 45% (or the equivalent Scottish rates). The
most commonly used code consists of a two to four digit number followed by the letter L. This letter indicates that the
basic personal allowance is included within the code. Taxpayers in 2022/23 with no other income would have a code
of 1257L (reflecting the normal personal allowance of £12,570 and no other adjustments).
6.3.4 Adjustments to the PAYE Code
The code number can be adjusted upwards to enable the individual to receive a greater amount of income tax-free
(perhaps as a result of other allowances available or a previous overpayment). It can also be adjusted downwards
meaning less income can be paid tax-free (perhaps to account for a previous underpayment of income tax or the tax
due on non-cash benefits) SI 2003/2682 reg 14.
Where an individual has taxable non-cash benefits (e.g., a company car) the tax due on this benefit has to be
collected from cash remunerations; the PAYE code takes this into account. This is done by netting off the value
of the benefit against the personal allowance, thereby using up the first part of the allowance against the benefit. A
taxpayer, who is entitled to the normal personal allowance and has a company car with a benefit of £2,000, will use
the first £2,000 of their allowance against the car. This will mean that only £10,570 of cash earnings will be tax-free.
For 2022/23 they would have a PAYE code of 1057L.
Notes

6.3.5 Administration of the PAYE Code
Where a taxpayer has more complex tax affairs, the code number will be adjusted to take account of the tax details
which are given in the individual’s tax return. HMRC will normally issue a coding notice (also called a “form P2”) with
a figure which is based on the assumption that the tax details disclosed for the previous year will apply for the next
year. Any adjustment will then be made when the next return is lodged or if the taxpayer/employer informs HMRC of
a change in circumstances. This will usually be dealt with by a coding adjustment in the next or following year.
Note that the PAYE code is only used to tell the employer how much tax to deduct at source from earnings. It
doesn’t affect the personal allowance that an individual is entitled to in their year-end tax computation, as covered
in Module 2. The availability and level of the personal allowance is based on income levels and residence status.
For example, the individual referred to above with the code of 1057L will most likely still record a personal allowance
of £12,570 in their computation. An illustration of this point is shown in Appendix 1 which should be read after
Section 6.3.5.
An example of PAYE coding is illustrated below:
Example 1 – PAYE Coding
Adrian earns an annual salary of £15,000. He has taxable non-cash benefits of £560 and his unpaid income
tax for 2021/22 was £57.40. Adrian is entitled to a personal allowance of £12,570 in 2022/23. Adrian pays
income tax at the basic rate of 20%.
Calculate Adrian’s PAYE code for 2022/23:
Notes

Personal allowance 12,570
Benefits (560)
Unpaid tax £57.40 x 100/20 (287)
Available allowances 11,723
Adrian’s PAYE code is 1172L.
As the code is based on an income figure, the tax underpaid has to be ‘grossed up’ to show the income that
would be required to generate the amount of tax underpaid (£287 x 20% = £57.40).
To simply show the £57.40 in the calculation would be to deduct a tax figure from an income figure – this would
not be a ‘like for like’ calculation.
If Adrian were a higher rate or additional tax payer the grossing up calculation used would be 100/40 or 100/45,
respectively.
Although the most common letter at the end of a PAYE code is L, there are a number of other letters that can be
used. Examples include, ‘BR’ (all income from this employment is taxed at the basic rate), ‘NT’ (no tax is due on this
income) and the ‘K’ code covered below. You will only be examined on ‘L’ and ‘K’ codes in this course.
It is also possible to have a tax code with a letter at the start. If a taxpayer’s benefits and adjustments exceed their
allowances, a ‘K’ code (or negative code) is used. This adds an amount to ‘taxable pay’ for PAYE purposes, rather
than showing tax-free pay. This ensures that the full amount of tax due is collected by the PAYE system. However,
there is a limit of 50% of the amount of actual cash remuneration on each pay day that can be deducted under a ‘K’
code.
The K code is derived by taking the excess of any benefits and adjustments over allowances, dropping the last digit
and finally deducting 1 from this figure. Thus a taxpayer with a personal allowance of £12,570 and non-cash benefits
of £13,570 would have a negative allowance of £1,000 which would become £100, then £99 and finally a code of
K99.
When the employer operates the code they are instructed to drop the letter and add a 9 to the end of the number. In
this instance this will result in the employee being taxed on every penny of their cash earnings plus a further £999.
Notes

Activity 1 – A ‘K’ coding
Phil has a salary of £45,000. He is aged 37 and has an expensive company car which has a taxable benefit of
£13,080. Calculate Phil’s tax code for 2022/23 and explain what this tell us about how his salary will be taxed.
Solution
As a result of the introduction of Scottish Income Tax (SIT) there has also been the introduction of ‘S’ codes to
denote a Scottish taxpayer. The S prefixes the code and is used to identify Scottish taxpayers.
If Adrian and Phil, from the last two examples, were Scottish taxpayers, their tax codes would be S1172L and SK50
respectively.
You should now be able to meet learning outcome one.
Notes

6.3.6 Cumulative Nature of PAYE
The PAYE code tells the employer how much the individual can earn tax-free (this may be nil in the case of a K
code). The employer removes the letter from the code and adds a 9 to the end of the number to arrive at the figure
of tax-free pay for the year. For example, tax code 508L becomes £5,089 worth of tax-free income.
The 9 is added to allow for rounding differences to go in the taxpayer’s favour. Code 508L applies to taxpayers with
tax-free allowances from £5,080 to £5,089 inclusive. All taxpayers in this range can receive £5,089 of tax-free pay
from their employers.
If the employee has a K tax code they are not entitled to receive any tax-free pay for the tax year. Tax code K508
means all of the cash received plus an additional £5,089 of income will be taxed in the year.
The actual tax to be paid is then calculated at 20%, 40% and 45% (or the Scottish equivalents of 19%, 20%, 21%,
41%, 46%). It is important to understand how the rates are applied. The tax-free amount and the tax bandings have
to be spread over a whole year. If this were not done, most of us would pay no tax for the first two or three months
of the tax year and would perhaps start to pay higher rates of tax in the latter part of the tax year.
All of the bandings are, therefore, spread across the year. An employer operating a 12-monthly payroll system would
allocate 1/12th of the tax-free amount to April (the first month of the tax year). The remaining income would be taxed
at 20%, or if the employee is a UK higher/additional rate taxpayer, 1/12th of £37,700 would be taxed at 20%, 1/12th
of £112,300 (£150,000 less £37,700) would be taxed at 40% and the remainder of taxable income would be taxed
at 45%. For Scottish Income Tax taxpayers the same principle applies but using the Scottish income tax bands and
rates.
Using this system will mean that a taxpayer earning the same amount each month should pay, broadly, the same
amount of tax each month.
PAYE calculations are not carried out for each week/month in isolation. Instead, the calculation will look at the
cumulative tax due for the fiscal year to date per SI 2003/2682 regs 22 and 23. In the September 2022 payroll,
the employer will be calculating the cumulative tax due for the first six months of 2022/23. This will be based on
6/12ths of the tax-free amount, then 6/12ths of £37,700 being taxed at 20% etc. Again, this is the amount applicable
for UK rate taxpayers. The resulting tax will be compared with the cumulative tax paid to the end of August 2022 and
the difference will be the tax for September 2022.
Notes

Example 2 – PAYE Calculations
Maria is a sales manager and earns £2,000 per month. She has a PAYE code of 1257L therefore making her
entitled to tax-free pay for the year of £12,579. By the end of June 2022 she has earned £6,000 in 2022/23 (3
months x £2,000) and has paid PAYE of £571.05.
In July 2022, Maria earns her £2,000 salary plus a £500 bonus. Calculate the income tax that will be collected
via PAYE from her £2,500 income in July 2022.
Cumulative position at the end of July should be considered:
Earnings to date [(4 x £2,000) + £500] 8,500
Tax free = £12,579 x 4/12 (round to nearest penny) (4,193)
Taxable pay 4,307
Tax to date:
£4,307 @ 20% (£37,700 x 4/12 not breached) 861.40
Paid to end of June (571.05)
PAYE for July 2022 290.35
Appendix 1 illustrates a PAYE code being applied in practice. Appendix 2 illustrates how the limit of 50% of the
amount of actual cash remuneration on each pay day that can be deducted under a ‘K’ code might operate. You
should read the two appendices now.
You should now be able to meet learning outcome two.
Notes

6.3.7 PAYE Administration
The employer must keep a working sheet for each employee, usually kept electronically under the real time
information (‘RTI’) system to record the employee’s pay, the tax and related national insurance contributions.
The employer determines the amount of tax and national insurance which has to be deducted from the employee’s
gross income by using tax tables and payroll software as outlined above. The employer is obliged to pay these
amounts to HMRC electronically within 17 days of the end of each tax month SI 2003/2682 reg 69(1).
The tax month ends on the 5th of each month and so payments are due by the 22nd. Employers whose payments
do not exceed an average of £1,500 per month are allowed to make these payments quarterly instead of monthly
SI 2003/2682 reg 70(1). Any PAYE not paid by 17 days after the end of the tax year (22 April) will attract interest
SI 2003/2682 reg 82.
Under the RTI system, employers must submit payroll information to HMRC on or before the day payments are
made to employees. This is done electronically using a Full Payment Submission (‘FPS’). At the end of the year
employers must submit their final FPS indicating that is the “final submission for the tax year”. If no payments have
been made in a tax period an employer should submit an Employer Payment Summary (‘EPS’) by the 19th of the
following tax month. This will ensure no late penalties are issued if HMRC are expecting an FPS.
Employers may file an FPS every week or every month depending on how often they make payments to staff. If
irregular payments, such as bonuses, are paid outside the normal payroll cycle an additional FPS will be required.
The aim of this new system is to provide more accurate payroll information throughout the year to HMRC and thus
allow employees to receive more accurate and up to date PAYE codes. Previously, all payroll filing was done at the
end of the tax year meaning any under or overpayment caused by an incorrect PAYE code could not be adjusted
until well into the following tax year.
HMRC has powers to visit the employer to inspect wage sheets and other records to ensure that the PAYE
regulations are being observed. The PAYE audit is an important area of activity which significantly increases the tax
yield for HMRC.
Where an FPS containing payment information is not filed on time, or the employer has not sent HMRC an EPS
(to indicate that no employees will be paid this month), late filing penalties will apply. The detail on these late filing
penalties is outside the course syllabus.
If PAYE is not accounted for, HMRC will take steps to recover the tax from the employer or, in certain cases, the
employee. Daily interest would also be payable from the ‘reckonable date’ (22 April). In addition, HMRC may levy
late payment penalties of up to 100% of the amount unpaid.
Notes

6.3.8 PAYE Forms
If employees are to complete a tax return and self-assess their total tax liability, they are required to file the
necessary information on a timely basis. As a result, there are statutory requirements to provide employees with
copies of certain forms, such as the P60. Some of the main PAYE forms are described below:
P60 On or before 31 May following the end of the tax year, employers must give each employee a
certificate showing his total taxable emoluments payable for the year and total tax deducted. The
form P60, or other approved substitute, will show the employee’s tax code, their national insurance
number, the employer’s name and address and full details of the emoluments for the tax year
SI 2003/2682 reg 67.
P45 When a new employee starts, they should bring a form P45 from their old employer and hand this
to their new employer. The new employer uses this information to begin PAYE calculations from
the start date. When the employee leaves, the employer is obliged to issue a certificate P45 to the
employee who is leaving SI 2003/2682 reg 36.
6.4 National Insurance Contributions (‘NICs’)
6.4.1 Administration
National insurance contributions are dealt with by the National Insurance Contributions and Employer Office (‘NICO’)
which is part of HMRC. National insurance is paid to build up an individual’s entitlement to a state pension and other
state benefits.
6.4.2 NICs – An Overview
Four classes of contribution exist as set out below:
1. Class 1: This is divided into:

a) Primary contributions, paid by employees.
b) Secondary, Class 1A and Class 1B contributions paid by employers.
2. Class 2: Paid by the self-employed.
3. Class 3: Voluntary (paid to maintain rights to certain state benefits).
4. Class 4: Paid by the self-employed.
Classes 1 (Primary, Secondary, 1A and 1B) and 3 are considered below.
Notes

6.4.3 Class 1 Contributions
These are only due when an employment relationship is in place.
The employee pays a primary contribution on salary and other cash earnings (e.g., bonus) and the employer is
responsible for a secondary contribution on the same amount SSCBA 1992 s6.
There can be no liability for either primary or secondary contributions where earnings are paid to an employed earner
who is younger than the age of 16. Similarly, there is no liability for primary class 1 contributions where the employed
earner has achieved state pension age. The date on which a taxpayer reaches state pension age depends on a
number of factors including gender and date of birth. An employer’s liability to pay secondary class 1 contributions in
respect of earnings paid to an employed earner continues even if the employee is over state pension age.
Employers who have employees under the age of 21 are not liable to pay secondary NICs on earnings paid to those
employees up to the upper secondary threshold limit (2022/23: £50,270). Class 1 primary contributions are still due
on these earnings.
In addition, employers who have apprentices under the age of 25 are not liable to pay secondary NICs on earnings
paid to those employees up to the apprentice upper secondary threshold (2022/23: £50,270). Class 1 primary
contributions are still due on these earnings.
Class 1A contributions
The provision of taxable benefits will result in a charge which is liable to employer’s NIC. The amounts chargeable
are those usually used for income tax purposes and there are specific collection procedures to pay the liability as an
annual sum, in arrears, by 22nd July following the end of the fiscal year if paying electronically. The contribution
rate is 15.05% in 2022/23 (13.8% in 2021/22).
Class 1B contributions
These are paid when an employer settles tax on behalf of an employee, known as a PAYE settlement agreement.
The contribution rate is again 15.05% in 2022/23 (13.8% in 2021/22) and is paid on the value of the benefits and
the tax being paid by the employer (the grossed up value of the benefit). Payment is due by 22 October following the
end of the fiscal year to which the contributions relate.
Notes

Amount of contributions
You should ensure that you familiarise yourself with the layout of the NIC information on your tax rates sheets.
Class 1 NIC rates are based on the following relevant earnings limits for 2022/23:
Annual Monthly Weekly
£ £ £
Lower earnings limit (LEL) 6,396 533 123
Primary threshold (PT) 12,570 1,048 242
Secondary threshold (ST) 9,100 758 175
Upper earnings limit (UEL) 50,270 4,189 967
Upper secondary threshold for U21’s (UST) 50,270 4,189 967
Apprentice upper secondary threshold for U25’s (AUST) 50,270 4,189 967
The weekly or monthly limits are used for those paid weekly or monthly. The NIC is calculated for each week or
month as a standalone calculation, not taking any other period into account. This is different from PAYE which
operates on a cumulative basis. The annual limit is used in the unusual situation where an employee is paid
annually. The annual limit is always used for directors. The monthly limit is derived by taking the annual limit and
dividing by 12.
Primary contributions
All individuals can earn up to £241 per week in 2022/23 (known as the primary threshold), before any NIC needs to
be paid. If an individual earns between the lower earnings limit (“LEL”) of £120 and the primary threshold (“PT”) of
£2,481 in 2022/23, they still have entitlement to certain state benefits (e.g., state pension) even though NIC is not
paid. If an individual earns less than £120 per week in 2022/23, there is no entitlement to state benefits.
The primary threshold increased from £9,880 to £12,570 in July 2022. However, for the purposes of your exam,
assume that this primary threshold is £12,570 for the entirety of 2022/23. All calculations in this module and in WSEs
will use the £12,570 primary threshold.
The primary contribution rates are:
• 13.25% of earnings between the PT and UEL; and

• 3.25% of earnings above UEL.

Secondary contributions
Secondary contributions are paid by an employer at 15.05%, where an employee earns over the secondary
threshold of £175 per week (‘ST’).
There is an upper secondary threshold (‘UST’) but it only applies to payments made to employees under the age of
21. The rate of secondary NICs for employees under the age of 21 on earnings between the ST and UST will be 0%.
An Employment Allowance is available to reduce an employer’s secondary Class 1 NIC liability by up to £5,000 each
tax year (2021/22 £4,000). This allowance will be available to the majority of employers and is claimed as part of the
RTI filing process, effectively reducing the liability to secondary contributions in the early months of the tax year. For
the purposes of your studies you should assume that the allowance has not been claimed unless it is specifically
mentioned in a question.
Activity 2 – Class 1 NICs
Mr Jones is an employee of A Ltd. He is 45 and earns £15,000 basic salary in 2022/23 paid weekly. He
receives a bonus of £7,000 on 30 June 2022.
1. Calculate his primary contributions for 2022/23.

2. Calculate his primary contributions for 2022/23 if he were a director of A Ltd.
3. Calculate the secondary contributions payable by A Ltd for 2022/23.
Solution
Notes

Activity 3 – Class 1 Secondary and Class 1A
Wanda is employed and earns £25,000 in 2022/23. In addition to her salary she receives a cash bonus of
£1,000 in March 2023. She is entitled to the use of a company car with a taxable benefit value of £2,500 and
receives private medical insurance which costs her employer £1,000 per annum.
Explain how Class 1 secondary contributions will be calculated and calculate the Class 1A liability payable by
Wanda’s employer for 2022/23.
Solution
6.4.4 Class 3 Contributions
These are of a voluntary nature and are usually paid by individuals who have insufficient contributions to qualify in
full for earnings-related state benefits. This would apply to individuals not working or not earning enough to pay NIC.
Class 3 contributions are paid at the rate of £15.85 per week in 2022/23 (£15.40 in 2021/22) SSCBA 1992 s13.
Notes

6.5 Apprenticeship Levy
From 6 April 2017, all employers who have an annual pay bill of more than £3 million a year need to pay a
monthly apprenticeship levy to HMRC whether or not they employ an apprentice.
The pay bill is the amount of earnings (wages/ salaries, bonuses and commissions) paid to employees that are
subject to secondary Class 1 national insurance contributions. This amount also includes any payments made to
employees which fall under the secondary threshold or upper secondary threshold for under 21s, which would not
normally require secondary Class 1 contributions to be made.
Once a pay bill reaches £3 million a year, an apprenticeship levy of 0.5% of the annual pay bill must be paid over
to HMRC.
All employers, however, receive an apprenticeship levy allowance of £15,000 to offset against the amount they
have to pay by way of apprenticeship levy (which is why a pay bill of less than £3 million will not give rise to an
apprenticeship levy charge, as the levy allowance reduces any amounts due to nil). The allowance can be shared
between connected companies, but cannot be carried over to the next year.
The apprenticeship levy is calculated in a similar way to PAYE, in that, for the first month of the tax year, 1/12th of
the apprenticeship levy allowance is compared to 0.5% of the first month’s pay bill. Any amount in excess of the
allowance is paid over to HMRC. This process is followed each month. For example, in month 6 of the tax year
calculate 0.5% of the total pay bill for the 6 months to date. This is compared to 6/12th of the apprenticeship levy
allowance and any excess is payable to HMRC after taking account of payments already made in the year to date.
Once paid, the apprenticeship levy is kept in a separate fund and the employer may be able to access the fund
again but only through spending it on hiring and training apprentices via a training provider.
You should now be able to meet learning outcome numbers four and five.
Notes

Students should now be aware of:
• The PAYE mechanism, including the cumulative nature of the PAYE system
• The calculation of a PAYE code and its application
• How to calculate PAYE deductions including income tax and Class 1 primary NIC
• Some of the main PAYE administrative responsibilities and forms – P45s, P60s, ‘Real Time Information’ filing
system
• The four classes of NIC and calculation of a NIC liability
• Class 1 primary (employees) – 13.25% between Primary Threshold and Upper Earnings Limit,
3.25% thereafter
• Class 1 secondary (employers) - 15.05% above Secondary Threshold with no upper limit
• Class 1A and 1B (employers) due on taxable value of benefits in kind (1A) and PAYE Settlement
Agreements (1B)
• Class 2 - self-employed – covered in TPS Business Taxation
• Class 3 - voluntary rate of £15.85 per week
• Class 4 - self-employed – covered in TPS Business Taxation
• Apprenticeship levy, what it is calculated on, how it is calculated and how it is used.
Notes

Appendix 1 – Operation of PAYE code 985L by employer
Total cash pay £25,000
Total non-cash benefits £2,720
Tax code = £12,570 (basic personal allowance) - £2,720 (non-cash benefits) = £9,850 = 985L
Tax-free pay = £9,859 (based on a code of 985L)
Taxable pay = £15,141 (£25,000 - £9,859)
Tax withheld by employer at 20% (basic rate band of £37,700 not exceeded) = £3,028.20. Tax collected via
cumulative calculations throughout the year (monthly/weekly).
End of year income tax computation (assuming no other forms of income received).
Non-savings Tax suffered
£ £
Employment (salary and benefits) 27,720 3,028.20
Total income 27,720 3,028.20
Tax thereon: £15,150 @ 20% = 3,030.00
Tax suffered at source (3,028.20)
Tax due 1.80
The tax collected throughout the year using the PAYE system is approximately the same as the end of year liability.
In this instance, the tax coding has worked.
The full personal allowance has been used in the end of year income tax computation. The restricted tax-free
allowance is used by the employer for the purposes of the PAYE calculations only.
Sometimes the tax collected during the year via PAYE is insufficient or excessive in which case the balance/refund
can be settled through self-assessment or by adjustment to a future tax code.
Notes

Appendix 2 – Limit on deductions via a ‘K’ code
Douglas is the sole director of and shareholder in Lost Dogs Ltd, a company offering shelter and rehoming for stray
dogs. During 2022/23, he draws a small salary, £12,000 and dividend income of £35,000 from the company. In
addition, the company provides Douglas with an expensive company car with a taxable benefit value of £31,570.
The salary and car will be taxed via the PAYE system as remuneration from an employment. The dividend income is
not subject to PAYE deductions as this is received in Douglas’ capacity as a shareholder, not an employee.
Tax code = £12,570 (basic personal allowance) - £31,570 (non-cash benefits) = £(19,000).
Therefore, Douglas will receive no tax-free pay and a K code is required. £(19,000) becomes 1,900, which becomes
1,899 and results in the code K1899.
Cash pay received each month = £1,000
Taxable pay each month = £1,000 + £1,583 (1/12 x £18,999) = £2,583
Tax due to be withheld by the employer at 20% (basic rate band of 1/12 x £37,700 not exceeded) = £516.60. This
exceeds 50% of Douglas’s cash pay (£1,000) and, therefore, only £500 can be withheld each month. By the year
end, £6,000 has been withheld via PAYE (12 x £500).
Notes

End of year income tax computation
Non-savings Dividend Tax suffered
£ £ £
Employment (salary and car benefit) 43,570 6,000.00
Dividends 35,000
Total Income 43,570 35,000 6,000.00
Taxable Income 31,000 35,000
Tax thereon:
£31,000 @ 20% 6,200.00
£2,000 @ 0% (dividend allowance) -
£4,700 @ 8.75% 411.25
£28,300 @ 33.75%* 9,551.25
16,162.50
Tax suffered at source (6,000.00)
Tax due 10,162.50
*the basic rate band (£37,700) is used by the non-savings income and the dividend income falling within the dividend
allowance.
The tax due via self-assessment represents £200 underpaid via PAYE on employment income (being the £516.60
x 12 = £6,199.20, as adjusted for rounding, that should have been collected at source less the £6,000 actually
collected at source) and £9,962.50 basic and higher rate tax due on the dividend income. This tax is due by 31
January 2024.
Notes

Personal allowance 12,570
Less benefit – company car (13,080)
Negative allowance (510)
£510 becomes 51, then deduct 1 gives 50. The tax code will be K50.
This tax code tells us that the taxpayer will not only be taxed on his full salary of £45,000 but also on an additional
amount of £509. His employer will calculate tax due on £45,509 at 20% and 40%.
Back to Activity
Notes

1. £15,000/52 = £288.46 weekly earnings. Mr Jones will earn £288.46 per week for 51 weeks of the year. In the
week in which he receives his bonus his earnings will be £7,288.46.
51 weeks x 13.25% x (£288.46 - £242) = 51 weeks x £6.15 313.65
1 week x 13.25% x (£967 - £242) 96.06
1 week x 3.25% x (£7,288.46 - £967) 205.45
Total 615.16
In the week the bonus is received, the earnings taxed at 13.25% are capped at £967.
The excess over £967 is taxed at 3.25%.
2. Class 1 – director so use annual limits.
[(£15,000 + £7,000) - £12,570)] x 13.25% 1,249.48
3. Secondary contributions have no upper limit so will be the same for both situations.
Either:
51 weeks at £17.08 871.08
being 15.05% x (£288.46 - £175)
Plus 1 week of 15.05% (£7,288.46 - £175) 1,070.58
1,941.66
Or:
15.05% (£22,000 - £9,100) 1,941.45
Difference is due to rounding of weekly calculations.
Back to Activity

Class 1 secondary contributions will be due on Wanda’s salary and cash bonus. Class 1 secondary contributions are
due at 15.05% on amounts received in excess of the secondary earnings threshold.
Class 1A contributions will be due to be paid by Wanda’s employer on the benefit in kind value of the car and private
medical insurance. There is no threshold for Class 1A. Therefore, the amount due is £526.75 ([£2,500 + £1,000] x
15.05%). No NIC is due by Wanda on these benefits.
Back to Activity
Notes

Module 7. Income Tax
Administration
Contents
7.3 Self-Assessment 197
7.4 Filing a Return 198
7.4.1 Notification of Liability 198
7.4.2 Issue of Tax Return 199
7.4.3 Submission of Return 199
7.4.4 Records 200
7.4.5 Amendments of Returns 200
7.4.6 HMRC Assessments 201
7.5 Payment of Tax 201
7.5.1 Payments on Account 201
7.5.2 Interest on Payments 205
7.6 Enforcement and Collection 209

7. Income Tax Administration
Module guides are available on myCABLE
7.1 Introduction
In this module we consider the administration of income tax in relation to individuals (excluding the administration of
PAYE, which was considered in Module 6).
Responsibility for the administration of taxation lies, to a great extent, with the taxpayer. HMRC do undertake
various publicity campaigns to promote timely filing and payments, however the ultimate responsibility for these
tasks lies with the taxpayer. We are also seeing more and more of the activity around the assessment of tax moving
online. This trend will continue as part of the ‘Making Tax Digital’ programme. Accountants and tax practitioners
need to understand the administration system to ensure that their clients comply with it and also be aware of the
consequences of non-compliance. This is, therefore, essential exam knowledge.
1. explain when a taxpayer should notify HMRC of their liability to tax;

2. describe the submission dates for self-assessment returns, the requirements for taxpayers to keep records and
related penalties;
3. identify the payment dates for tax and NIC by individuals and the amounts of tax due as payments on account
by individuals;
4. describe the interest regime for individuals; and
5. describe the enforcement and collection powers available to HMRC.
Achieving these learning outcomes will help you to meet the second learning outcome of this course as a whole, as
per the syllabus.
Notes

7.3 Self-Assessment
We saw in Module 1 that the self-assessment system requires certain taxpayers to complete and submit a tax return
detailing their income and capital gains. It also provides for a calculation of tax payable based on these figures. This
calculation may be carried out by the individual or, in certain circumstances, by HMRC.
Many individual taxpayers are not required to complete a self-assessment return because they pay virtually all of
their tax through the PAYE system (see Module 6) which, in general terms, requires that employers deduct and
account for tax on behalf of their employees. In addition, some types of investment income, for example, bank
interest and dividends, may be covered by other allowances and, therefore, no tax on these is due.
Self-assessment, therefore, mostly affects those with self-employment or rental income (income received without
tax deducted at source) or those with significant investment income. Such taxpayers must notify HMRC of their
chargeability to tax and will then be sent a notice to file an electronic return by HMRC on an annual basis.
The majority of taxpayers now file electronic returns using the HMRC website. The system is designed to allow
taxpayers without an intricate knowledge of the UK tax rules to file their own returns and will produce a full return
and computation based on the entries input by the taxpayer.
Taxpayers are still entitled to file paper returns, but these must be filed earlier than online returns. The paper tax
return (known as SA100) consists of a ‘core’ return plus any relevant supplementary pages dealing with various
sources of income, for example, employment or rental income and capital gains tax. There is also a tax calculation
guide issued with the return which the taxpayer can use to calculate their tax. This does not form part of the return
but the liability calculated should be recorded on the return. A personal tax return (SA100) and guide to the return
can be viewed on the HMRC website.
The timely payment of income tax and capital gains tax is also the responsibility of the taxpayer and will be dealt with
later in this module.
You will have seen in Module 1 that HMRC intend to move to a fully digital tax system which became mandatory for
VAT from April 2019 for VAT registered businesses with taxable turnover above the VAT threshold. VAT registered
business with taxable turnover below the VAT threshold are now required to operate digitally from April 2022. Income
tax is currently undergoing pilot phases and testing. This programme is known as ‘Making Tax Digital’ (‘MTD’) and
will involve taxpayers filing quarterly online returns during the tax year before completing a final ‘washup’ return after
the tax year end. The aim of this system is to try to improve the accuracy of filing and encourage taxpayers and
HMRC to share information electronically. Self employed businesses and many landlords will need to follow the rules
for MTD from their next accounting period starting on or after from 6 April 2024. There will still be payment and filing
deadlines once this system has been introduced.
Notes

7.4 Filing a Return
7.4.1 Notification of Liability
An individual who is chargeable to income tax or capital gains tax for any fiscal year, and who has not received a
notice to file a return, is required to give notice of chargeability to HMRC. The time limit for giving this notice is
within six months of the end of the fiscal year. So, for the tax year 2022/23, the last date for giving the notice is 5
October 2023.
A person who has no chargeable gains, and who is not liable to a high-income child benefit charge, does not have to
give notice of chargeability if all their income:
• is taken into account under PAYE; and/ or

• is income on which the person could not become liable to tax under self-assessment, for example, income
from an ISA (an Individual Savings Account, which is exempt from tax); and/ or
• has had (or is treated as having had) income tax deducted at source provided the person is not liable to tax at
the higher or additional rate; and/ or
• is savings income covered by a personal savings allowance/ starting rate band or is dividend income falling
within the dividend allowance.
The maximum penalty where notice of chargeability is not given is based on a percentage of the income tax and
classes 2 and 4 NIC which is not paid on or before 31 January following the end of the fiscal year, that is, 31 January
2024 for 2022/23. This means that, although the deadline for notifying chargeability is 5 October 2023 for the tax
year 2022/23, no penalty will arise as long as all tax is paid by 31 January 2024. The penalties are detailed in
Module 1. These penalties can be substantially reduced where the taxpayer makes full disclosure and even further
reduced for unprompted disclosure.
Should a taxpayer notify their liability after the deadline, HMRC will generally allow them three months from the issue
of a notice requiring a tax return to be filed for filing to take place. This prevents the taxpayer immediately incurring
both late notification and late filing penalties.
Notes

7.4.2 Issue of Tax Return
HMRC will generally issue a tax return automatically when one has been filed in the past. Returns are normally
issued on 6 April, immediately after the end of the tax year, for example, 6 April 2023 for 2022/23. Where online filing
has previously been used, the presumption is that the taxpayer will again file online.
The taxpayer filing a paper return will receive the basic return plus supplementary pages for the different types of
income they receive. Additional pages can be requested if new sources of income or gains arise.
Both the electronic and the paper returns end with a declaration that the taxpayer must agree to. This declares that
the “information I’ve given on this tax return and any supplementary pages is correct and complete to the best of
my knowledge and belief. I understand that I may have to pay financial penalties and face prosecution if I give false
information”. Although a tax adviser may prepare the form, the taxpayer must fully review it so that they can sign this
declaration.
7.4.3 Submission of Return
The due date for filing a tax return depends on whether it is filed online or as a paper version.
• Where a paper return is filed, this is due by 31 October following the end of the fiscal year to which it relates
(31 October 2023 for 2022/23); and
• Where the return is filed online, this is due by 31 January following the end of the fiscal year to which it relates
(31 January 2024 for 2022/23).
If the taxpayer wishes HMRC to calculate the tax liability, the return must be filed by the deadline of 31 October. If
the taxpayer is filing an online return, this automatically includes a calculation of the tax liability.
If a notice to deliver a return is issued late by HMRC, the taxpayer will be allowed three months to file the return if
they are calculating the tax, or two months to file it if they wish HMRC to calculate the tax.
If the return is delivered late, the penalties detailed in Module 1 will apply (initial penalty of £100, followed by a £10
daily penalty after three months and a further 5% penalty after six months).
A taxpayer is permitted to use provisional figures in the tax return where they are unable to provide final figures
by the due filing date. The taxpayer must make it clear to HMRC that provisional figures have been used (by ticking
the relevant box on the form) and indicate when a final figure will be available. This will allow the taxpayer to submit
the return on time and avoid the late filing penalty. A penalty for an incorrect return (as detailed in Module 1) could be
due if there was no good reason for using a provisional figure or it was not estimated reasonably (i.e., the taxpayer
failed to take reasonable care in completing their return).
Notes

7.4.4 Records
All taxpayers must keep and retain all records required to enable them to make and deliver a correct tax return.
For individuals, records must be retained until the later of:
• five years after 31 January following the fiscal year where the taxpayer is in business, (i.e., 31 January
2029 for 2022/23) and one year after 31 January following the fiscal year otherwise (i.e., 31 January 2025
for 2022/23). HMRC have the right to shorten these time limits on a case by case basis; and
• where an enquiry notice is given before the five year/one year date, the time after which enquiries by HMRC
into the return can no longer be commenced or the date any such enquiries have been completed.
The maximum penalty for failing to keep and preserve records is £3,000.
7.4.5 Amendments of Returns
Within 12 months of the final due filing date of 31 January (not the actual filing date used by the particular
taxpayer) the taxpayer can give notice to amend their tax return and/ or his self-assessment. Such amendments
are not confined to the correction of obvious errors. An amendment does not take effect while an enquiry is in
progress.
Within nine months of receiving a tax return, HMRC can amend a taxpayer’s self-assessment to correct any
obvious errors or mistakes. These may be errors of principle, arithmetical mistakes or otherwise. The correction can
be rejected by the taxpayer.
There are similar provisions dealing with amendments to requests for tax relief (known as a ‘claim’) whether the
claim was made in the tax return or as a ‘stand-alone’ claim.
If an error resulting in an overpayment of tax is discovered outside the time limit for amending the return, a claim
for relief for overpaid tax may be made by the taxpayer. The time limit is four years from the end of the relevant
tax year. The claim may not be made where the liability was computed in accordance with practice prevailing at the
time the return was made.
If there has been an error or mistake in a claim for tax relief, a supplementary claim can be made provided that it is
within the time limit for the original claim.
Notes

7.4.6 HMRC Assessments
If a return has not been made, HMRC may make a determination of the amounts liable to income tax and capital
gains tax. Such a determination must be made to the best of HMRC’s information and belief and is treated as a
self-assessment. The time limit for a determination to be made is three years after 31 January following the end
of the tax year (i.e., 31 January 2027 for 2022/23). The determination will be replaced by the correct figure once the
self-assessment is filed.
If HMRC discovers that profits have been omitted from an assessment, that any assessment has become insufficient
or that any relief given is, or has become, excessive, an assessment may be raised to recover the tax lost. This
is called a discovery assessment. It can only be raised if there has been fraudulent or negligent conduct by the
taxpayer or his agent or HMRC did not have the information available within the usual time limits. The time limits are
covered in Module 1.
7.5 Payment of Tax
7.5.1 Payments on Account
The self-assessment system may result in the taxpayer making three payments of income tax and class 4 NIC
(NIC for traders) for any fiscal year. A Payment on Account (“POA”) system operates whereby HMRC will collect
instalments of tax and class 4 NIC based on the previous year’s liability. Class 4 NIC was referenced in Module 6.
Date Payment
31 January in the fiscal year 1st payment on account
31 July following the end of the fiscal year 2nd payment on account
31 January following the end of the fiscal year Final payment
For example, POAs will be due for 2022/23 on 31 January 2023 and 31 July 2023 with the final balancing payment
due on 31 January 2024.
The two payments on account are in respect of 2022/23 but are based on the liability of the prior year (2021/22).
The final payment on 31 January 2024 will be the difference between the actual liability for 2022/23 and the amounts
paid to date, both at source and through the payment on account system.
Notes

Class 2 NIC (referenced in Module 6) and capital gains tax do not have payments on account and the payment
date is simply 31 January following the end of the fiscal year (i.e., 31 January 2024 for 2022/23).
Although HMRC issues payslips/demand notes in ‘Statement of Account’ format, there is no statutory obligation for it
to do so and the onus is on the taxpayer to pay the correct amount of tax on the due date.
Payments on account are usually required where the income tax and class 4 NICs due in the previous year
exceeded the amount of income tax deducted at source. This excess (the amount the taxpayer would have to pay
directly to HMRC) is known as the ‘relevant amount’.
The payments on account are each 50% of the ‘relevant amount’ for the previous year. This means that 2022/23
payments on account are based on the actual tax and class 4 NIC for 2021/22 rather than estimated tax and NIC for
2022/23. It is important to note that although payments on account are calculated based on the prior year’s liability,
they are still payments made in respect of the current year. Prior year figures are simply used as an appropriate
estimate.
5 April 2023
31 January 2023 31 July 2023 31 January 2024
Balance for 2021/22 2nd PoA for 2022/23 Balance for 2022/23
1st PoA for 2022/23 (based on prior year) 1st PoA for 2023/24
(based on prior year) (based on prior year)
Payments on account are not required if the ‘relevant amount’ falls below a de minimis limit of £1,000 (i.e., each
payment would be less than £500). Also, payments on account are not required from taxpayers who paid 80% or
more of their tax liability for the previous fiscal year through PAYE or other deduction at source arrangements.
Payments on account will not be made during the first year that an individual has to self-assess (as there is no
‘relevant amount’ for the prior year). Only a balancing payment will be due for this year with payments on account
being made for the subsequent years.
Notes

Activity 1a – Payments on Account
Sharon is self-employed and paid tax and NIC for 2021/22 as follows:
Total amount of income tax charged 9,200
That included: Tax deducted at source 3,200
She also paid: Class 4 NICs 1,776
Class 2 NIC 159
Capital gains tax 4,800
What is the ‘relevant amount’ and the payments on account for 2022/23?
Solution to Activity 1a
The relevant amount for 2021/22 is:
Payments on account for 2022/23 are therefore:
Date Amount
Solution
Notes

Activity 1b – Payments on Account
It is mid-January 2024. Sharon has now calculated her 2022/23 tax liability as:
Income tax 10,600
Which includes income tax deducted at source 3,900
Class 4 NIC 1,830
Class 2 NIC 164
Calculate the payment(s) Sharon will have to make on 31 January 2024.
Solution to Activity 1b
Solution
Notes

The payment on account system works well where the taxpayer’s liability is rising each year. The POA amounts are
based on the prior year and the balancing payment deals with the amount by which tax has increased in the current
year. However, if tax is decreasing, then paying the two POA amounts would result in the taxpayer overpaying
initially and then requiring a refund.
Therefore, a taxpayer may claim to reduce their payments on account to a stated amount or to nil. The claim
must state the reason why they believe their tax liability will be lower than the prior year, or nil. If the taxpayer’s
eventual liability is higher than estimated, the payments on account may have been reduced too far. Although the
payments on account will not be adjusted, the taxpayer will suffer an interest charge on late payment. In addition, a
penalty of the difference between the reduced payment on account and the correct payment on account may be due
if the reduction was claimed fraudulently or negligently.
A taxpayer would never make a claim to increase payments on account. If tax is increasing each year a balancing
payment will be due, but no changes to the payments on account being calculated are required. The taxpayer would
prefer to retain cash until the balancing payment is due rather than pay it either as a payment on account or on
account towards the final liability.
If a taxpayer makes a claim to reduce their payments on account, HMRC will expect the two amended payments to
exactly cover the whole liability. If a final payment remains due, then interest will be due based on a comparison of
the tax that was paid and the tax that should have been paid.
The tax that should have been paid will be the lower of:
• the original payments on account due; and

• half of the final tax bill.
7.5.2 Interest on Payments
Interest is chargeable on late payment of both payments on account and balancing payments. In both cases, interest
runs from the due date until the day before the actual date of payment. Interest is charged from 31 January
following the tax year, even if this is before the due date in certain circumstances. For example, this could apply to
any tax payable following an amendment to a self-assessment.
Notes

Example 1 – Altering payments on account
Harold should have made two POAs for 2022/23 of £4,500 each based on his 2021/22 liability of £9,000.
However, he made a claim to reduce each POA to £3,500, believing that his profits for 2022/23 would be lower
and would result in total tax of £7,000.
He paid the first POA of £3,500 on 28 January 2023 and the second POA of £3,500 on 12 August 2023.
Harold’s actual income tax liability for 2022/23 was £10,000 due to a sudden increase in his business late in
the tax year. He paid the final amount of £3,000 on 19 February 2024.
Explain what POAs should have been made and the interest implications.
Harold has made an excessive (although not fraudulent or negligent) claim to reduce his payments on account.
The payments on account should have remained at £4,500 as his current year (2022/23) liability of £10,000
exceeds his prior year (2021/22) liability of £9,000. The interest will be based on the figures shown below.
Should have paid Paid Interest
First POA £4,500 31 Jan 2023 £3,500 28 Jan 2023 On £3,500 - n/a
On £1,000 from 31 Jan 2023 - 18 Feb 2024
Second POA £4,500 31 Jul 2023 £3,500 12 Aug 2023 On £3,500 from 31 Jul 2023 - 11 Aug 2023
On £1,000 from 31 Jul 2023 - 18 Feb 2024
Final payment £1,000 31 Jan 2024 £3,000 19 Feb 2024 On £1,000 from 31 Jan 2024 - 18 Feb 2024
Total £10,000 £10,000
Notes

Activity 2 – Altering payments on account
How would your answer to Example 1 differ if Harold’s final liability for 2022/23 was £8,000 and the final
£1,000 was paid on 19 February 2024?
First POA
Second POA
Final payment
Total
Solution
In addition to interest due on all late payments, penalties (as covered in Module 1) may also be due. To recap,
penalties are imposed in respect of payments of tax (and classes 2 and 4 NIC) made after the due date for
settling all tax (i.e., 31 January following the fiscal year).
Tax paid Penalty
Within 30 days of final due date None
More than 30 days after the final due date 5% of unpaid tax at that date
More than five months after the penalty date Further 5% of unpaid tax at that date
More than eleven months after the penalty date Further 5% of unpaid tax at that date
If a penalty is imposed, it is due for payment within 30 days of the penalty being made. If the penalty is paid late,
interest on the penalty will run from the due date to the day before the penalty is paid.
Notes

Activity 3 – Interest and Penalties
Marilyn was required to make a final payment of £7,500 for 2022/23. She had paid both of her POAs on time.
26 March 2024 £2,500
25 June 2024 £2,500
1 September 2024 £2,500
Explain the interest and penalty position.
Solution
Notes

7.6 Enforcement and Collection
HMRC often has to deal with cases of tax evasion which, as you know from Module 1, is a criminal offence. As
well as the various penalties that have already been discussed, HMRC may instigate criminal proceedings.
There is a statutory offence of evading income tax, the penalty for which may be up to seven years in prison or
an unlimited fine, or both.
Once it is established that tax is due, HMRC may then have to deal with non-payment. Tax can be collected by
assessment (self-assessment or HMRC assessment) and/or at source, for example, via PAYE. There are a number
of civil proceedings that HMRC can use to recover unpaid tax from taxpayers.
These measures include summary warrant in Scotland (distraint in England and Wales) where HMRC is allowed
to seize a taxpayer’s possessions and sell them to settle the debt owed by the taxpayer and court proceedings in the
Court of Session in Scotland (County Court in England and Wales).
HMRC can also apply for the sequestration in Scotland (bankruptcy in England and Wales) of an individual.
Notes

The following is a summary of the key material in this module:
• Self-assessment notification of liability

• by 5 October following the end of the fiscal year
• penalty of up to 100% of tax unpaid at 31 January following the end of the fiscal year
• Self-assessment forms
• by 31 October if filing a paper return (HMRC can calculate tax if requested)
• by 31 January if filing an online return (tax calculation will be included)
• Keeping records
• for five years past filing date if in business
• for one year past filing date if not in business
• retain whilst enquiry in process
• penalty of up to £3,000 for non-compliance
• Amending return
• within one year of filing date for any reason
• within four years of end of relevant tax year if overpayment (‘error or mistake’)
• HMRC determinations
• Made in the absence of a self-assessment
• With three years of 31 January following the end of the fiscal year
• Made to the best of HMRC’s information and belief
• Payments
• POA1 – 31 January in fiscal year. POA2 – 31 July after end of fiscal year. Final balance – 31 January
following end of fiscal year
• each POA = 50% of ‘relevant amount’
• ‘relevant amount’ (RA) = prior year income tax not paid at source and class 4 NIC (not class 2 NIC or
capital gains tax)
• if RA < £1,000 or 80% of tax collected at source, POA not required
• can claim to reduce POA
• interest on all late payments
• penalty on final payments – 5% of tax not paid on or before ‘penalty date’ (penalty date = 30 days after the
due date), further 5% on tax unpaid 5 months after the penalty date, further 5% on tax unpaid 11 months
after the penalty date
• Enforcement
• Tax evasion is a criminal offence and criminal proceedings can be brought
• Statutory offence of evading income tax = maximum of seven years in prison, an unlimited fine, or both
• Civil proceedings used to collect unpaid tax including summary warrant and sequestration
• You should now be able to meet all of the learning outcomes for this module. Should you not be able to do
so, go back and read the relevant section(s).

The ‘relevant amount’ for 2021/22 is:
Income tax:
Total income tax charged for 2021/22 9,200
Less: Tax deducted at source 2021/22 (3,200)
6,000
Class 4 NICs 1,776
‘Relevant amount’ 7,776
This exceeds £1,000 and less than 80% of the total liability was collected at source so payments on account are
required.
The payments on account for 2022/23 are:
31 January 2023 3,888
31 July 2023 3,888
There are no payments on account for Class 2 NIC or capital gains tax.
Back to Activity
Notes

On 31 January 2024 Sharon will have to settle her tax liability for 2022/23.
This is calculated as:
Income tax (£10,600 - £3,900) 6,700
Class 4 NIC 1,830
Class 2 NIC 164
Total liability 9,694
Paid – POA1 – 31 Jan 2023 (3,888)
Paid – POA2 – 31 Jul 2023 (3,888)
Balance due on 31 Jan 2024 1,918
On the same date Sharon will have to make her first payment on account for 2023/24 based on the relevant amount
for 2022/23.
The ‘relevant amount’ is:
Income tax (£10,600 - £3,900) 6,700
Class 4 NIC 1,830
‘Relevant amount’ 8,530
The first POA is therefore 50% of this = £4,265.
On 31 January 2024, Sharon should pay:
Balancing payment for 2022/23 1,918
First POA for 2023/24 4,265
6,183
Back to Activity

Interest will be charged based on what Harold should have paid. In this case HMRC will expect the POAs made to
cover the whole liability and will base the interest on two POAs of £4,000:
First POA £4,000 31 Jan 2023 £3,500 28 Jan 2023 On £3,500 - n/a
On £500 from 31 Jan 2023 - 18 Feb 2024
Second POA £4,000 31 Jul 2023 £3,500 12 Aug 2023 On £3,500 from 31 Jul 2023 - 11 Aug 2023
On £500 from 31 Jul 2023 - 18 Feb 2024
Final payment £nil £1,000 19 Feb 2024 Dealt with above
Total £8,000 £8,000
Back to Activity
The interest position is:
Date Payment Interest runs
26 Mar 2024 £2,500 31 Jan 2024 – 25 Mar 2024
25 Jun 2024 £2,500 31 Jan 2024 – 24 Jun 2024
01 Sep 2024 £2,500 31 Jan 2024 – 31 Aug 2024
After 1 March 2024 (i.e., the penalty date being 30 days after 31 January, due to the leap year) £7,500 remains
outstanding and a penalty of 5% is applied (£7,500 x 5% = £375). After 1 August 2024 (five months later) £2,500
remains outstanding and a further 5% is applied to this amount (£2,500 x 5% = £125). The total penalty is,
therefore, £500.
Back to Activity
Notes

Module 8. Investments and
Pensions
Contents
8.3 Individual Savings Account (‘ISA’) 215
8.3.2 Lifetime ISA (‘LISA’) 216
8.4 Enterprise Investment Scheme (‘EIS’) 217
8.4.2 Income tax relief 218
8.4.3 Capital gains relief 219
8.5 Venture Capital Trust (‘VCT’) 219
8.5.2 Income tax relief 219
8.5.3 Capital gains relief 220
8.6 Pensions 221
8.6.2 Tax relief on contributions to a pension scheme 221
8.6 3 Method of giving tax relief 221
8.6.4 Annual Allowance 224
8.7 Pension benefits on retirement 226
8.7.1 Options on how to take a pension 226
8.7.2 The pension ‘lifetime’ allowance 226

8. Investments and Pensions
8.1 Introduction
To encourage taxpayers to save, the government offers tax incentives for certain types of investment. In this module,
we will look at the main tax-efficient investments currently available including the Individual Savings Account (‘ISA’),
the Enterprise Investment Scheme (‘EIS’) and Venture Capital Trusts (‘VCT’). We will also examine the tax rules
regarding pensions and will understand why making contributions to a pension scheme is one of the most tax-
efficient way that the taxpayer can save for their retirement.
1. calculate the basic operation of different types of tax-efficient investments;

2. calculate the basic operation of different types of pension plan; and
3. calculate the tax rules relating to pension schemes.
Achieving these learning outcomes will help you to meet the third learning outcome of the course as a whole, as per
the syllabus.
8.3 Individual Savings Account (‘ISA’)
8.3.1 Introduction
An ISA is a tax-efficient way to save or invest. Investments within an ISA are exempt from both income tax and
capital gains tax.
Investment in an ISA must, generally, be either in cash or in stocks and shares. Currently, there are four types of ISA:
• cash ISA;
• stocks and shares ISA;
• innovative finance ISA (‘IFISA’): peer-to-peer lenders have been able to offer a tax-free ISA known as an
innovative finance ISA;
• Lifetime ISA (‘LISA’).
Notes

To be eligible to invest in an ISA, an individual must be UK resident in the year in which the investment is made and
must be aged 18 or over (although this limit is reduced to 16 for a cash only ISA).
The maximum amount which can be invested in an ISA for 2022/23 is £20,000. This limit can be used to invest in
one type of ISA only or the allowance can be split across the various ISAs available (although a maximum amount of
£4,000 can be contributed annually to a LISA).
Illustration – Investing in an ISA
In the fiscal year 2022/23, an individual could save £8,000 in a cash ISA, £5,000 in a stocks and shares ISA, £3,000
in an IFISA and £4,000 in a LISA. Any interest or dividends received would be exempt from income tax and any
increase in value would be exempt from capital gains tax.
Parents (or guardians) of children under the age of 18 who are living in the UK can open a Junior ISA for them. The
Junior ISA can either be a cash ISA, a stocks and shares ISA or one of each, provided the annual investment limit is
not exceeded. At the age of 16, the child can take control of their Junior ISA although they cannot withdraw money
from it until they turn 18. In 2022/23, the maximum which can be invested in a Junior ISA is £9,000 per year.
8.3.2 Lifetime ISA (‘LISA’)
LISAs were introduced to replace Help to Buy ISAs. It is no longer possible to open a Help to Buy ISA, but they
currently still exist for those who opened one prior to November 2019. Help to Buy ISAs will not be examined on this
course.
A LISA can be opened by an individual who is UK resident and aged between 18 and 39. Up to £4,000 per annum
can be saved in a LISA until the age of 50. This £4,000 counts towards the annual limit of £20,000. Cash or stocks
and shares or a combination of both can be held in the LISA.
When the individual reaches the age of 50, no further amounts can be paid into the LISA although the account
will remain open, and the savings will earn interest/dividends in the normal way. A 25% bonus will be paid by the
government on the total amount paid into the LISA up to a maximum of £1,000 annually.
Money can only be withdrawn from the LISA if the taxpayer is:
• buying their first home, provided this is at least 12 months after opening the LISA, or
• 60 or over; or
• terminally ill with less than 12 months to live.
If a withdrawal is made for any other reason, a 25% withdrawal charge will be imposed on the full value withdrawn.
Notes

Activity 1 – Early withdrawal from a LISA
Sarah is aged 35. She invested £1,200 in cash in her LISA account and has earned a government bonus of
£300. Sarah wishes to withdraw her money from her LISA to go on holiday. How much will she receive?
Solution
8.4 Enterprise Investment Scheme (‘EIS’)
8.4.1 Introduction
The EIS is designed to encourage investment in the ordinary shares of unquoted trading companies and, so, help
smaller companies raise finance. The EIS works by giving qualifying individuals (individuals not connected to the
company) various tax reliefs for subscribing for shares (i.e., purchasing new issue shares). An unconnected individual
is someone who does not work for the company and does not own more than 30% of the company’s shares.
Notes

8.4.2 Income tax relief
Individuals who subscribe for EIS shares are entitled to income tax relief. Individuals can claim an income tax
reducer of the lower of:
• 30% of the amount subscribed (i.e., for new shares. Note: the tax reducer is not available where shares are
bought second hand); and
• the individual’s tax liability for the year (i.e., the income tax reducer cannot reduce an investor’s income tax
liability to less than £0).
The taxpayer can, however, elect to treat the investment as if it had been made in the previous tax year if that is
beneficial to them for example, if a greater amount of tax relief was received in the previous year than in the year of
investment. The annual maximum investment qualifying for relief is £1 million which means the maximum income tax
reducer in a tax year is £300,000.
Shares must be held by an investor for at least three years. If the shares are sold within three years, the income tax
reducer will be clawed back and the tax due in the original year of investment will be re-calculated, thus increasing
the tax due. The calculation of the claw back is outside the scope of the PoT course.
Activity 2 – EIS tax reducer
Anne invests £20,000 in subscribing for qualifying EIS shares on 1 May 2022. Her only income in 2022/23 is
her salary of £26,570. Calculate Anne’s income tax relief for 2022/23 in respect of her EIS investment.
Note: Dividends from EIS shares are taxable as normal.
Solution
Notes

8.4.3 Capital gains relief
Where EIS shares are disposed of after three years, any capital gain is exempt from capital gains tax (‘CGT’). If the
shares are disposed of within three years, the gain is taxable and calculated in the normal way.
If the EIS shares are sold at a loss at any time, the loss is allowable but, in calculating the capital loss, the
acquisition cost of the shares is reduced by the amount of any EIS income tax relief attributable to the shares.
The calculation of capital losses on EIS shares will not be examined for PoT.
8.5 Venture Capital Trust (‘VCT’)
8.5.1 Introduction
A VCT is a listed company which is approved by HMRC, and which invests in unquoted trading companies. The
investor invests directly in the shares of the VCT company and then the VCT company invests in the shares of
unquoted companies. This allows investors to spread their risk. A VCT must satisfy certain conditions to be approved
by HMRC, but these conditions are outside the scope of the PoT course.
An individual can claim both income tax and capital gains tax relief for investing in VCT shares where certain
conditions are satisfied.
8.5.2 Income tax relief
An investor in a VCT company is entitled to an income tax reducer of the lower of:
• 30% of the amount subscribed (i.e., for new shares. Note: the tax reducer is not available where shares are
bought second hand); and
• the individual’s tax liability for the year (i.e., the income tax reducer cannot reduce an investor’s income tax
liability to less than £0).
The annual maximum investment qualifying for relief is £200,000 which means the maximum income tax reducer in
a tax year is £60,000. An individual may subscribe for more than £200,000 in a tax year but the income tax reducer
will be restricted to £200,000. If the investor both subscribes for new shares and purchases existing shares, the
income tax reducer will only be available on the new shares. However, it does not matter the order in which the
shares are acquired during the year; the income tax relief is available up to £200,000 pa regardless of the order in
which shares are acquired during the year.
Notes

Shares must be held by an investor for at least five years. If the shares are sold within five years, the income tax
reducer will be clawed back and the tax due in the original year of investment will be re-calculated, thus increasing
the tax due. In respect of VCT shares, income tax relief will also be withdrawn if the VCT loses its approved status
within five years of issuing eligible shares to the investor. The calculation of the claw back is outside the scope of the
PoT course.
Unlike the EIS, dividends received from shares held in a VCT are exempt from income tax, regardless how long
the shares have been held for, provided the shares from which the dividend is paid is within the £200,000 per annum
maximum. The income tax relief available in respect of the dividends paid includes shares subscribed for and/or
shares purchased.
8.5.3 Capital gains relief
Capital gains arising on the disposal of VCT shares are exempt from capital gains tax regardless how long the
shares have been held for. The CGT relief is given on the first £200,000 per annum of shares acquired in each tax
year i.e., for the dividends above, the £200,000 includes both shares subscribed for and/or purchased.
Activity 3 – VCT relief
On 1 May 2022, Hasib bought existing shares in VCT1 which had a value of £60,000. On 1 December 2022,
he subscribed £250,000 new shares in VCT2.
Explain to Hasib what income tax relief he will obtain on these investments in 2022/23.
Solution
You should now be able to achieve learning outcome one.
Notes

8.6 Pensions
8.6.1 Introduction
The government encourages individuals to make financial provision for retirement by giving tax relief on contributions
into an HMRC approved pension scheme. Although the state pension scheme provides a level of financial support,
the government wants individuals not to rely on state provision but to make their own pension arrangements. The
two main ways in which an individual can provide for a pension are through an occupational pension scheme
which is set up and administered by an employer and/or a personal pension scheme which is run by a financial
institution but into which both the individual and, if the individual is employed, the employer can contribute.
An individual may make several different pension arrangements. This means an individual may be a member of
both an occupational pension scheme/s and a personal pension scheme/s. However, there is an overall limit on the
amount on which the individual can obtain income tax relief in respect of all their pension arrangements in a tax year.
8.6.2 Tax relief on contributions to a pension scheme
The maximum gross contribution that an individual can make which will attract income tax relief in any tax year is the
higher of:
• £3,600; or
• 100% of ‘UK taxable earnings’, subject to the ‘annual allowance’ rules (see 8.6.4 below).
‘UK taxable earnings’ include employment income, trading income (sole trader or partner) and income from furnished
holiday lettings (FHL).
8.6 3 Method of giving tax relief
The way in which an individual will obtain tax relief depends on whether the contribution is to an occupational
scheme or a personal scheme.
In the case of an occupational pension scheme, the employer deducts the gross contribution from the individual’s
employment income before operating PAYE. This means that the individual will pay less tax through PAYE and will
receive tax relief at the appropriate rate (20%, 40%, or 45% or the Scottish equivalents) at source. Contributions by
an employer are exempt benefits for the employee. For the employer, the contributions are a tax-deductible trading
expense in the period they are paid.
Notes

Activity 4 – Tax relief on pension contributions to an occupational pension scheme
Charlotte has employment income of £25,000 in 2022/23 and is a member of an occupational pension
scheme. She wishes the scheme to receive £5,000 by way of pension contribution. Charlotte lives and works
in London.
For the tax year 2022/23, explain to Charlotte the tax treatment of the pension contribution she wishes to
make and how she will obtain income tax relief.
Solution
In the case of a personal pension scheme, the individual makes their contribution to the fund, net of basic rate
tax, i.e., for every £1,000 they want to contribute they only have to pay £800. The remaining 20% (£200) will be paid
by HMRC direct to the pension provider. However, if the taxpayer pays tax at the higher or additional rates, they are
entitled to further relief. This extra relief is obtained by extending the individual’s basic rate band and, if applicable,
the higher rate band by the gross pension contribution.
Notes

Activity 5 – Tax relief on pension contributions to a personal pension scheme
Consider the following two taxpayers who both live and work in England:
1. Donny is self-employed. He is a basic-rate taxpayer. He wants £3,600 to reach his personal pension
scheme.
2. Marie is self-employed. Her sole-trade business has made a profit of £100,000 and she wants £10,000 to
reach her personal pension scheme.
For the tax year 2022/23, explain to Donny and Marie the tax treatment of the pension contributions they wish
to make and, in the case of Marie, calculate her income tax liability assuming she has no other income.
Solution
All contributions in a tax year, whether made by the individual or by an employer, count towards the annual
allowance (see 8.6.4 below).
You should now be able to achieve learning outcome two.
Notes

8.6.4 Annual Allowance
Although there is no limit to the amount which an individual can contribute into an approved pension scheme in any
tax year, there is an annual maximum level of contributions (including both individual and employer contributions) on
which income tax relief will be given.
Currently, the annual allowance is £40,000.
The annual allowance can be found on your rates sheet
The annual allowance is reduced by £1 for every £2 of net income in excess of £240,000. This is, however, subject
to a minimum annual allowance of £4,000. So, an individual who has net income of ≥ £312,000 will be entitled to tax
relief on £4,000 of pension contributions.
If, for any year in which an individual is a member of a pension scheme, they make contributions of less than
£40,000 (or their reduced allowance) they will have unused allowance. This unused amount can be carried forward
for three years to be used in later years on a first in first out (FIFO) basis. But any amount carried forward can only
be used after the current year’s allowance has been used.
If an individual makes pension contributions in excess of their annual allowance (including any amounts brought
forward) an annual allowance charge will be imposed to claw back income tax relief given on the excess
contribution. This is achieved by adding the annual allowance charge onto the income tax computation which will
then be taxed at the individual’s marginal rate of tax.
Notes

Activity 6 – Carry forward of unused pension contributions
Mary earns an annual salary of approximately £100,000 and makes gross pension contributions of £55,000
during 2022/23. In the previous three tax years, Mary made the following gross pension contributions:
2021/22 £25,000
2020/21 £30,000
2019/20 £20,000
Calculate the maximum value of Mary’s pension contributions for which she can obtain income tax relief in
2022/23 and state how much of the prior years’ unused pension contribution can be carried forward to 2023/24.
Solution
Notes

8.7 Pension benefits on retirement
8.7.1 Options on how to take a pension
When an individual reaches the age of 55, they have several options regarding their pension fund. They can, if they
wish, leave the money in the pension fund to accumulate. If they decide to draw on money from their pension fund,
this can be done in several ways which include:
• Use the pension fund as a ‘drawdown’ facility and only take cash out as and when required. The first 25%
of each drawdown will be tax free with the balance taxable as part of ‘non-savings’ income at the taxpayer’s
marginal rate.
• A tax-free lump sum (up to 25% of the fund value) may be taken at retirement and the remaining funds used to
purchase an annuity to provide an ongoing pension. The regular pension income would be taxable as part of the
individual’s ‘non-savings’ income in the income tax computation at the taxpayer’s marginal rate.
• A tax-free lump sum (up to 25% of the fund value) may be taken at retirement with the balance of the fund
invested in a different way, for example, in a share portfolio rather than an annuity, to provide the individual with
a regular income taxed at the taxpayer’s marginal rate.
• Take the whole fund value as a cash payment on the date of retirement. The first 25% of the payment will be
tax free and the balance taxed as part of ‘non-savings’ income at the taxpayer’s marginal rate. This will normally
give rise to an immediate, large tax charge but it gives the individual total freedom on how to use the cash.
• It is generally also possible to use a combination of the above.
8.7.2 The pension ‘lifetime’ allowance
As well as HMRC imposing a limit on income tax relief on payments into a pension fund, HMRC also places a limit
on the total value of a pension fund which will benefit from favourable tax treatment. This is known as the ‘lifetime
allowance’. The lifetime allowance for 2022/23 is £1,073,100.
The lifetime allowance is not determined until money is taken from the pension fund. Once money is withdrawn,
there will be an income tax charge on the excess in the fund above the lifetime allowance. The rate of income tax
paid depends on how the excess is withdrawn from the pension fund. The rate is either:
• 55%, if the excess is paid to the individual as a lump sum; or

• 25% if the excess is used to purchase pension income e.g., by operating a drawdown arrangement or by
purchasing an annuity.
Notes

The income tax will be collected by the pension scheme trustees from the lump sum itself and paid over to HMRC on
the taxpayer’s behalf. The tax on the balance will be deducted from the pension fund.
Activity 7 – Lifetime allowance
Stella retires during 2022/23. Her pension fund, at the date on which she first takes a benefit from it, is valued
at £1.45m. She decides to take 25% of the fund as a lump sum and she uses the balance to purchase an
annuity.
Explain the income tax implications to Stella of how:
1. The lump sum will be taxed, and

2. The balance remaining will be taxed, and
3. How much Stella will have to invest in an annuity.
Solution
You should now be able to achieve learning outcome three.
Notes

ISA
• ISAs allow a UK taxpayer to invest up to £20,000 annually in either cash or stocks and shares free of income tax
and capital gains tax
• A parent/guardian can invest up to £9,000 annually in a junior ISA for a child
• Lifetime ISAs available to 18–39-year-olds to save up to £4,000 annually until age 50 Government bonus of 25%
paid on contributions. Withdrawal on 60th birthday or on purchase of first home. Penalties for early withdrawal
EIS
• Income tax relief of 30% on amount subscribed to annual maximum of £1 million. IT relief clawed back if shares
sold within 3 years
• No CGT on disposal if shares kept for 3 years. If sold at a loss at any time, capital loss can, within limits, be set
off against net income
• Dividends taxed as normal
VCT
• Income tax relief of 30% on amount subscribed to annual maximum of £200,000. IT relief clawed back if sold
within 5 years
• No CGT on disposal regardless of length of time shares held for
• Dividends exempt from income tax
Tax relief on pension contributions
• Maximum contributions which attract tax relief is higher of £3,600 or UK taxable earnings
• Contributions to an occupational pension scheme given at source through PAYE
• Income tax basic rate relief on contributions to a personal pension scheme given by paying contribution net of
basic rate tax; higher relief given by extending the basic rate/higher rate bands
• Annual allowance on which tax relief given is £40,000; £40,000 reduced for net income over £150,000; unused
allowance can be carried forward for 3 years on a FIFO basis
Taxation of pension fund
• Lifetime allowance £1,073,100 for 2022/23

• Individual can withdraw 25% tax free
• Remaining taxed at marginal rate
• Excess over lifetime allowance subject to either 55% or 25% rate of tax

The total value of Sarah’s LISA account is £1,500. As she is not withdrawing the money for any of the permitted
reasons, she will pay a withdrawal charge of 25% on the full value withdrawn. Therefore, she will receive £1,125 i.e.,
£1,500 - (£1,500 x 25%) which is less than the £1,200 she invested.
Back to Activity
Anne’s income tax liability for 2021/22 would be:
Tax liability @ 20% 2,800
Less EIS tax reducer
(£20,000 x 30%) = £6,000 capped at (2,800)
Nil
The relief which Anne can claim cannot exceed her IT liability for the tax year and, so, is capped at £2,800. It would
be possible for Anne to consider carrying back part of the investment to the previous tax year to get full relief for the
investment.
Back to Activity

The VCT1 shares are not eligible for an income tax reducer as the shares are existing shares which have been
purchased and not a new subscription. However, as they are within the £200,000 p.a. maximum, Hasib will not pay
income tax on any dividends he receives from them. Similarly, there will be no CGT payable on the disposal of these
shares.
In respect of VCT2, £200,000 of the £250,000 invested will qualify for the 30% income tax reducer as these are new
shares for which Hasib has subscribed.
However, as earlier in the tax year he invested £60,000 in VCT1, income tax relief on any dividends he receives
from the VCT2 shares will be limited to £140,000/£250,000 x dividend received. Similarly, the CGT exemption will be
limited.
The £50,000 which exceeds the £200,000 threshold will not be eligible for the income tax reducer, dividend income
relief or capital gains relief.
Back to Activity
Charlotte’s employer will deduct £5,000 from her employment income before deducting PAYE. So, only £20,000 of
her employment income will be taxed. The £5,000 which Charlotte contributes to the pension scheme will not suffer
tax. Hence, Charlotte will pay £1,000 less tax (£5,000 x 20%) because of her pension contribution.
Back to Activity
Notes

Donny wants £3,600 to reach his personal pension fund. Donny pays tax at the basic rate. Donny should, therefore,
pay £2,880 (i.e., £3,600 x 80%) to his personal pension scheme. The remaining £720 will be contributed by HMRC.
By making his contribution net of basic rate tax, Donny has obtained income tax relief at 20%.
Marie wants £10,000 to reach her personal pension fund. Marie should pay £8,000 into her fund i.e., £10,000 x
80%. The remaining £2,000 will be contributed by HMRC. By making her contribution net of basic rate tax, Marie
has obtained income tax relief at 20%. However, Marie is a higher rate taxpayer (her business has made profits of
£100,000) so, she is entitled to further relief. She will get this through her income tax computation by extending the
basic rate band as follows:
Marie
Income tax computation - Year to 5 April 2023
Taxable trading profits 100,000
Tax on income
£47,700 @ 20%* 9,540
£39,730 @ 40% 15,892
£87,430 25,432
*Basic rate band would normally end at £37,700. As Marie made a gross contribution of £10,000 it will end at
(£37,700 + £10,000) = £47,700. This provides an additional 20% relief on the £8,000 paid.
Back to Activity
Notes

In 2022/23, Mary’s gross pension contributions are more than £40,000. So, we need to consider any unused relief
from prior years to establish whether the full amount of £55,000 paid in 2022/23 will qualify for relief. Unused relief in
the past three years is as follows:
2021/22 £40,000 - £25,000 £15,000
2020/21 £40,000 - £30,000 £10,000
2019/20 £40,000 - £20,000 £20,000
£45,000
So, in 2022/23 Mary could make a gross pension contribution of £85,000 (£40,000 + £45,000) and obtain income tax
relief on that full amount. So, Mary will be entitled to relief on the full £55,000 she actually paid.
The payment of £55,000 is deemed to use up, firstly, the current year (2022/23) allowance of £40,000 and then, on
a FIFO basis, £15,000 from 2019/20. As unused contributions can only be carried forward for three years the £5,000
remaining unused in 2019/20 will be lost. The amount Mary will have to carry forward to 2023/24 will be £25,000
(i.e., the unused amounts from 2020/21 and 2021/22).
Back to Activity
Notes

The value of Stella’s pension fund exceeds the lifetime allowance of £1,073,100 at the time she first takes a benefit
from it. The excess is £376,900. Stella may take a tax-free cash lump sum of £268,275 (25% x £1,073,100). She
has, however, withdrawn £362,500 (£1,450,000 x 25%) which exceeds the maximum tax-free amount by £94,225.
This amount will suffer tax at 55% so the tax due on the excess lump sum payment is £51,824 (£94,225 x 55%).
The balance of the excess of £282,675 (£376,900 - £94,225) which will be paid as pension income from an annuity
will suffer tax at 25%.
Stella Lifetime Excess Taxed at Lifetime

Allowance Allowance
Charge
£ £ £ £
Lump Sum 362,500 268,275 94,225 55% 51,824
Annuity 1,087,500 804,825 282,675 25% 70,669
1,450,000 1,073,100 376,900 122,493
The trustees of the pension scheme will withhold income tax of £122,493.
Stella will receive a lump sum of £310,676 (£362,500 - £51,824).
She will have £1,016,831 (£1,087,500 - £70,669) to purchase an annuity.
Back to Activity
Notes

Module 9. Chargeable Gains
Computations
Contents
9.3 The Charge to Tax 235
9.3.1 What Triggers a Charge to Tax? 235
9.4 Reporting and Paying Tax 237
9.4.1 Reporting Gains 237
9.4.2 Annual Exempt Amount (‘AEA’) 237
9.4.3 Paying Tax 238
9.4.4 Capital Gains Tax – Rates 238
9.5 Calculation of a Chargeable Gain 240
9.6 Disposals 240
9.6.1 Basic Pro Forma 240
9.6.2 Disposal Value and Incidental Costs of Disposal 241
9.6.3 Acquisition Cost/Allowable Expenditure 242
9.7 Completing the Computation 243
9.7.1 Interaction of Annual Exempt Amount and Brought Forward Losses 244
9.7.2 Connected Person and Capital Losses 245
9.7.3 Reporting Gains 245
9.8 Other Issues Affecting the Basic Computation 247
9.8.1 Transactions between Spouses/Civil Partners 247
9.8.2 Part Disposals 248
9.8.3 Treatment of Leasehold Disposals 250
9.8.4 Chattels 251
9.9 Disposal of residential property by an individual 254
9.9.1 Principal Private Residence Relief 254
9.9.2 Calculating the tax liability 256
9.10 Shares 257
9.10.1 Identification Rules 258
9.10.2 Sale by an Individual 259
9.10.3 Rights Issues and Bonus Issues 260
Appendix 1 – Chattels 262

9. Chargeable Gains Computations
9.1 Introduction
Chargeable gains are made on the disposal of assets. The legislation is found within the Taxation of Chargeable
Gains Act 1992.
Individuals will pay capital gains tax (‘CGT’) on their chargeable gains. This is a separate tax from income tax.
This module will identify those transactions that result in a chargeable gain and will calculate the CGT payable.
1. identify situations giving rise to a chargeable gain;

2. apply the correct rate(s) of capital gains tax to chargeable gains and state the relevant payment date;
3. apply capital losses of current or prior years;
4. calculate gains/losses involving spousal transfers, part disposals, leasehold disposals and chattels;
5. calculate gains and the tax payable after principal private residence relief on residential properties,
6. calculate gains/losses on the disposal of shares by an individual.
Achieving these learning outcomes will help you to meet the sixth learning outcome of the syllabus as a whole.
9.3 The Charge to Tax
9.3.1 What Triggers a Charge to Tax?
Tax on a chargeable gain arises when there is a:
• chargeable person; making a

• chargeable disposal; of a
• chargeable asset.
An individual will be liable for UK CGT if they are resident in the UK in a year of assessment. They will be taxed
on gains, and will receive relief for losses, arising on disposals of their worldwide assets. We will only consider UK
resident individuals on this course.
Notes

A chargeable disposal is wider than a sale and includes any of the following situations:
• Sale of an asset;
• Sale of part of an asset;
• Gift of whole or part of an asset;
• Loss or destruction of whole or part of an asset; and
• Compensation in connection with an asset.
A chargeable asset is any asset which is not an exempt asset. Exempt assets in the list below need to be learned so
that you can identify them in a question. If an asset is exempt, no calculation is required.
The main exempt assets are as follows:
• Sterling currency;
• Foreign currency for personal use;
• Decorations awarded for valour (i.e., war medals), unless acquired by purchase;
• Betting and lottery winnings;
• Passenger vehicles (including vintage cars);
• National Savings Certificates and Premium Bonds;
• Wasting chattels and non-wasting chattels in certain situations (see Section 9.8.4);
• Principal private residence occupied throughout period of ownership (i.e., your main home) (see Section 9.9.1);
• Disposals within an Individual Savings Account (ISA);
• Compensation or damages for any wrong or injury suffered by an individual or in their profession or vocation; and
• Sterling commercial loan stock issued by the government or a company (a Qualifying Corporate Bond).
All three conditions (chargeable person, disposal, and asset) must be in place to trigger a chargeable gain. If I gift
£10,000 cash to my niece, there is no CGT. Whilst I am a chargeable person and a gift is a chargeable disposal,
cash is not a chargeable asset. However, if I gift my niece a building, CGT may arise as all three conditions are met.
As I am the chargeable person, the CGT will be my liability.
Notes

9.4 Reporting and Paying Tax
An individual will pay capital gains tax (‘CGT’) on their chargeable gains.
9.4.1 Reporting Gains
When capital gains tax is due this will be self-assessed by the taxpayer by showing the gain on their annual
personal tax return, which covers both income and capital gains. The return is due to be with HMRC by
31 January in the year following the end of the year of assessment – for example, 31 January 2024 for 2022/23
returns. However, this deadline is 31 October 2023 for paper versions of the tax return.
If the taxpayer does not normally receive a tax return form, they must ensure that HMRC is notified of the liability
to capital gains tax for the fiscal year, within six months of the end of that tax year. An individual who normally
pays all their income tax through PAYE but sells a valuable asset and makes a large gain in 2022/23 must, therefore,
notify HMRC of this by 5 October 2023.
If a taxpayer disposes of a UK residential property, this disposal needs to be reported alongside any capital gains tax
paid within 60 days of selling the property if the completion date was on or after 27 October 2021. This time limit was
30 days for properties that had a completion date between 6 April 2020 and 26 October 2021.
9.4.2 Annual Exempt Amount (‘AEA’)
Although income and capital gains are reported on the same form, the calculations should be carried out separately.
They are two separate taxes. The ‘personal allowance’ of £12,570 relates only to income tax and will not affect
CGT. Instead, every individual has an annual exempt amount (‘AEA’) relating to CGT. For 2022/23 this exemption is
£12,300 (£12,300 in 2021/22) and only net chargeable gains in excess of this amount will be charged to tax. These
figures are shown on your rates sheet.
A taxpayer with chargeable gains of, say, £14,300 in 2022/23 would therefore be assessed to CGT only on the
£2,000 which exceeds the AEA.
The AEA may only be used in the fiscal year in question. It may not be carried forward, carried back or given to any
other individual.
As this AEA may cover all gains made by an individual in the fiscal year there are concessions relating to the
reporting of gains on the tax return. Where an individual’s total chargeable gains do not exceed £12,300, and the
proceeds received on the sale of these assets do not exceed four times this amount (£49,200), then no reporting is
required. There are rules on how these limits will be applied and these are discussed further in Section 9.7.3.
Notes

9.4.3 Paying Tax
Payment of CGT is due by 31 January following the end of the fiscal year. CGT is paid in one lump sum and does
not impact on Payments on Account (‘POA’) from year to year as a taxpayer does not usually have capital gains
arising year after year.
9.4.4 Capital Gains Tax – Rates
Capital gains are currently taxed at 10% and/or 20% depending on the level of the individual’s income.
Capital gains are treated as sitting on top of income and will be taxed at 10% to the extent that the gains fall within
the basic rate band and 20% for the gains that are above the basic rate band. The basic rate band for 2022/23
ends at £37,700 for all taxpayers for this purpose. The Scottish Income Tax bands do not apply for CGT
purposes as they only relate to non-savings and non-dividend income.
Certain assets are taxed at a higher rate. Residential properties will be charged at rates of 18% and 28%. As a
principal private residence (main home) is generally exempt from CGT (see 9.9.1) the higher rates of tax will affect
second homes or buy-to-let properties.
Activity 1 – Rates of Tax
Jason is employed as a policeman and earns a salary of £32,270. He also has some property income of
£4,700 in 2022/23.
During 2022/23, he sells a few valuable antiques and makes gains totalling £27,250.
Calculate Jason’s capital gains tax for 2022/23 and state the payment date.
Notes

Income tax situation: £
Total income
Personal allowance
Taxable income
Amount remaining in basic rate band = £
Capital gains situation: £
Chargeable gains
Annual exempt amount
Taxable gains
These will be taxed as follows:
£ @ 10%
£ @ 20%
Total capital gains tax
Due date
Solution

9.5 Calculation of a Chargeable Gain
The procedure for calculating tax on chargeable gains is as follows:
Step 1 Calculate the gain or loss on each, separate, chargeable disposal (except exempt assets) in a fiscal year.
Step 2 Net the total chargeable gains and/or losses arising in the period.
Step 3 Apply the annual exempt amount and calculate the CGT payable.
A chargeable gain or allowable loss is essentially the tax profit (or loss) on disposal, that is, the disposal proceeds
less allowable costs. Individuals only pay tax on their net chargeable gains in excess of the annual exempt amount
each year.
9.6 Disposals
9.6.1 Basic Pro Forma
£ £
Disposal value (gross proceeds) X
Less: incidental costs of disposal (X)
Net sale proceeds (‘NSP’) NSP
Less:
Acquisition cost/allowable expenditure X
Incidental costs of acquisition X
Enhancement expenditure X
(Cost)
Chargeable gain X
Notes

9.6.2 Disposal Value and Incidental Costs of Disposal
Where a disposal takes place ‘at arm’s length’ (acting independently with their own self-interest in mind), between
unconnected parties, the starting point is the actual disposal proceeds. Where a transaction is not at arm’s length
(e.g., a gift), or is between connected persons, then market value is used instead.
The list of connected persons includes an individual’s spouse or civil partner, an individual’s ‘relatives’, their spouse’s
(or civil partner’s) relatives and their relatives’ spouses (or civil partners). A ‘relative’ is a child, grandchild (or further
descendants), a parent, grandparent (or further ancestors), brothers and sisters.
The next example explains why this rule is in place.
Example 1 – Connected Persons
Kylie (a higher rate taxpayer) bought an asset for £5,000 and later sells it to her sister Dannii. At the date of
sale, the asset is worth £25,000 but Kylie sells it to Dannii for £17,000. Explain why Kylie would do this.
By selling the asset for £17,000 Kylie would calculate a gain of £12,000 (proceeds £17,000 less cost £5,000).
This would be covered by her AEA and would therefore not attract tax. Perhaps Dannii would give her the
other £8,000 at a later date and, as cash is an exempt asset, this would not attract CGT for anyone.
However, because of the non-arm’s length/connected persons rules, Kylie will be forced to calculate her gain
using deemed proceeds of £25,000. The gain would therefore be £20,000. Even with the AEA, £7,700 would
remain taxable at 20%. CGT payable is £1,540.
We will see later that this rule is overridden by another rule when the ‘connected person’ is your spouse or civil
partner.
Incidental costs incurred on the disposal of an asset are an allowable deduction. Examples of such costs include
valuation fees, advertising costs, legal fees, and auctioneer’s fees.
Notes

9.6.3 Acquisition Cost/Allowable Expenditure
If the asset is bought after 31 March 1982, the cost will be:
• the purchase price if bought at full market value;

• the market value at date of receipt if gifted or purchased at undervalue; or
• the probate value, (i.e., value on inheritance) if inherited on a death.
The capital gains tax rules were substantially altered in 1982 (this was known as the ‘rebasing’ of gains). Essentially,
the CGT rules were reset at 31 March 1982 and only gains from that date forward become taxable. If an individual
sells an asset that they bought before that date, we assume that the asset was bought on 31 March 1982 for its
market value at that date (‘MV82’) and substitute that value for the actual cost. You will be told the 31 March 1982
market value in an exam question if required.
Activity 2 – Asset bought pre-April 1982
Barbara bought an antique jewellery box in June 1979 for £7,900. At 31 March 1982, it was worth £10,790.
She sold the box in May 2022 for £33,490. Calculate the chargeable gain.
Solution
Incidental costs of acquisition (such as delivery costs, auctioneer’s commission, etc.) are added to the cost and
therefore receive tax relief. In addition, any further capital expenditure on the asset (known as ‘enhancement
expenditure’) is deductible. An example of this would be the purchase of a picture where the owner later reframes
the picture. The cost of the new frame would be enhancement expenditure. However, be careful to check the date of
the enhancement.
If this was before April 1982 the enhancement will already be reflected in the market value in 1982 (e.g., the value
will include the new frame) and should not be accounted for again.
Notes

Activity 3 – Disposals
Bruce disposes of two assets during 2022/23. On 14 September 2022, he gives his friend Tess a valuable
vase worth £25,600. Bruce had bought the vase in June 1990 for £7,500 and had paid commission of £750 on
the purchase.
On 3 January 2023, Bruce sells a painting for £76,400 and incurs selling fees of £1,000. Bruce inherited the
painting in July 1986 when it was worth £14,740.
Calculate the gain on each asset.
Solution
9.7 Completing the Computation
Once the gains and losses on individual transactions are computed, the results need to be summarised and the tax
payable calculated. This will include setting off current gains and losses arising in a fiscal year against each other.
After claiming the annual exempt amount of £12,300, any remaining gain will be taxed at 10% or 20% depending on
the taxpayer’s income (18% or 28% if the disposal is of residential property).
Notes

9.7.1 Interaction of Annual Exempt Amount and Brought Forward Losses
Current year capital losses must be set against current year chargeable gains where possible, even if this results in
part of the annual exempt amount being wasted. Any unused losses will be carried forward to use against gains of
later years. The current year loss should be used before any brought forward loss.
Losses brought forward are deducted after losses that are incurred in the current tax year and cannot reduce the net
chargeable gains to below the annual exempt amount. Any losses that cannot be deducted continue to be available
in future tax years. This is best illustrated by way of an example.
Activity 4 – Interaction of Annual Exempt Amount and Brought Forward Losses
Othello has the following capital gains and losses:
2021/22 £
Gains 9,000
Losses (10,500)
2022/23
Gains 13,500
Losses (1,000)
Calculate the gains chargeable, if any, after considering all reliefs and exemptions.
Solution
Notes

The rules on use of losses can therefore be summarised as:
• Current year losses must be used in the current year where possible and may result in the annual exempt
amount being wasted;
• Unused capital losses are carried forward to later years;
• Current year losses are set off before brought forward losses; and
• Brought forward losses should be used after the annual exempt amount.
9.7.2 Connected Person and Capital Losses
If a capital loss arises on the disposal of a chargeable asset between connected persons (e.g., siblings, parents,
children, or grandchildren, etc.) the capital loss can only be offset against gains arising from the sale of assets to
that same person. Remember that the loss will have been calculated by substituting the market value for the actual
proceeds.
9.7.3 Reporting Gains
At the start of this module, we saw that gains of an individual need not be reported if the total gains do not exceed
£12,300 (before the deduction of any capital losses) and the proceeds do not exceed £49,200 (four times the
annual exempt amount).
Notes

Example 2 – Reporting Gains
In 2022/23, Ant sells an asset for £25,000. The gain is £10,000. This is his only disposal in the year.
In the same tax year, Dec also sells an asset for £25,000. The gain is £12,500. Dec also sells an asset at a loss
of £2,000. This sale had proceeds of £7,500.
Calculate the chargeable gain for each individual and state whether or not each would be required to report this.
Ant Dec
£ £
Gain 10,000 12,500
Loss of current year (2,000)
Net gain 10,000 10,500
Less annual exempt amount (10,000) (10,500)
Taxable gains Nil Nil
Neither Ant nor Dec has total proceeds exceeding £49,200 nor do they have any tax to pay as the net gains
are covered by the annual exempt amount. However, Dec will have to report his gains and losses as the gains
(before losses) exceed £12,300.
Notes

9.8 Other Issues Affecting the Basic Computation
9.8.1 Transactions between Spouses/Civil Partners
We have seen that ‘connected parties’ are deemed to transact with each other at market value. An additional rule
applies for transactions between spouses or between civil partners.
Since the Civil Partnership Act 2004, all references in legislation to spouses also include the situation where two
individuals are civil partners. The rules do not extend to common law spouses/partners.
Where an asset is transferred from one spouse/partner to the other it is deemed to have proceeds equal to
whatever is required to give a result of no gain/no loss. This effectively means that the asset will be transferred
at its original cost. The deemed proceeds of the individual disposing of the asset will also be the deemed cost to the
partner receiving the asset.
When jointly held property is disposed of, each individual will be deemed to have owned half of the property unless
some other split has been documented previously.
Activity 5a – Transfers between Spouses
Judy gives her husband, Richard, a valuable vase on 15 October 2020. Judy had bought the vase in January
1997 for £12,000. The vase is worth £20,000 at October 2020. Richard sells the vase in January 2023 for
£22,000. Calculate the gains in October 2020 and January 2023.
Solution
Notes

Activity 5b – Transfers between Connected Parties
Explain how your answer to Example 7a above would change if Richard and Judy live together but are not
married (i.e., are common law spouses).
Solution
9.8.2 Part Disposals
An asset may be split up and sold in parts, for example, a large field may be sold in smaller parts over several years.
In this case we need a rule to work out the original cost of the part of the asset that is being disposed of.
The cost of the part disposal is calculated as a proportion of the original cost.
This formula does NOT appear on your rates sheet and needs to be learned.
£ Original cost x A
A+B
where:
A = Market value of the part disposed of (gross proceeds if an arm’s-length disposal).

B = Market value of the remainder.
Incidental and other costs which relate wholly to the part sold are deductible in full. These are generally selling
costs. Those relating to the whole asset (generally purchase costs) are apportioned using the above formula.

Activity 6a – Part Disposal
Graham bought a plot of land for £17,000 and incurred purchase fees of £1,000. Graham disposed of one-
quarter of the field for proceeds of £30,000 and incurred expenses on disposal of £1,200. The remaining
three-quarters of the plot of land was valued at £31,500.
Calculate the chargeable gain on the disposal.
Solution
Activity 6b – Remaining Cost
Graham subsequently sells the rest of the plot of land. Calculate the cost of this part.
Solution

9.8.3 Treatment of Leasehold Disposals
For chargeable gains purposes, leases are categorised as short leases (50 years or less to run) or long leases
(more than 50 years to run). A disposal of a long lease follows normal chargeable gains rules, whilst a disposal of a
short lease is subject to the special rules explained below.
The disposal of a short lease is a similar concept to a part disposal. If an individual purchases a 25-year lease
and sells it five years later, they are disposing of a 20-year lease. This is only part of the original asset and so only
part of the original cost figure should be used. The revised cost is determined as follows:
Cost % lease remaining at disposal

x
% lease when expenditure incurred
The percentages are found in the lease depreciation table on your PoT rates sheet. The schedule also shows how to
calculate lease percentages for periods which are not complete years. The calculation is best explained by way of an
example.
Activity 7 – Disposal of a Short Lease
Ken disposed of a leasehold building in December 2022 for £170,000. The lease had 40 years to run at the
date of disposal. It was acquired at a cost of £70,000 in December 2014 when it had 48 years to run.
An extract from the lease table in Schedule 8 shows:
40 years 95.457
48 years 99.289
Calculate the chargeable gain.
Solution

If you are required to calculate a disposal on a lease with a life that is not a full number of years, the percentage
should be calculated as follows:
If you wish to find the percentage for, say 32 years 6 months, use the data from the table:
32 years 89.354
33 years 90.280
To find the figure for 32 years, 6 months:
Percentage for 32 years 89.354
Difference between 32 years and 33 years 0.926
Add 6/12 difference 0.463
Percentage for 32 years, 6 months 89.817
9.8.4 Chattels
A chattel is tangible moveable property (an asset which can be seen and touched and moved) and has special
chargeable gains rules attaching to it. Land is not a chattel as it cannot be moved. Shares are not chattels as they
cannot be seen and touched.
Chattels may be wasting or non-wasting depending on whether or not they have a predicted useful life of more or
less than 50 years.
For example:
Wasting chattels (≤ 50 years) Non-wasting chattels (> 50 years)
Washing machines Antiques
Computers Jewellery
Boats or caravans Paintings
Plant and machinery Valuable postage stamps
Case law has determined that anything with moving parts will always be a wasting chattel.
Wasting chattels are exempt from chargeable gains on disposal. No gain or loss will therefore arise.
Non wasting chattels are treated as follows:
Notes

The chattel rules exempt the gain on any chattel sold for gross proceeds (the ‘consideration’) which do not exceed
£6,000.
The rule for assets sold for consideration of more than £6,000 restricts the amount of any gain. It dictates that the
gain (being proceeds less cost) should be compared to:
5/3 (gross proceeds - £6,000)
Whichever calculation (normal gain or the formula) gives the lower gain will be used. In practice, this is only
required if the proceeds exceed £6,000 and the cost is less than £6,000, as in any other case the formula will always
give a higher result.
Where a chattel is sold at a loss for gross proceeds of less than £6,000, the legislation states that the actual gross
proceeds should be replaced with a figure of £6,000, thus reducing the value of the allowable loss. In practice, this
will only occur where proceeds were less than £6,000 and the cost more than £6,000.
When learning these rules, it can be simpler to show them as a table based on the gross proceeds and the cost.
Activity 8 – Summary of Chattel Rules
Using the text above, complete the table below to show a summary of the treatment of chattels.
Gross proceeds ≤ £6,000 Gross proceeds > £6,000
Cost <
£6,000
Cost ≥
£6,000
A diagrammatic summary of all the chattel rules is shown in Appendix 1 to this module.
Solution
Activity 9 – Chattels
Notes

In July 2022, Duncan sells the following assets. Calculate the gain/loss on each:
1. Sale of a celebrity’s electric guitar found when cleaning out the loft. This cost £7,000 when purchased at
auction in June 1999 and Duncan sold it for £12,500.
2. Sale of an antique vase bought for £2,500 in February 2006. Duncan realised gross proceeds of £5,800 at
auction but had to pay 10% commission on this.
3. Sale of a painting bought for £5,320. This achieved £8,100 at the same auction as the vase. Again 10%
commission was due.
4. Sale of an antique chair at the auction. It was inherited at a value of £12,000 in March 2005 and achieved
proceeds of £5,500. Again 10% commission was due.
Solution
Notes

9.9 Disposal of residential property by an individual
Gains on disposals of residential property by individuals are subject to tax at 18%/28% rather than the standard
rates of 10%/20%.
There are different reporting deadline dates for disposals that relate to UK residential properties, as discussed in 9.4.1.
9.9.1 Principal Private Residence Relief
Often gains on residential property are exempt by virtue of the Principal Private Residence Relief (‘PPR relief’).
The relief will exempt gains on properties used throughout the period of ownership as an individual’s only or main
residence.
The key situations that affect the computation of the relief are:
Property is occupied throughout period of ownership Gain arising is fully relieved

as principal private residence
No capital loss permitted
Owner is absent from the residence for certain periods Calculate gain and deduct PPR relief for relevant
period
Where the house has always been occupied as the main residence there is no need to calculate the gain/loss as it
will be completely exempt. In any other situation the basic chargeable gain/loss must be calculated before relief can
be considered.
PPR relief is only available where the owner has actually lived in the house at some point. The relief cannot be used
on a property that is rented out during its entire ownership.
An individual, or a married couple/civil partners, may only have one principal private residence. If more than one
property is owned, then an election as to which is the main residence must be made.
Where there has been an absence from the house, the procedure is as follows:
1. Calculate the gain using normal capital gains rules.
2. Compute the total period of ownership (to the nearest month in exams).
3. Calculate ‘periods of occupation’ (to the nearest month in exams).
4. Calculate the PPR relief: Period of occupation x gain
Period of ownership

5. The relief is deducted from the chargeable gain.
The following information appears on your rates sheet.
The ‘periods of occupation’ in step 3 above include any period of actual occupation. However, they also include the
following periods of deemed occupation:
Periods of occupation
Actual occupation Deemed occupation
Up to four years absence while required

Last 9 months of
to live elsewhere in the UK due to work
ownership (allowing
(employed or self-employed), or living with
‘bridging’ where owner
spouse/civil partner whose work requires
may have two properties)
them to be elsewhere
Any period spent working abroad

Up to three years’
(employed), or living with a spouse/
absence for any reason
civil partner working abroad
Must be both preceded and followed by a period of actual occupation. This condition is relaxed where an
employer requires the owner to work elsewhere indefinitely, thus making it impossible to resume occupation
The legislation on the PPR exemption applies to the dwelling house and the ground with it, to a maximum of 0.5
of a hectare, or larger if required for reasonable enjoyment of the residence, based on the size and character of
the house.

Activity 10 – PPR relief
Janine bought her house on 1 July 2007 for £98,000 and lived in it until 31 December 2012. She sold the
house for £198,500 on 31 December 2020.
Calculate the gain after PPR relief.
Solution
9.9.2 Calculating the tax liability
If a property has not been the taxpayer’s only or main residence, there may well be tax on selling the property. This
will affect buy-to-let properties, second homes or holiday homes.
If an individual has gains from residential property, the legislation allows him or her to allocate their AEA and
losses (unless specific restrictions apply) in the most beneficial way to minimise CGT charged. This means that
a taxpayer with gains from both residential property and other assets should generally use their AEA and losses
against the residential property gains in preference to other gains.
Notes

Activity 11 – Allocation of AEA and losses
Elaine earns £27,420 in 2022/23 from her employment. She also receives £2,500 of rental income from letting
out her holiday home when she is not using it herself.
Elaine sells her holiday home in 2022/23 realising a gain of £45,400. In the same year she also realises gains
of £10,000 on the sale of some shares and £3,000 on the sale of a plot of land.
Calculate Elaine’s capital gains tax liability for 2022/23:
Solution
9.10 Shares
All of the shares held by one individual in one company are generally deemed to be treated as one asset (known as
a “pool of shares”). When some shares are sold, the sale is of a part of the pool of shares, rather than of individual
shares.
Notes

9.10.1 Identification Rules
We need identification rules so that we can establish which shares have been sold and, therefore, what
acquisition costs can be deducted from the disposal proceeds. The rules dictate the order in which the sold shares
are matched with acquisitions.
There are some anti-avoidance rules which require certain shares to be deemed to be disposed of first. The
identification rules state that disposals should be matched in the following order:
1. Shares acquired on the same day as the disposal; then

2. Shares acquired within the following 30 days (earliest first) to combat anti-avoidance; then
3. Shares acquired before the date of sale (using a “pooling” technique).
Example 3 – Identification Rules for an Individual
Eric has the following transactions in the shares of Seagulls plc:
12 May 1992 Bought 950 shares for £1,805
2 Sep 1994 Bought 550 shares for £1,045
1 June 1998 Bought 4,000 shares for £8,000
20 May 2001 Bought 1,000 shares for £12,000
15 June 2022 Sold 6,200 shares for £86,800
4 July 2022 Bought 200 shares for £2,700
Match the 6,200 shares sold in June 2022 with the relevant acquisitions.
No shares in Seagulls plc. were purchased by Eric on the date of sale (15 June 2022).
200 shares in Seagulls plc. were purchased by Eric in the 30 days following 15 June 2022 (on 4 July 2022)
and are now deemed to have been sold.
The remaining 6,000 of the shares sold on 15 June 2022 are then deemed to be matched with earlier
purchases. Prior to 15 June 2022 Eric had purchased 6,500 shares in Seagulls plc. so the sale of 6,000
shares comes from this pool of shares and is treated as a part disposal of the 6,500 shares. It is not attributed
to individual purchases.

9.10.2 Sale by an Individual
Having identified which shares were sold, the cost can be identified. For purchases prior to the sale, the calculation
of cost is carried out by adding together all previous shares purchased and their total cost. Once the total cost has
been ascertained, the disposal is simply treated as a pro-rata portion of the pool, for example, if 3,000 shares out of
a pool of 10,000 have been sold, the cost of these 3,000 will be 3/10 of the total cost in the pool.
Illustration:
Number Cost £
Total no. of shares in pool 10,000 Total cost of shares in pool 15,000
Sale (3,000) Sale 3,000/10,000 x £15,000 (4,500)
Pool c/f 7,000 Pool cost c/f 10,500
The calculation of ‘proceeds less cost’ can then be carried out using actual proceeds received, less a cost of £4,500.
For shares bought on the date of sale or in the 30 days after sale, the individual costs are used.
Activity 12 – Disposal by an individual
Following on from Example 3, calculate Eric’s gain on his disposal of 6,200 shares in Seagulls plc.
Solution
Notes

9.10.3 Rights Issues and Bonus Issues
We have examined the situation where an individual purchases a number of shares. However, it is possible that they
may acquire additional shares by means of rights issues and/or bonus issues of shares.
A bonus issue is the distribution of free shares to shareholders based on existing shareholdings.
A rights issue involves shareholders paying for new shares, usually at a rate below market price and in proportion
based on existing shareholdings.
For identification purposes it is important that the acquisitions arising from bonus and rights issues are matched with
the original holdings that have allowed the shareholder to take up the additional shares. They will be included in the
pool calculation even where there is no cost.
Activity 13 – Bonus Issue and Rights Issue
Max acquired and disposed of shares in Allington plc., a quoted company, as follows:
1 June 1987 Bought 2,000 shares for £11,500
15 October 1988 Bonus 1 for 2 = 1,000 shares for £0
29 November 2010 Rights 1 for 4 at £3 = 750 shares for £2,250
4 December 2022 Sale 2,600 shares for £45,000
Calculate the gain on the disposal of the 2,600 shares.
Solution

The key points covered in this module were:
• CGT paid by individuals.

• CGT - reported on tax return, due by 31 January. Annual exempt amount (AEA) 2022/23: £12,300. Rates:
10% or 20% unless dealing with residential property (18%/28%).
• CGT reported and paid within 60 days for UK residential property disposals with completion dates on or after
27 October 2021 (30 days for completing dates between 6 April 2020 and 26 October 2021).
• Must have a chargeable person making a chargeable disposal (wider than sale) of a chargeable asset
(i.e., not exempt).
• Basic computation = net sale proceeds – cost/MV
• Use MV82 as the cost for a purchase by an individual before April 1982.
• Use MV instead of disposal proceeds for any gift or any transaction between connected parties.
• Current year capital losses must be set off against current year capital gain(s). May waste AEA for individual.
Remaining loss carried forward.
• Brought forward losses should not reduce the gain to a figure lower than the annual exempt amount.
• Spousal or civil partner transactions deemed to take place at original cost. No gain nor loss arises.
• Multiply cost by (A/ (A + B)) on a part disposal. A = gross proceeds received for part disposal. B = market
value of retained part of asset. Use Schedule in rate sheet to calculate cost of disposal of short lease
• Chattel rules are summarised at Appendix 1.
• PPR relief will exempt some/all of the gain on the sale of residential property.
• PPR relief = (actual + deemed occupation)/ownership × chargeable gain
• Residential property charged to tax at 18%/28% rather than 10%/20%. It is advisable to use the AEA and any
losses in the most tax efficient manner.
• Shares in the same company are grouped together. On a disposal by an individual the “identification rules”
show which shares have been disposed of:
a) those bought on the same day
b) those bought in the next 30 days (earliest first)
c) all prior acquisitions grouped together.
• Rights issues and bonus issues are linked to the original holdings of shares giving these rights.
Notes

Appendix 1 – Chattels
Chattel = tangible moveable property
What is the predicted life?

rs
>5
ea
0y
0y
ea
≤5
rs
Wasting chattel Non-wasting chattel follow
(£6,000) rules per table below
Exempt transaction
Chattel Rules:
Cost < Gain exempt Compare gain to 5/3 x (Gross proceeds -

£6,000 £6,000) and use lower figure.
Cost ≥ Loss. Restrict it by replacing gross proceeds Gain or loss, normal rules apply.
£6,000 with £6,000.
Notes

Income tax situation: £
Total income (£32,270 + £4,700) 36,970
Amount remaining in basic rate band (of £37,700) = £13,300
Capital gains situation: £
Total gains 27,250
Annual exempt amount (12,300)
Taxable gains 14,950
These will be taxed as follows:
£13,300 @ 10% 1,330.00
£1,650 @ 20% 330.00
Total capital gains tax 1,660.00
Payment date = 31 January 2024.
Back to Activity
Notes

As the asset was bought by an individual before April 1982 the actual cost of £7,900 is ignored and the asset is
treated as if bought on 31 March 1982 for its MV82 of £10,790.
The gain on the jewellery box is:
Proceeds 33,490
MV82 (as bought pre-82) (10,790)
Chargeable gain 22,700
The annual exempt amount is not shown here as we do not know what other assets Barbara sold in 2022/23, and
the exemption is applied to the total of all her transactions in the year.
Back to Activity
Notes

The vase was not sold at arm’s length and so the market value (£25,600) is substituted for the actual proceeds of £nil.
The painting was received via an inheritance and therefore the probate value will apply as the deemed acquisition cost.
Vase Painting
£ £
Disposal value (market value/proceeds) 25,600 76,400
Incidental costs of disposal (0) (1,000)
Net sale proceeds 25,600 75,400
Less acquisition cost/probate value (7,500) (14,740)
Less cost of acquisition (750) (0)
Chargeable gains 17,350 60,660
If we were going on to calculate the capital gains tax, Bruce’s annual exempt amount of £12,300 would be applied to
the total gains of £78,010.
Back to Activity
Notes

2021/22 £
Current year gains 9,000
Current year losses (9,000)
Net gains 0
Annual exempt amount wasted
Loss carried forward (£10,500 - £9,000) (1,500)
2022/23
Current year gains 13,500
Current year losses (1,000)
Annual exempt amount (12,300)
200
Brought forward losses (see below) (200)
Gain subject to tax Nil
Loss carried forward (£1,500 - £200) (1,300)
Back to Activity

Judy to Richard Sale by Richard
£ £
Proceeds (MV/actual) 12,000 22,000
Cost (12,000) (12,000)
Gain Nil 10,000
Back to Activity
The no gain/no loss rule only applies to spouses. If Richard and Judy are not married, the non-arm’s length rule
would apply as follows:
Judy to Richard Sale by Richard
£ £
Proceeds (MV/actual) 20,000 22,000
Cost (12,000) (20,000)
Gain 8,000 2,000
Back to Activity
Notes

Sale proceeds 30,000
Less expenses (1,200)
Net proceeds 28,800
Less part cost: 30k / (30k + 31.5k) x (£17,000 + £1,000) (8,780)
Note that the total cost of £17,000 plus costs of £1,000 is apportioned. The apportionment is always calculated using
the formula and never by the size of the part of the asset disposed of (one-quarter).
Back to Activity
The cost of the remainder of the land is £9,220, that is, the original cost of £18,000 less the cost of the land per
above (£8,780).
Back to Activity
The chargeable gain is:
Proceeds 170,000
Cost: 95.457/99.289 x £70,000 (67,298)
Back to Activity
Notes

Chattel Rules:
Cost < Gain exempt. Compare gain to 5/3 x (Gross proceeds -

£6,000 £6,000) and use lower figure.
Cost ≥ Loss. Restrict it by replacing gross proceeds Gain or loss, normal rules apply.
£6,000 with £6,000.
Back to Activity
1. The guitar is a wasting chattel and therefore exempt.

2. The antique vase is a non-wasting chattel with proceeds no more than £6,000. It is sold at a gain, and this is
exempt.
3. The painting is a non-wasting chattel with proceeds greater than £6,000 but cost less than £6,000. The normal
gain is:
Proceeds (£8,100 - £810) 7,290
Cost (5,320)
Gain 1,970
This should be compared with 5/3 (£8,100 - £6,000) = £3,500. The lower gain of £1,970 should be used.
4. The chair is a non-wasting chattel with proceeds no more than £6,000 which is sold at a loss. The loss is
calculated by substituting a figure of £6,000 for the real gross proceeds:
Deemed gross proceeds 6,000
Costs of sale (10% x £5,500) (550)
Net sale proceeds 5,450
Cost (probate value) (12,000)
Capital loss (6,550)
The actual loss would have been £7,050, prior to this rule application.
Back to Activity

Calculate the gain: £
Proceeds 198,500
Cost (98,000)
Identify the qualifying ownership:

Total ownership = 13 years, 6 months = 162 months
Qualifying ownership:
Actual occupation = 5½ years = 66 months
Last 9 months = 9 months
Total 75 months
Apply PPR relief: £
PPR relief (75/162 × £100,500) (46,528)
Gain after relief 53,972
Back to Activity
Notes

With taxable income of £17,350 (£27,420 + £2,500 - £12,570) in 2022/23, Elaine has £20,350 (£37,700 – £17,350)
of her basic rate band available to use against her gains. It would be beneficial to use the AEA against the gain on
the residential property as this gain will suffer higher rates of tax than the other gains.
Residential property Other gains Total
£ £ £
Holiday home 45,400
Shares 10,000
Land 3,000
Less: AEA (12,300)
Taxable gains 33,100 13,000
£20,350 @ 18% 3,663.00
£12,750 @ 28% 3,570.00
£13,000 @ 20% 2,600.00
Tax payable 7,233.00 2,600.00 9,833.00
Tutor Note:
The allocation of the different sources against the Basic Rate Band does not impact the final calculation. (£13,000 @
10%) + (£7,350 @ 18%) + (£25,750 @ 28%) = £1,300 + £1,323 + £7,210 = £9,833.
Back to Activity
Notes

To calculate the cost of the earlier purchases (the ‘pool’), the costs should simply be added together and pro-rated
for any disposals.
The pool calculation is:
Number Cost
May 1992 950 1,805
September 1994 550 1,045
June 1998 4,000 8,000
May 2001 1,000 12,000
6,500 22,850
Less: sale in June 2022 (6,000) (21,092)
Carried forward 500 1,758
The gain on the disposal in June 2022 is:
Proceeds 86,800
Cost – July 2022 (2,700)
Cost – pool (per above) (21,092)
Gain on disposal 63,008
Back to Activity
Notes

There are no shares bought on the same day as, or in the 30 days following, the disposal and so they all come from
the pool:
Number Cost
June 1987 2,000 11,500
October 1988 (bonus issue) 1,000 0
November 2010 (rights issue) 750 2,250
3,750 13,750
Less: sale in December 2022 (2,600) (9,533)
Carried forward 1,150 4,217
Sales proceeds 45,000
Cost (per above) (9,533)
Gain on disposal 35,467
Back to Activity
Notes

Module 10. Inheritance Tax
Contents
10.3 The Inheritance Tax calculation 276
10.4 Step 1: Valuing the net chargeable estate 276
10.4.1 Basic rules 276
10.4.2 Life assurance policies 277
10.4.3 Quoted shares 278
10.4.4 Land and buildings 278
10.4.5 Excluded property 279
10.4.6 Exempt transfers 279
10.5 Step 2: Residence nil rate band 282
10.6 Step 3: Nil rate band 284
10.7 Step 4: The Inheritance Tax calculation 285
10.7.1 Reduced tax rate where part of the estate is left to charity 285
10.8 Spouses and civil partners 287
10.8.1 Transfer of unused nil rate band and residence 287
10.8.2 Unused nil rate band 287
10.8.3 Unused residence nil rate band 289
10.9 Quick Succession Relief 290
10.10 Administration 292
10.11 Death estate tax planning 292
10.11.1 Using spouse/civil partnership rules 292
10.11.2 Life assurance 294
10.11.3 Use of charitable donations 294
10.11.4 Post death variations 294
Appendix 1 Solutions to Module Activities 296

10. Inheritance Tax
10.1 Introduction
Inheritance Tax (‘IHT’) is a direct tax on the transfer of wealth. IHT is charged primarily when an individual dies.
This module focuses solely on the IHT arising on the value of the estate that an individual leaves on death. Although
there may be IHT payable during an individual’s lifetime and arising on death on transfers made during life, these
aspects are beyond the scope of the course.
The primary source of legislation for IHT is the Inheritance Tax Act 1984 IHT 1984.
1. calculate the valuation of the death estate and excluded property;

2. calculate inheritance tax due on the death estate;
3. calculate Quick Succession Relief;
4. state the due dates for lodging accounts and making payments; and
5. explain the basic principles of inheritance tax planning.
Achieving these learning outcomes will help you to meet the eighth learning outcome of the syllabus as a whole.
Notes

10.3 The Inheritance Tax calculation
To calculate the IHT due on an individual’s estate, the following steps need to be followed:
Step 1 Calculate the value of the individual’s net chargeable death estate.
This will cover:
• Which assets to include (Section 10.4)

• How to value the assets (Section 10.4.1)
• Any debts owed by the individual, as we need to value the net estate (Section 10.4.1)
• Whether any exempt transfers have been made (Section 10.4.6)
Step 2 Consider whether the residence nil rate band (‘RNRB’) will be available to the individual and deduct
it from the value of the chargeable estate, if applicable (Section 10.5)
Step 3 Calculate the value of any nil rate band (‘NRB’) available and deduct it from the value of the
chargeable estate (Section 10.6)
Step 4 Tax the remaining estate at 40% (or 36% where there has been a large charitable donation – see
Section 10.7)
As we progress through this module, we will cover each of these steps in more detail allowing us to build up a full
IHT calculation.
10.4 Step 1: Valuing the net chargeable estate
10.4.1 Basic rules
The death estate is essentially an individual’s net assets using market value at the date of death (given in the exam).
There are no exempt assets for IHT, unlike for CGT, so even assets like cars and small chattels will be included in
the death estate.
Any legally enforceable debts outstanding at death can be deducted, for example, credit card debts and income tax
and capital gains tax outstanding at death. Where a repayment of tax is due to the deceased this will form an asset
of the estate.
Reasonable funeral expenses (including a tombstone) can also be deducted from the death estate.
Notes

Pro forma death estate calculation
Property X
Less outstanding mortgage (X)
Stocks and shares X
Insurance policy proceeds (see Section 10.4.2) X
Cars X
Personal chattels X
Debts due to deceased X
Cash and savings X
Less debts due by deceased (X)
Less funeral expenses (X)
Net estate X
Less exempt transfers (see Section 10.4.6) (X)
Net chargeable estate (X)
When valuing the death estate, certain assets have their own specific rules which must be adhered to. Three of
these are covered on this course i.e., life assurance policies, quoted shares, and land and buildings.
10.4.2 Life assurance policies
When a life assurance policy is set up there will be a ‘life assured’ and a ‘beneficiary’.
• The ‘life assured’ is the person on whose life the policy is taken out and whose death will trigger a pay-out.
• The ‘beneficiary’ will be the person to whom the policy pays out.
The ‘life assured’ and the ‘beneficiary’ can be the same person, or they can be different people. It is therefore
important to understand how the policy has been set up.
Notes

If the life assured and the beneficiary are the same person, the proceeds from the policy will form part of the
deceased’s death estate and IHT will be chargeable on the policy proceeds.
If the life assured is the deceased but the beneficiary is someone else other than the deceased, the policy proceeds
will not form part of the death estate and will be paid directly to the beneficiary. In this situation, no IHT is payable
on the policy proceeds as they are not part of the death estate.
10.4.3 Quoted shares
The basic rule of using market value at the date of death applies.
However, the executors may need to sell these shares to distribute the proceeds of the estate across several
beneficiaries. This may impact on the market value of the shares used to calculate the IHT due on the death estate
as explained below.
If the shares are sold within 12 months of death and the market value has fallen since the date of death, a claim
can be made to value the shares using the gross proceeds of sale instead of the market value at the date of death.
(The claim applies to the whole portfolio of quoted shares sold within 12 months – it is not possible to pick and
choose which shares the election applies to.)
Should the share portfolio increase in value between death and sale it is not necessary to substitute a higher value
in calculating the value of the death estate.
10.4.4 Land and buildings
A similar rule to that applying to quoted shares applies to land and buildings which form part of the death estate,
and which are sold for a lower value within three years of death. Again, all sales of land and buildings must
be considered, and the election may only be made where a loss has been made when all such transactions are
included.
Notes

10.4.5 Excluded property
UK domiciled individuals pay UK IHT on their worldwide assets. Non-UK domiciled individuals pay UK IHT on their
UK assets only. Their overseas assets are excluded from IHT in the UK. There are rules governing the location of
property, but these are normally quite obvious, for example, tangible property is where it is physically located.
A deceased will be UK domiciled if they were:
• UK domiciled in the three years prior to death; or

• Born in the UK with a UK domicile of origin before moving overseas and then later becoming UK resident (a
returning non-domiciled individual); or
• UK resident in not less than 15 out of last 20 tax years.
Note that this is a slightly different definition than for income tax (‘IT’) and capital gains tax (‘CGT’). There are only
two categories of deemed domicile for IT and CGT – there is no equivalent three-year rule.
10.4.6 Exempt transfers
Any amounts left to certain specific beneficiaries will be exempt from tax completely and can, therefore, be removed
from the estate. This is typically done in the row directly below the asset being left in an exempt legacy in the death
estate calculation.
Any assets passed to any of the following recipients are exempt from IHT:
1. A transfer of assets to a spouse of civil partner is exempt whether on death of during their lifetime. If the
recipient is non-UK domiciled, the exemption is limited to £325,000. It is possible, however, to elect to treat the
non-UK domiciled spouse/civil partner as UK domiciled for IHT purposes only. If this election is made, the result
is that any transfer to the spouse becomes entirely exempt from IHT. However, the quid pro quo of this election
is that the spouse/civil partner’s whole death estate would then be subject to UK IHT rather than just their UK
assets.
2. An outright gift to a UK registered charity is exempt from IHT.
3. A gift to a major UK, recognised political party.
Notes

Activity 1 – Valuing the Death Estate
Sarah Milton recently died leaving a significant estate. She is survived by her husband, Philip, three grown-up
children and several grandchildren. You have collated the following information about her estate on death:
Note £
Half-share in family home 1 645,000
Cash – bank accounts 300,000
Cash – building society accounts 125,000
Antique painting 80,000
Quoted share portfolio 2 327,000
Vintage car 64,900
Jewellery 42,500
In addition, there was a life assurance policy with Sarah as the life assured. This paid out a total of £410,000
to the children (who were the sole beneficiaries of the policy) on Sarah’s death.
Philip received the half-share of the house and the vintage car on Sarah’s death. In addition, £45,000 cash was
left to a registered UK charity. All other assets passed to Sarah’s children and grandchildren. Sarah’s funeral
cost £4,000.
Notes:
1. The house was jointly owned with Sarah’s share passing to Philip on her death.
2. Sarah owned shares in three quoted companies. The executors of her estate sold all these shares
approximately four months after her death. The values at death and on sale were as follows:
MV on Death Gross proceeds on sale
£ £
X plc shares 145,000 151,000
Y plc shares 97,000 72,000
Z plc shares 85,000 86,000
Calculate the taxable value of the chargeable estate on Sarah’s death, assuming her executors make any
beneficial claims.

Solution
Notes

10.5 Step 2: Residence nil rate band
In Step 2 of our calculation, we will consider whether any residence nil rate band (‘RNRB’) is available and deduct it
from the value of the chargeable estate.
If the estate includes residential property that has been the deceased’s residence, a RNRB is available.
The RNRB is being phased in and is the lower of:
• The value of the property; and

• The residence nil rate band applicable at the date of death: £175,000 for both 2021/22 and 2022/23
To receive the RNRB, the property must be left to a direct descendant on death – that is, to the deceased’s children
or grandchildren.
The RNRB is deducted from the overall estate value. It is not a relief set against the value of the property specifically.
Activity 2a – RNRB
James died in March 2023 leaving his estate valued at £450,000 to his two children. The estate included
James’s house which was valued at £250,000.
Calculate the RNRB available on James’s estate.
Activity to Activity 2a
Back to Solution
Notes

Activity 2b – RNRB
Calculate the RNRB if James’s house is worth £90,000.
Solution
Activity 2c – RNRB
Calculate the RNRB if James’s left his estate to his nephew.
Solution to Activity 2c
Solution
If the estate is valued at more than £2 million, then the amount of RNRB will be restricted at a rate of £1 for every £2
over the £2 million limit. In 2022/23 once the estate value exceeds £2.35 million the RNRB will have been restricted
to £nil.
The value of the estate for this restriction is the net value considering any liabilities.
Notes

Activity 3 – Restricted RNRB
Maeve died in February 2023 leaving her estate, valued at £2,120,000 to her grandson. The estate included
Maeve’s house which was valued at £890,000.
Calculate the RNRB available on Maeve’s death estate.
Solution
10.6 Step 3: Nil rate band
In Step 3 we calculate the value of any nil rate band (‘NRB’) available and deduct it from the value of the chargeable
estate.
IHT is designed to tax high-net-worth individuals, and so a nil rate band of £325,000 removes most people from
its charge. Depending on the value of the chargeable estate after the deduction of any RNRB, the IHT will be as
follows:
• Estates ≤ £325,000 – taxed at 0%

• Estates > £325,000 – taxed at 0% up to £325,000 and 40% on the excess
The NRB has been £325,000 since 2009/10 and remains at this figure until 2022/23.
To stop individuals avoiding IHT by transferring their assets out of their estate prior to their death, when calculating
the NRB available to an individual, the legislation requires us to consider any gifts the individual has made in the
seven years prior to their death. The mechanics of how the tax works on these lifetime gifts is beyond the scope of
the course. However, you are expected to know that these rules exist.
Notes

Thus, the NRB available will be £325,000 minus chargeable transfers in the previous seven years (given in the
exam). If the chargeable transfers in the seven years prior to death exceed £325,000, the nil rate band will be
reduced to nil. It is not possible to have a negative NRB.
10.7 Step 4: The Inheritance Tax calculation
In Step 4 of our calculation, once the available RNRB and NRB have been deducted from the net chargeable estate,
the resultant figure is taxed at 40%.
Activity 4 – Tax on the death estate
Mary died in February 2023 leaving her estate, valued at £258,000, to her children. The estate included
Mary’s flat which was valued at £95,000. The value of her chargeable transfers in the seven years prior to her
death is £217,000.
Calculate the IHT payable on Mary’s death.
Solution
10.7.1 Reduced tax rate where part of the estate is left to charity
To encourage individuals to leave part of their estate to charity, a lower IHT rate of 36% may be used (instead of
40%) where the amount left to a registered charity is at least 10% of the ‘baseline amount’.
The ‘baseline amount’ is the amount of the net chargeable estate before the deduction of the RNRB or the
charitable donation but after the deduction of any available NRB.
Notes

There are two implications of paying more than 10% of the baseline amount:
• The deduction of the charitable donation from the death estate; and
• The reduction of the rate of inheritance tax from 40% to 36%.
If the donation is not more than 10% of the baseline amount, the deduction for the donation would still be taken from
the chargeable estate. However, the rate of IHT applicable would remain at 40% since the condition for the reduced
rate has not been met.
Activity 5 – Tax on the death estate (2)
Explain how your answer to Activity 4 would change if Mary had left £20,000 to a UK registered charity on her
death.
Solution
Notes

10.8 Spouses and civil partners
10.8.1 Transfer of unused nil rate band and residence
A proportion of the NRB and/or RNRB that was not used when the first spouse/civil partner died may be used in the
calculation of tax due on the death of the surviving spouse/civil partner. An election must be made by the executors
on the subsequent death of the surviving spouse for this rule to be used.
10.8.2 Unused nil rate band
Upon the first death, tax on the death estate is calculated as normal. However, when the surviving spouse/civil
partner dies, a claim can be made to transfer the unused percentage of the NRB from the original death and to add
it to the NRB available on the second death. To carry out this calculation you will need to look back to the original
death – the NRB may have been different at that time.
You will find the historic NRBs on your rates sheet
The unused proportion is then applied to the NRB applicable in the year of death of the surviving spouse/civil partner.
For example, if the first spouse/civil partner only used 20% of their NRB, then the second spouse/civil partner will be
entitled to 180% of the total available NRB on the date of their death.
Notes

Activity 6 – Transfer of NRB
Terry and June had been married for many years until June died in May 2007. June’s estate consisted of
assets worth £266,500, £92,500 being left to Terry, the remainder to her son.
Terry died in March 2023, leaving an estate of £620,000. There was no residential property in either estate.
Calculate the IHT payable on Terry’s death, assuming neither spouse had made any previous chargeable
transfers.
Solution
Notes

10.8.3 Unused residence nil rate band
The same rule applies to any unused RNRB.
Activity 7 – Transfer of RNRB
Mark died in March 2012 leaving everything to his wife, Jane. Jane died in June 2023 leaving her estate to her
daughter. The estate included the family home worth £550,000. The total estate was valued at £1,035,000.
Neither Mark nor Jane made any chargeable transfers during their lifetime.
Calculate the IHT payable on Jane’s death estate.
Solution
Notes

10.9 Quick Succession Relief
Quick Succession Relief (‘QSR’) exists to reduce the tax burden where IHT is charged twice in quick succession on
the same assets with the second charge being as a result of death.
If the two charges occur within five years of each other, the tax on the second charge is reduced by a percentage
shown below:
These rates can be found on your rates sheet
Gap between first and second charge Percentage reduction
0 – 1 years 100%
1 – 2 years 80%
2 – 3 years 60%
3 – 4 years 40%
4 – 5 years 20%
QSR is calculated as:
Tax on transfer one x Value of transfer one – tax on transfer one x relevant %
Value of transfer one
Notes

Activity 8 – Succession Relief
Blanche died three and a half years ago, leaving an estate of £418,000 to her daughter Deirdre. The IHT paid
on Blanche’s estate was £37,200.
Deirdre is tragically killed in a road accident on 3 May 2022 and leaves a total estate of £595,000 to her
daughter, Tracy. The estate includes the assets received from Blanche’s estate and a residential property
valued at £230,000. Deirdre had not made any previous chargeable transfers.
Calculate the IHT due on Deirdre’s death estate.
Solution
Notes

10.10 Administration
Accounts Payment
The executor or ‘personal representative’ (‘PR’) must IHT is payable by the executor/ PR and is due at the
submit an account within 12 months of the end of same time as delivery of the account (i.e., 12 months
month of death. from the end of month of death).
The executor/PR needs to submit the account and However, interest is charged on any IHT payable from
pay any tax due before they can obtain a ‘grant of six months from the end of month of death.
representation’ in England and Wales or a ‘grant of
confirmation’ in Scotland. This enables them to deal
with the estate.
Typically, the account is usually submitted well before

the 12-month deadline.
Banks are often unwilling to release funds until

the estate is finalised, and grant of representation/
confirmation is obtained. However, some banks and
building societies will allow funds to be released so
that IHT can be paid prior to the estate being finalised.
Accounts do not have to be delivered in respect of

excepted estates (i.e., low value estates with no IHT
payable).
10.11 Death estate tax planning
This section looks at ways to minimise IHT.
10.11.1 Using spouse/civil partnership rules
One of the most common forms of IHT planning involves ‘equalising estates’ by using the inter-spouse/civil partner
exemption.
Notes

Each individual has a nil rate band, currently £325,000, and they may also be entitled to the residence nil rate band.
A basic piece of tax planning is to make sure that each individual makes the best use of their available nil rate
band(s). This is particularly relevant for married couples or civil partners who wish to transfer assets directly to their
children. It is also possible to use the transfer of the nil rate band(s) to reach a similar outcome.
Activity 9 – Equalising the estate
Mrs Smith has an estate of £1,000,000. Mr Smith has no estate. Mrs Smith wishes to leave the full estate,
including the family home worth £350,000, to their daughter. She has calculated that if she were to die in
2022/23 and leave the estate to her daughter, then the IHT payable would be £200,000. This is calculated as:
Estate 1,000,000
Less RNRB and NRB (500,000)
500,000
£500,000 @ 40% 200,000
Explain how the estate could be passed on in a more tax-efficient manner.
Solution
Notes

10.11.2 Life assurance
Where the donor does not want to burden beneficiaries with a tax liability, life assurance can be used to cover the
liabilities arising due to death.
It is important to arrange such a policy so that it pays out to the beneficiary rather than the deceased to avoid IHT
being due on the proceeds as explained at 10.4.2 above.
10.11.3 Use of charitable donations
The lower rate of 36% for estates with sizeable charitable legacies means that it is important to ensure that anyone
wishing to leave a significant amount to charity passes the ‘10% test’ where possible. Depending on the amounts
involved, this can allow additional amounts to reach beneficiaries after tax.
It is possible to write a will to include a ‘formula clause’ which specifies that the amount(s) going to charity will be the
greater of:
• A specific amount listed in the will; or

• 10% of the ‘baseline amount’ computed in accordance with the legislation.
However, the charity will receive more if a donor is able to donate the same cash value under the Gift Aid scheme
whilst alive, because the charity will be able claim an additional 25% from HMRC in respect of the tax paid on the
donation (see Module 3).
10.11.4 Post death variations
A beneficiary of a will does not need to accept any asset(s) from the will. They can ask the executors to make a
variation to the will so that it is treated as if the asset(s) were specifically bequeathed to a different person. The
variation must be made within two years of death.
If the will is varied, the IHT on the deceased’s estate will be calculated as if the deceased had left the property
subject to the variation directly to the new beneficiary.
This can be useful when the individual has made an inappropriate will (e.g., not using the nil rate band effectively),
does not have a will and so died intestate or the beneficiary is looking for the inheritance tax liability to skip a
generation.
Notes

This module has covered the following key points:
Calculating the Taxable Death Estate

• Add together market value of individual assets owned at date of death.
• Deduct spousal transfers, charitable/political donations, reasonable funeral expenses, and enforceable debts.
• Where there is a life assurance policy check to see whether the deceased is the ‘beneficiary’ or not. If they are,
proceeds form part of the estate.
• Elections available to reduce estate where quoted shares/land are sold at a loss within 12 months/3 years of death.
• Do not include ‘non-UK property owned by a non-UK domicile (“excluded property”).
Calculating the Tax

• RNRB available where property which was the deceased’s residence is left to a direct descendant.
• NRB available on death will be reduced by any chargeable transfers in the seven years before death.
• Tax the chargeable estate at 0% (on part covered by RNRB and NRB) and 40% in excess of the NRB.
• Where 10% of ‘baseline amount’ (being the chargeable estate ignoring the charitable donation and the RNRB) is
left to charity, then the tax rate is 36%.
• Transfer unused RNRB and/or NRB on the death of one spouse/civil partner to the death estate of the surviving
spouse/civil partner.
• Apply QSR to reduce final tax if part of estate previously taxed in last five years.
Administration
• Accounts from executors/PRs on death within twelve months of death.
• Excepted estates do not need a return.
• Payment due along with account/interest charged from six months from end of month of death.
Planning
• Use nil rate band – equalise estates.
• Consider transfer of nil rate band.
• Use life assurance policy with proceeds payable to beneficiary (not the deceased) to avoid IHT on proceeds
(proceeds to transferee who will be liable for tax).
• Consider use of charitable donations to reduce tax to 36% on chargeable estate.
• Post-death variation of will possible if conditions met.
You should now be able to meet all the learning outcomes of this module. Should you not be able to do so, please
go back and read the relevant section(s).
Notes

Appendix 1 Solutions to Module Activities
Sarah’s taxable estate is valued as follows:
Note £
Half-share of house 1 645,000
Less: spousal exemption (645,000)
Cash – bank and building society 2 380,000
Antique painting 80,000
Quoted share portfolio 3 309,000
Vintage car 1 64,900
Less: spousal exemption (64,900)
Jewellery 42,500
Life assurance policy 4 0
Funeral costs 5 (4,000)
Total 807,500
Notes:
1. As the house and car were passed to Philip these are exempt from tax.
2. The cash totalled £425,000 (£300,000 + £125,000). As £45,000 was left to a registered charity only £380,000 is
included in the estate. The amount going to charity is exempt.
3. Some of the quoted shares rose in value whilst others fell. However, the net effect was a fall from £327,000 to
£309,000 and, therefore, the executors are able to claim to use the lower total value of £309,000.
4. There is no amount recorded for the life assurance policy as the beneficiary was not Sarah.
5. Sarah’s funeral costs may be deducted from her estate.
Back to Activity
Notes

RNRB is lower of:
RNRB in 2022/23 175,000
Main residence left to direct descendants 250,000
RNRB available 175,000
Back to Activity
RNRB is lower of:
RNRB in 2022/23 175,000
Main residence left to direct descendants 90,000
RNRB available 90,000
Back to Activity
Solution to Activity 2c
James leaves his entire estate to his nephew who does not qualify as a direct descendant and so no RNRB is
available.
Back to Activity
Notes

The available RNRB is reduced as the net estate value exceeds £2,000,000. The reduction is 1/2 (£2,120,000 -
£2,000,000) = £60,000.
RNRB = £175,000 - £60,000 = £115,000
Back to Activity
IHT on death estate
£ £
Value of taxable estate 258,000
Less RNRB (main residence value) (95,000)
Available NRB at death 325,000
Chargeable transfers in last 7 years (217,000)
Available NRB (108,000)
Chargeable estate 55,000
IHT payable:
£55,000 @ 40% 22,000
Back to Activity
Notes

Mary’s ‘baseline amount’ is £150,000 – the value of her net chargeable estate before the deduction for the charitable
gift and the RNRB and after the deduction of any available NRB (£258,000 – £108,000). Mary has given at least
10% of this amount to charity and, therefore, any taxable estate will only be subject to tax at 36%.
Net estate 258,000
Less charitable donation (20,000)
Net chargeable estate 238,000
Less RNRB (95,000)
Available NRB at death per Activity 4 (108,000)
Chargeable estate 35,000
IHT payable:
£35,000 @ 36% 12,600
Back to Activity
Notes

On June’s death in 2007/08, her chargeable estate would have been £174,000 (gross estate of £266,500 less
exempt legacy of £92,500 to spouse).
The NRB in June’s year of death was £300,000. Only 58% (£174,000/£300,000 × 100%) of this was used to
calculate the IHT liability. Therefore, 42% of the NRB was unused.
Assuming Terry’s executors make a claim to use the 42% unused relief from June’s death, the total NRB available
on Terry’s death is:
£ £
Chargeable death estate 620,000
Less Terry’s NRB 325,000
+ 42% spouse’s unused NRB × £325,000 136,500
461,500
Chargeable transfers in last 7 years (0)
NRB available (461,500)
158,500
IHT payable:
£158,500 × 40% 63,400
Back to Activity
Notes

Chargeable estate 1,035,000
Less: RNRB (including 100% spouse unused) (350,000)
NRB (including 100% spouse unused) (650,000)
35,000
IHT payable:
£35,000 × 40% 14,000
Back to Activity
Deirdre’s estate
Deirdre inherited £380,800 (£418,000 less IHT of £37,200) from Blanche’s estate.
There is a gap of between two and three years from one death to the next – QSR of 60% applies.
Deirdre’s total estate 595,000
Less: RNRB (175,000)
NRB (325,000)
95,000
£95,000 @ 40% 38,000
Less: QSR: £37,200 × (£380,800/£418,000 × 60%) (20,334)
17,666
Back to Activity
Notes

There are two ways to make this more tax efficient:
• If Mrs Smith had given half of her estate which would include half the house to Mr Smith during her lifetime
(which is exempt via the spousal exemption) she could have left the other half to their daughter on her death
and used her nil rate band and RNRB against this, resulting in no tax. On his death, Mr Smith could leave his
estate to their daughter and no IHT would be payable as a result of his nil rate band and RNRB. This is known
as ‘equalising estates’.
• Mrs Smith could leave everything to Mr Smith on her death, resulting in no IHT as this is an exempt transfer. In
addition, she would have used none of her nil rate band nor her RNRB. On his death, Mr Smith could make an
election to use 200% of the nil rate bands available to him at the time of his death (being his nil rate band and
residence nil rate band [at future rates] plus the unused 100% from his wife). This would allow assets worth at
least £1,000,000 to be passed on with no IHT.
In each case, Mrs Smith would have to be comfortable that her husband’s subsequent will passed the assets to
their daughter if this is what she wanted to achieve. She would also have to be happy that their daughter would not
receive the assets until Mr Smith’s death.
Back to Activity
Notes

Module 11. Stamp Taxes
Contents
11.3 Stamp Duty 305
11.3.1 The Stamp Duty Charge 305
11.3.2 The Consideration 306
11.3.3 Administration of Stamp Duty 307
11.3.4 Penalties and Interest 307
11.4 Stamp Duty Reserve Tax (“SDRT”) 307
11.5 Stamp Duty Land Tax (“SDLT”), Land and Buildings Transaction Tax (“LBTT”)
and Land Transaction Tax (“LTT”) 308
11.5.2 Rates of tax 308
11.5.3 Mixed Use of Property 310
11.5.4 Higher Rates of Tax on Additional Residential Properties 311
11.5.5 Relief for First-Time Buyers 312
11.5.6 The Consideration 313
11.5.7 Leases 315
11.5.8 SDLT Administration 317
11.5.9 Penalties and Interest 317
11.5.10 LBTT Administration 318
11.5.11 LTT Administration 318
11.6 Summary 319

11. Stamp Taxes
11.1 Introduction
Stamp taxes are levied on share and property transactions. These taxes have been in existence for many years,
with some of the legislation used today dating from the 19th century. There are three categories of stamp taxes in
existence today – Stamp Duty, Stamp Duty Reserve Tax (“SDRT”) and the land taxes.
The land taxes include Stamp Duty Land Tax (“SDLT”) which is charged on property acquisitions and land
transactions in England and Northern Ireland. Land and Buildings Transaction Tax (“LBTT”) has replaced SDLT in
Scotland and Land Transaction Tax (“LTT”) has been introduced as the Welsh equivalent. Each of these taxes will be
briefly considered in this chapter.
Stamp tax rates are provided on the rates sheet. The Rate Sheet shows the information provided on the tax rates sheet.
Stamp taxes are indirect taxes paid on the purchase of certain assets. As the tax attaches to the transaction, both
individuals and companies can be subject to these taxes and follow, broadly, the same rules. Where stamp taxes
are incurred, they should be included as part of the purchase price of that asset and, therefore, can reduce the
chargeable gains arising upon its eventual sale.
1. identify situations where stamp duty will be payable and describe basic advice on the administration of the tax;
2. identify situations where stamp duty reserve tax will be payable and calculate the tax due;
3. calculate a stamp duty land tax, land & buildings transaction tax or land transaction tax liability; and
4. identify situations where stamp duty land tax, land and buildings transaction tax and land transaction tax will be
payable and describe basic advice on the administration of the tax.
Achieving these learning outcomes will help you to meet the seventh learning outcome of the course as a whole, as
per the syllabus.
Notes

11.3 Stamp Duty
11.3.1 The Stamp Duty Charge
Stamp duty is the oldest of the stamp taxes and the primary legislation is contained in the Stamp Act 1891 SA1891
and the Stamp Duties Management Act 1891 SDMA1891. The tax was originally levied on ‘instruments’ (broadly,
written documents used in transactions). Finance Act 2003 amended the rules relating to stamp duty and so this duty
is now only chargeable on an instrument to purchase shares or securities, that is, ‘stock or marketable securities’.
Stamp duty is the purchaser’s liability and the rate of tax is 0.5%. The rate is applied to the price paid by the
purchaser and the final duty is always rounded up to the nearest £5. Despite the fact that 0.5% seems a very low
figure, this could be a substantial sum where the purchase price itself is large. Stamp duty is not chargeable where
the value of a transfer is less than £1,000 as this would give rise to a stamp duty charge of less than £5.
Activity 1 – Stamp duty calculation
Robin sells 14,920 shares in Reliant Ltd to Derek for a price of £17.63 per share. What stamp duty is due and
who is responsible for paying this?
Solution
The rate of 0.5% (known as the ‘ad valorem rate’ from the Latin meaning ‘according to value’) relates to purchase
situations.
Notes

There are a number of transfers where no stamp duty is payable. Some of the exempt transfers listed are:
• A transfer of shares between trustees on changes of composition of trustees or when shares are transferred
to a trust;
• A lifetime gift of shares;
• A transfer of shares on marriage or civil partnership;
• A transfer of shares in relation to a divorce or dissolution of a civil partnership agreement; and
• A transfer of shares left in a will.
11.3.2 The Consideration
If the actual consideration is not known but a maximum or minimum figure is set by the contract, then the 0.5% will
apply to the maximum or minimum that has been set. Where both a maximum and a minimum figure is shown,
the maximum will be used. No additional payment will be due and no repayment will be made based on the final
figure paid.
Activity 2 – Calculating Stamp Duty
Marion sells 75,000 shares in Sherwood Ltd to Mr Tuck. They agree a fixed price of £7.69 per share plus a
percentage of Sherwood’s profits for the following two accounting periods. The sale contract specifies that the
maximum additional sum will be £300,000 but Mr Tuck ultimately only pays £240,000 additional consideration.
What stamp duty is payable?
Solution
Notes

11.3.3 Administration of Stamp Duty
On a transfer of shares, a ‘stock transfer form’ should be completed showing details of the transferor, the
transferee and the amount of any consideration. This form also has space to record the fact that the transfer is
exempt from stamp duty if applicable (see Section 11.3.1 above). This form should be sent to the Stamp Office to be
received within 30 days of it being executed i.e., signed along with the relevant stamp duty. Late stamping and late
payment attract interest and penalties.
11.3.4 Penalties and Interest
If the transfer document is presented within one year after the end of the 30-day period mentioned above, a
maximum penalty of the lower of £300 or the amount of the unpaid duty will be payable. If the transfer document
is not presented until after the end of the one-year period, the maximum the penalty will be is the higher of £300 or
the amount of the unpaid duty. The penalties can be reduced or cancelled if HMRC see fit.
Interest will also be due where stamp duty is paid late. This will be calculated on a daily basis up to the day the
stamp duty is actually paid. The amount of interest payable will be based on the duty unpaid and how late the
payment is. It is not possible to reduce the interest and the interest is not deductible for income tax (or corporation
tax) purposes.
The document will normally remain unstamped by HMRC and, hence, not enforceable until the penalties and/or
interest have been paid.
Penalties of up to £3,000 are chargeable for the filing of a fraudulent return and for fraudulently failing to disclose
all facts and circumstances affecting the duty payable.
11.4 Stamp Duty Reserve Tax (“SDRT”)
SDRT was introduced in 1986 and is designed to charge duty on paperless share transactions, that is, ones on
which stamp duty itself cannot be charged as there is no ‘instrument’. Electronic share transactions are carried out
using the CREST electronic settlement system.
SDRT is chargeable at a rate of 0.5%. This is not rounded up or down – the exact figure is used. When
transactions are processed through the CREST system the SDRT is deducted by the system and passed to HMRC
via an electronic link.
Notes

11.5 Stamp Duty Land Tax (“SDLT”), Land and Buildings Transaction Tax (“LBTT”)
and Land Transaction Tax (“LTT”)
11.5.1 Introduction
Stamp Duty Land Tax (“SDLT”) is payable on land and property transactions in England and Northern Ireland.
Land and Buildings Transaction Tax (“LBTT”) is payable on land and property transactions in Scotland and Land
Transaction Tax (“LTT”) is payable on land and property transactions in Wales.
All three taxes affect broadly the same types of transactions - the purchase/sale of land or property and the grant
or assignment (assignation in Scotland) of a lease. Most of us will have to pay SDLT/LBTT/LTT on the purchase
of our home. Companies also pay SDLT/LBTT/LTT on the purchase/rent of land or property.
11.5.2 Rates of tax
The current rates of these taxes depend on whether the property is residential or non-residential. The rates
are reproduced on your rates sheet. The table of rates makes reference to a ‘non-natural person’; this includes
a company, a partnership including a company or a collective investment scheme.
Non-residential property includes commercial properties such as shops or offices, agricultural land and buildings,
forests and any other land or property not used as a residence.
When using the rates table you should pay close attention to whether SDLT, LBTT or LTT applies to a transaction
and whether the residential or non-residential rates should be used.
With all three taxes, more than one rate of tax can apply to the consideration depending on which of the bands are
crossed. For example, a residential property bought for £500,000 in England or Northern Ireland will be taxed at 0%
up to £125,000, 2% from £125,001 to £250,000 and 5% on the excess over £250,000 (SDLT, residential rates).
Where a ‘non-natural person’ (as defined above) buys residential property in England or Northern Ireland, SDLT is,
broadly, charged at 15% of the total consideration for purchases over £500,000.
Whichever system applies, the SDLT/LBTT/LTT is always rounded down to the nearest pound.
Notes

Activity 3 – Calculation of SDLT
Jemima owns a residential property in London, England. She sells it to Peter for £386,000. Calculate the
SDLT payable and state who it is payable by.
Activity to Activity 3
Solution
Notes

Activity 4 – Calculation of LTT
Mick owns a factory in Cardiff, Wales. He sells this to Sean for £250,250. Calculate the LTT payable and state
who it is payable by.
Solution
11.5.3 Mixed Use of Property
The SDLT/LBTT/LTT rate to be applied will depend on whether the property is residential or non-residential. Where a
property is mixed use, it will be treated entirely as non-residential use.
Notes

Activity 5 – Mixed Use of Property
Sanjit sells a property in Scotland to Andy for £620,000. The property is 75% used for residential purposes
and 25% used for non-residential purposes and the consideration is split in this proportion. Calculate the LBTT
due and state who it is payable by.
Solution
11.5.4 Higher Rates of Tax on Additional Residential Properties
Higher rates of SDLT/LBTT/LTT are payable on residential property when the individual making the acquisition
ends up owning more than one dwelling at the end of completion day and they are not replacing their only or main
residence. The additional tax applies to dwellings costing £40,000 or more.
For the purposes of SDLT, the ‘surcharge’, or additional tax charge, is 3% of the total consideration for properties
purchased for £40,000 or more. For LTT and LBTT purposes, the additional tax charge is 4% of the total
consideration for properties purchased for £40,000 or more. The tax is aimed at second properties and buy-to-let
properties. There are reliefs available where an individual purchases a new home and sells their old home within a
designated timeframe. The detailed provisions on the reliefs are outside the scope of the syllabus.
Notes

Spouses and civil partners are treated as one ‘economic unit’ for these purposes meaning each couple can only
have one main home and any additional residential property acquisitions by either spouse/civil partner will attract the
3%/4% surcharge (this rule is extended to cohabitants for LBTT purposes).
There are reliefs available if two or more properties are purchased at the same time (e.g., if a block of ten flats is
purchased). Again, these are outside the scope of the syllabus.
Activity 6 – Additional residential property
Peter, from Activity 3, already owned a residential property in Cumbria at the time he purchased the residential
property in London for £386,000. Calculate how much SDLT is now payable.
Solution
11.5.5 Relief for First-Time Buyers
There is a relief for first-time buyers for SDLT and LBTT.
In England and Northern Ireland, the relief applies for SDLT for purchases of £500,000 or less. First-time
buyers purchasing a residential property as their only or main residence for £300,000 or less pay no SDLT (the 0%
threshold is extended to £300,000 instead of £125,000). If the first-time buyer is buying a property for more than
£300,000 but less than £500,000, they pay 5% on the excess amount above £300,000. First-time buyers buying a
property for more than £500,000 do not receive any relief, the normal rates apply to the total consideration.
Notes

First-time buyers in Scotland will be entitled to relief where they purchase a residential property as their only or
main residence for £175,000 or less (the 0% threshold is raised from £145,000 to £175,000). First-time buyers
in Scotland buying a property for more than £175,000 but less than £250,000 will pay 2% on the excess above
£175,000. If first-time buyers buy a property for more than £250,000, the normal rates of LBTT will apply to the
excess.
Therefore, the approach in Scotland is different to that taken in England and Northern Ireland. Under the SDLT
regime, purchases above the first-time buyer threshold of £500,000 receive no relief whereas, in Scotland, a
purchase above the first-time buyer threshold of £250,000 will still receive an element of relief.
The Welsh Government has decided against introducing a similar relief in Wales as the 0% limit for LTT
(£180,000) is already higher than the equivalent limits for both SDLT and LBTT (at £125,000 and £145,000
respectively).
You should assume that questions in this course do not relate to first-time buyers unless specifically stated.
11.5.6 The Consideration
Tax is due on the consideration paid for the property. The definition of consideration includes ‘money or money’s
worth’. Where non-cash consideration is used (e.g., an asset) then the market value of that item will be taken to be
the consideration.
Similarly, if debts are used as payment (e.g., either the purchaser assuming existing debts of the vendor or the
purchaser releasing the vendor’s debt) then the amount of the debt assumed or released will be taken as the
consideration.
The consideration will include any VAT chargeable on the property at 20%, meaning that SDLT/LBTT/LTT can be a
tax on another tax.
In some situations, part of the consideration may be deferred. The deferred consideration must still be included
within the total consideration in calculating the tax due.
If part of the purchase price is contingent on a future event, tax will be payable assuming that the event will take
place and the contingent sum will be paid. Where the contingent sum is uncertain then a reasonable estimate of the
consideration should be made.
Notes

Activity 7 – Determination of Consideration
Determine the consideration in each of the following cases and calculate the SDLT due (assuming a sale in
England or Northern Ireland):
1. Philippe sells a one-year old factory to Jean-Paul for £220,000 plus VAT at 20%.
2. Marie sells a four-year old shop to Lisa for £122,000 plus an additional £20,000 if the property use
changes in the next two years. There is no VAT on this transaction.
3. Malcolm sells a ten-year old mansion house to Gillian for a total price of £1,093,000. £893,000 is payable
now and the remaining £200,000 is payable in six months’ time.
4. Vanessa sells her mansion to a UK company, Boxter Ltd, for £1.9 million cash, plus a diamond necklace
worth £215,000.
Solution
Notes

11.5.7 Leases
When dealing with leases, you may come across the ‘grant’ of a lease and/or the ‘assignment’ (or assignation) of
a lease. The grant of a lease refers to the situation where a lease is first established, that is, initially granted by the
landlord. An assignment/assignation refers to the sale or transfer of an existing lease from one tenant to another.
Assignment
On the assignment/assignation of a lease from one tenant to another there is normally one single capital sum paid.
SDLT/LBTT/LTT will be due on the capital sum paid on the assignment/assignation of a lease. The rates depend on
whether the property being leased is residential or non-residential and are the same as those used for the purchase
of a property.
Grant
On the grant of a lease, the tenant may make a one-off payment known as the ‘lease premium’ to secure the lease
(see Module 4). This is paid in addition to the ongoing rent for the lease.
SDLT/LBTT/LTT will be due on any lease premium paid on the grant of a lease. The rate of tax on a lease premium
again depends on whether the property is residential or non-residential.
In addition to the tax due on the premium, a further sum will also be payable on the grant of a lease. This will be
based on the net present value (“NPV”) of the lease which is determined by the future rental payments.
Different tables of rates should be used when calculating SDLT/LBTT/LTT on the NPV of the lease rental payments.
These are included on your rates sheet. The NPV of the lease is calculated using a formula and it will be provided to
you in the exam should you require it.
Notes

Example 1 – SDLT on Leases
Fred grants a 14-year lease on a small shop in Northern Ireland to a new tenant, Wilma, in July 2021. The
agreement provides that a lease premium of £154,000 is payable. The annual rent on the shop is going to be
£3,600 and the net present value of the rental payments amounts to £39,313. What SDLT is due?
The standard SDLT on a premium of £154,000 would be £80 (£150,000 x 0% + £4,000 x 2%).
In addition, SDLT is due on the NPV of the rental payments of £39,313. The applicable rate is 0% and no
further SDLT is payable.
Total SDLT payable by Wilma is £80.
Activity 8 – SDLT on Leases
How would your answer change if the lease premium is reduced to £9,000 and the annual rent is increased to
£15,000 with a NPV of £163,807?
Solution
Notes

Remember that when you are dealing with SDLT/LBTT/LTT on the grant of a lease you will have two calculations
to do. You need to calculate the tax on the lease premium, and then tax on the NPV of future rents. The two figures
can be added together to give a total SDLT/LBTT/LTT figure due on the transaction.
11.5.8 SDLT Administration
A ‘land transaction return’ must be completed online or on paper and returned to HMRC to report the transaction.
The deadline for this is within 14 days of the ‘effective date’ of the transaction. The ‘effective date’ of a purchase is
generally the completion date.
This return will normally be completed by the solicitor dealing with the transaction but has to be signed by the
purchaser, indicating that the details are complete and correct.
SDLT is due to be paid by the purchaser of the property (or the tenant if a lease) at the same time as the land
transaction form is filed.
When the land transaction return is received by HMRC, the information on the form will be checked and a certificate
will be issued by HMRC if the following conditions are met:
• The return is correctly completed;

• Any relevant supporting information has been included;
• The calculation of SDLT is correct, and
• The correct payment has been made.
This certificate is important because, without it or an equivalent self-completed certificate stating that no return is
due, the transaction cannot be entered in the records of the Land Registry.
Records of the transaction should be kept for six years from the date of the transaction. A penalty of up to £3,000
can be charged for failing to do so.
11.5.9 Penalties and Interest
The penalties for late returns and incorrect returns for SDLT follow the new harmonised penalty rules covered in
Module 1. You should refer back to that module for more information.
If any person is knowingly concerned in the fraudulent evasion of SDLT they are liable, on conviction, to
imprisonment of up to seven years and/or a fine.
Interest will be payable on late paid SDLT.
Notes

11.5.10 LBTT Administration
Revenue Scotland is responsible for the administration of LBTT, supported by Registers of Scotland. None of the
HMRC administration or penalty rules apply to LBTT.
An ‘LBTT return’ must be submitted and payment of tax made before title to the land can be registered with the
Keeper of the Registers of Scotland. The deadline for this is within 30 days of the ‘effective date’ of the transaction.
The tax payable must be paid at the same time as the LBTT return is submitted.
11.5.11 LTT Administration
The Welsh Revenue Authority deals with the administration of LTT.
An ‘LTT return’ must be submitted within 30 days of the effective date of the transaction.
The tax is due along with the LTT return.
You should now be able to meet learning outcome number three and four.
Notes

11.6 Summary
The following key points were covered in this module:
Stamp Duty
• 0.5% on sales of ‘stocks or marketable securities’ (round up to £5)

• Purchaser’s liability
• Not collectable if the transaction is for less than £1,000
• Non-fixed consideration – use 0.5% of maximum/minimum if known. If both provided, use maximum
• 30 days to complete stock transfer form and pay tax
• Late filing penalties and interest apply
Stamp Duty Reserve Tax (SDRT)
• Applies on paperless share transactions (i.e., CREST)

• 0.5% rate (no rounding)
Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT) and Land Transaction
Tax (LTT)
You should now be able to meet all of the learning outcomes of this module. Should you not be able to, please go

The total consideration is £263,039.60 (14,920 shares x £17.63). Stamp duty at 0.5% would result in a charge of
£1,315.20, which would be rounded up to a final charge of £1,320.
Derek is responsible for paying this amount.
Back to Activity
The consideration that is known amounts to 75,000 x £7.69 = £576,750.
In addition, there is a further sum that is not yet known but which is capped at £300,000. The stamp duty is,
therefore, due on a total amount of £876,750. At 0.5% this would be £4,383.75 rounded up to £4,385.
There would be no refund of tax despite the fact that only £240,000 was actually paid in relation to the profits.
Back to Activity
Peter’s purchase falls in the 0%,2% and 5% bands. This gives SDLT of £9,300 (see below).
£0 to £125,000 x 0% = £nil
£125,001 to £250,000 x 2% = £2,500.00
£250,001 to £386,000 x 5% = £6,800.00
Total SDLT = £9,300.00
Payable by Peter.
Back to Activity
Notes

Sean’s purchase falls in the 0%,1% and 5% bands. This gives LTT of £262 (see below).
£0 to £225,000 x 0% = £nil
£225,001 to £250,000 x 1% = 250.00
£250,001 to £250,250 x 5% = 12.50
Total LTT = £262.50
Rounded down to £262, payable by Sean.
Back to Activity
The property will be treated as fully non-residential and the LBTT will amount to £19,500.
£0 to £150,000 x 0% = £nil
£150,001 to £250,000 x 1% = £1,000.00
£250,001 to £620,000 x 5% = £18,500.00
Total LBTT = £19,500.00
Andy will be liable for the LBTT.
Back to Activity
Notes

Peter’s purchase falls in the 0%,2% and 5% bands. In addition there is 3% due on the total consideration as it
exceeds £40,000 and the purchase is an additional residential property. This gives SDLT of £20,880 (see below).
£0 to £125,000 x 0% = £nil
£125,001 to £250,000 x 2% = £2,500.00
£250,001 to £386,000 x 5% = £6,800.00
£9,300.00 (as before)
£386,000 x 3% = £11,580.00
Total SDLT = £20,880.00
Back to Activity
Notes

1. With VAT the total price is £264,000. The non-residential SDLT is:
£0 to £150,000 x 0% = £nil
£150,001 to £250,000 x 2% = £2,000.00
£250,001 to £264,000 x 5% = £700.00
Total SDLT = £2,700.00
2. Part of the consideration is contingent but will be treated as if it will definitely be payable, making the
consideration £142,000. As the property is non-residential, 0% applies and no SDLT is due from Lisa.
3. Despite the fact that some of the consideration is deferred, SDLT is due on the full amount of the consideration
of £1,093,000. The residential SDLT rates are 0%, 2%, 5% and 10% and the duty payable by Gillian is,
therefore, £53,050.
£0 to £125,000 x 0% = £nil
£125,001 to £250,000 x 2% = £2,500.00
£250,001 to £925,000 x 5% = £33,750.00
£925,001 to £1,093,000 x 10% = £16,800.00
Total SDLT = £53,050.00
4. The total consideration (cash and necklace) amounts to £2,115,000. The property is residential, costs over
£500,000, and the purchaser is a company and so a flat rate of 15% applies, making total SDLT of £317,250
paid by Boxter Ltd.
Back to Activity
As the premium is now less than £150,000, there will be no SDLT due on this. SDLT is due on the NPV of the rental
payments of £163,807. The table shows that amounts up to £150,000 are taxable at 0% and only the excess at 1%.
The NPV exceeds £150,000 by £13,807 and so SDLT of £138.07, rounded down to £138, is due.
Back to Activity
Notes

Module 12. Environmental Taxation
and Relief
Contents
12.3 UK Environmental Taxes 326
12.3.1 Fuel Duty and Vehicle Excise Duty 326
12.3.2 Air Passenger Duty 327
12.3.3 Aggregates Levy 328
12.3.4 Landfill Tax, Scottish Landfill Tax and Landfill Disposals Tax 329
12.3.5 Climate Change Levy 331
12.3.6 Plastic Packaging Tax 333
12.4 Tradeable Permits 333
12.4.2 Tradeable Permits Example 333
12.4.3 The Economics of Tradeable Permit Schemes 334
12.4.4 Overview of Tradeable Permit Schemes in the UK 334

12. Environmental Taxation and Relief
12.1 Introduction
This module will explore what environmental taxes there are, who they are paid by and provide examples of how
changes to environmental taxation can influence behaviour.
Human activities have increased carbon dioxide emissions, driving up temperatures. There is uncertainty about
how great the impact of a changing climate will be. It could cause fresh water shortages, alter our ability to produce
food and increase the number of deaths from floods, storms and heatwaves. Plant and animal extinctions are also
predicted. Responding to climate change will be one of the biggest challenges we face this century. The UN is
leading a political effort to stabilise greenhouse gas emissions and limit the effect of climate change. The UK has
committed to reach net zero greenhouse gas emissions by 2050. The government will use tax policy to meet this
challenging target.
The tax system can be used as a powerful tool to discourage harmful environmental behaviours, by incorporating
a proxy for the cost of the damage into the price paid for goods and services and by encouraging individuals and
businesses to use and develop greener alternatives. Environmental taxes target a physical unit, for example, a litre
of petrol or a passenger flight, that has a proven negative impact on the environment.
Almost 80% of all revenue from UK environmental taxes is currently from energy taxes. These include taxes on
the production and use of energy products like petrol, diesel, gas and electricity. The largest single contributor to
revenue from environmental taxes is fuel duty. This tax covers petrol and diesel fuels and almost half of the tax is
paid by individual households. Pollution and resource taxes include taxes on waste management and the extraction
of raw materials.
Six environmental taxes are covered in this module. Two further reliefs, enhanced capital allowances on the
purchase of zero emission cars and land remediation relief, which encourages companies to clean up and build
commercial property on contaminated land, will be covered in your later studies. The environmental taxes we cover
in this module are:
1. Fuel duty and vehicle excise duty;

2. Air passenger duty;
3. Aggregates levy;
4. Climate change levy;
5. Landfill tax (including devolved variations); and
6. Plastic packaging tax.
Notes

Alongside these taxes sit other intervention schemes to tackle pollution by businesses. Such schemes provide
environmental permits that are distributed to polluters. Emission levels are then monitored and controlled, with
penalties issued for non-compliance.
The growth in taxes and subsidies to promote environmental sustainability requires accountants, both in practice and
business, to be involved in reducing the environmental impacts of plans and activities to reduce the tax burden, and
related social issues.
By the end of this module you should be able to:
1. identify the main types of environmental taxes and explain how they will affect individuals and businesses;
2. explain the economics of tradeable permit schemes;
3. explain the implementation of the UK Emissions Trading Scheme and describe how this will affect a business.
Achieving these learning outcomes will help you to meet the eighth learning outcome of the course as a whole.
12.3 UK Environmental Taxes
12.3.1 Fuel Duty and Vehicle Excise Duty
Taxation on the use of vehicles and duties on fuel represent the biggest source of revenue from environmental taxes
in the UK.
There are four direct sources of vehicle and fuel taxation:
• Vehicle Excise Duty (‘VED’);

• Fuel duty;
• Congestion charging; and
• Road pricing (e.g., toll charges).
Vehicle Excise Duty (‘VED’), colloquially known as road tax, is required for most vehicles used on public roads in
the UK. VED is based on the amount of carbon dioxide emissions a car produces. Vehicles with zero CO2 emissions
currently pay no VED.
Fuel duty is paid by consumers on some vehicle fuels purchased in the UK. Fuel duty is added to the price of
petrol, diesel, biodiesel and bioethanol by retailers. VAT is then added to this price, to give the total price.
Notes

Unleaded petrol, diesel, and biofuels such as bioethanol and biodiesel for road use are all charged at the same rate
of fuel duty.
A congestion charge is payable when driving into central London and certain streets in Durham. The aim is
to discourage the use of roads within congestion charge zones and thus reduce congestion and pollution in those
areas. Similar schemes operate in Europe and the US. At present, a number of local authorities in the UK have
adopted a similar charge to reduce congestion and pollution. Research is also being conducted to assess the
viability of road pricing on a national scale.
A Low Emission Zone (‘LEZ’) exists throughout most of Greater London for commercial vehicles which do not
meet certain European emission standards. The charges apply at present to buses and coaches over 5 tonnes,
lorries over 3.5 tonnes, caravans and various other commercial vehicles. The charge applies to both commercial and
private use of such vehicles.
Clean air zones apply in cities around the UK, including Bath, Birmingham and Portsmouth, whereas an Ultra Low
Emission Zone (‘ULEZ’) applies in central London. Users of vehicles that do not meet required Euro emissions
standards will need to pay a charge in order to drive in these areas.
Toll charges are payable by motorists who use specific roads around the UK.
Several of these forms of taxation discourage the use of both petrol and diesel cars and encourage the use of
alternatives, such as hybrid and electric vehicles.
The revenue from vehicle excise duty and fuel duty is set to fall as new conventional petrol and diesel cars and
vans will no longer be able to be sold in the UK from 2030. To help the transition to electric vehicles (‘EV’), money is
being invested in EV charging points across the UK, battery development and power generation from non-fossil fuels
to help meet the demand for electricity the growing number of EVs will bring.
12.3.2 Air Passenger Duty
Air Passenger Duty (‘APD’) is a tax on passenger flights from UK airports. It was originally introduced to raise money
rather than for environmental reasons. But it has also been seen as having potential environmental benefits by
discouraging people from taking certain flights.
The tax is collected by the airlines and is included in the cost of the ticket. The amount of APD payable depends
roughly on the distance of the flight and in which class you fly.
There are two bands:
• For flights from the UK to a country whose capital city is less than 2,000 miles from London, and
• For flights from the UK to a country whose capital city is more than 2,000 miles from London
Within each band there are three rates based on how much space the seat takes up and therefore how many people
can fit in the plane. The bands are broadly equivalent to economy, and business/first class, with a separate band for
private jets.
Long-haul direct flights from Northern Ireland and all flights from airports in the Scottish Highlands and Islands
are exempt from APD. APD is devolved to the Scottish Parliament for flights from all Scottish airports. The rates in
Scotland are currently the same as the rest of the UK.

12.3.3 Aggregates Levy
The aggregates levy is a tax on the commercial exploitation of sand, gravel, and rock that is dug from the ground
or dredged from the sea in the UK.
The aim of this tax is to address the environmental damage caused by these business activities. Specifically, the tax
is designed to:
• recognise the significant environmental impact of extracting aggregates;

• encourage the use of alternative or recycled materials; and
• channel some of the proceeds into a sustainability fund to finance improvements to the environment.
At present, quarry operators and anyone else that commercially exploits taxable aggregate must pay a tax of £2 per
tonne of sand, gravel or rock.
Exporters of aggregates receive full relief from aggregates levy. Certain materials are excluded from the aggregates
levy including coal, lignite, slate, clay, soil, and vegetable (or other organic) material.
Notes

Activity 1 – Aggregates Levy
North Kelvin Quarriers dig 500 tonnes of materials from their quarry during the tax year. The material is made
up of 390 tonnes of rock and gravel and 110 tonnes of soil and clay. North Kelvin sells the rock and gravel to
the construction industry in the UK.
Calculate the aggregates levy due for the year.
Solution
12.3.4 Landfill Tax, Scottish Landfill Tax and Landfill Disposals Tax
Landfill taxes are taxes on the disposal of waste to landfill sites, designed to encourage businesses to produce
less waste and to use alternative forms of waste management.
Landfill taxes are paid to HMRC by landfill site operators who will re-charge them to local businesses and local
authorities, along with normal landfill fees, when they dispose of waste at a landfill site.
Landfill Tax has been devolved in Scotland and in Wales where the equivalent taxes are called Scottish Landfill
Tax (Scotland) and Landfill Disposals Tax (Wales). The rates of these devolved taxes are the same as the main UK
rates, therefore all three taxes have been referred to as the ‘Landfill Taxes’ in these notes.
Notes

There are two rates of Landfill Tax:
• The lower rate – £3.15 per tonne for inactive waste such as rocks and soil in 2022/23 (£3.10 in 2021/22); and
• The standard rate – £98.60 per tonne in 2022/23 (£96.70 in 2021/22).
Waste arising from certain activities is exempt from landfill tax, (e.g., some dredging activities, quarrying and mining).
Landfill tax is not payable on household waste.
HMRC may prescribe an area on a landfill site where a landfill operator can deposit material pending sorting or
removal for recycling etc. This is called an ‘information area’. Tax is not due on material deposited here.
Tax credits are available where landfill site operators pay tax on a disposal and later send the waste:
• for recycling, incineration or reuse; or

• to another landfill site.
Activity 2 – Landfill Tax
Peckham Landfill (‘PL’) site receives 4,570 tonnes of waste in 2022/23. 1,200 tonnes of the waste is rocks
and soil from construction sites. The remaining 3,370 tonnes are waste from industrial and commercial
businesses. 1,250 tonnes of this commercial waste is recycled by PL.
Calculate the Landfill Tax due for the year.
Solution
Notes

The Landfill Communities Fund – formerly the Landfill Tax Credit Scheme – encourages landfill site operators in
England and Northern Ireland to contribute money to enrolled environmental bodies to carry out improvement
projects that benefit the local environment. The site operators can claim a tax credit from HMRC for the
contributions that they make. This scheme aims to offset some of the negative impacts of the landfill site on the local
community.
Landfill site operators can claim a credit of 5.3% in 2022/23 (also 5.3% in 2021/22) from HMRC against their landfill
tax liability. This credit is passed to the environmental body and represents 90% of the contribution made by the site
operator to that body. The site operator can then either bear the remaining 10% of the contribution themselves or ask
an independent third party to contribute.
There are similar landfill communities funds in place relating to the devolved landfill taxes. Further details are outside
the scope of this course.
In addition to landfill taxes the UK government have introduced a plastics packaging tax in April 2022. The aim of
this intiative is to decrease the negative impact of plastics on our environment and also to drive demand for recycled
materials. Plastics Packaging tax is covered in more detail at section 12.3.6.
12.3.5 Climate Change Levy
The climate change levy (‘CCL’) is designed to encourage businesses to reduce their energy consumption.
There are currently two rates of CCL:
• The main rates of CCL

• The carbon price support (‘CPS’) rates of CCL
CCL is paid by commercial and industrial users of energy. CPS is paid by the operators of the power stations.
The main rates of CCL apply to specified energy products when used as fuels, such as:
• electricity;
• natural gas supplied by a gas utility;
• petroleum and hydrocarbon gas in a liquid state;
• coal and lignite;
• coke; and
• petroleum coke.
Commercial and industrial users of energy from these sources will be charged CCL by their suppliers. The suppliers
account for the tax to HMRC. The tax does not apply to domestic users or charity use for non-business purposes.
Notes

The main rates of CCL are charged at an exact rate per unit of energy:
Commodity Normal Rate
Electricity 0.775 pence per kilowatt hour
Gas supplied by a gas utility or any gas supplied in a gaseous state that is of 0.568 pence per kilowatt hour
a kind supplied by a gas utility
Any petroleum gas or other gaseous hydrocarbon supplied in a liquid state 2.175 pence per kilogram
Any other taxable commodity, for example, coal 4.449 pence per kilogram
These rates are effective from 1 April 2022. For periods prior to 1 April 2022 see your rates sheet.
Energy intensive businesses can get a reduction on the main rates of CCL if they have entered into a climate
change agreement (‘CCA’) with the Environment Agency. Energy intensive businesses can get a 92% reduction
for electricity and a 86% reduction for gas, coal and other solid fuel, with a 77% reduction for liquified petroleum gas
(‘LPG’).
Some supplies are also exempt from the levy. For example:
• supplies not for burning or consuming in the UK; and

• supplies from certain combined heat and power schemes.
Use of energy from renewable supplies, such as solar panels, is charged at the same rate as energy from non-
renewable sources (shown above).
The CPS rates of CCL affect owners of electricity generating stations or operators of combined heat and power
stations. The CPS rates of CCL tax the supply of specified energy products such as coal and gas for use in electricity
generation. The aim of the CPS rates of CCL is to tax the carbon emissions of such stations and encourage
investment in low carbon emission technology.
Commodity Normal Rate
Gas supplied by a gas utility in Great Britain 0.331 pence per kilowatt hour.
LPG 5.280 pence per kilogram.
Coal and other solid fossil fuels (petroleum coke; lignate; coke and coal). 154.790 pence per gigajoule on
gross calorific value.

12.3.6 Plastic Packaging Tax
The plastic packaging tax was introduced in April 2022 in order to incentivise businesses to use recycled plastic
when manufacturing plastic packaging.
This tax only applies to businesses that import or manufacture at least 10 tonnes of finished plastic packaging
components in the last 12 months or will do so in the next 30 days. If this plastic packaging that has been imported
or manufactured contains less than 30% recycled plastic, a tax of £200 per tonne of plastic is payable to HMRC.
Plastic packaging that contains at least 30% recycled plastic will not incur charges to this tax but will count towards
the 10-tonne limit mentioned above.
There are three types of products excluded from the tax. These do not need to be included when working out the
total weight of packaging manufactured or imported. They are products which are designed to be:
• used in the long-term storage of goods such as tool boxes

• an integral part of the goods such as inhalers and printer cartridges
• reused for presentation of goods such as shop fittings
12.4 Tradeable Permits
12.4.1 Introduction
Tradeable permits are issued by government agencies to provide an efficient and flexible means of achieving
environmental targets.
Each business is provided with a permit, limiting pollution or output to some predefined limit. These permits
are then tradeable among other businesses. The costs of such schemes are limited to fees to issue and administer
permits and to administer penalties when allocations are exceeded. Consequently, when certain conditions are met,
tradeable permits are seen as highly cost-effective means of reducing overall pollution.
The concept of tradeable permits is best illustrated with an example.
12.4.2 Tradeable Permits Example
The government wishes to reduce an activity which has a negative impact on the environment. For example, it may
wish to reduce waste put to landfill by 15%. The government then issues each business with an activity permit as its
target level, for example, maximum landfill waste to be 85% of output in the prior year.
Notes

At the end of the period, the government measures the waste put to landfill by each business and provides it with
a permit for a similar, or reduced, amount. Businesses are then allowed to trade permits. A business that is able to
easily reduce its landfill waste can sell its permit to an organisation that will struggle to meet its target, or one that
can meet the target, but only at significant cost.
The overall effect is that landfill waste created by business is reduced by the target activity. Some businesses will
contribute more to this target than others, but will be able to reap the benefits by permit trading.
The concept of such trading schemes is not new. Other schemes have related to fishing quotas and greenhouse
gases in Europe, acid rain in the United States and milk quotas in the UK
12.4.3 The Economics of Tradeable Permit Schemes
For trading schemes to be successful, three conditions need to be met:
1. Polluters must have sufficiently different costs for there to be potential for trading;
2. Polluters should trade if such potential exists. Therefore, transaction costs need to be relatively low; and
3. It must be possible to move emissions without serious environmental implications.
This last point indicates that trading schemes are likely to be most successful for a pollutant like carbon, where the
location of emissions is unimportant. However, where the location of pollution does matter, trading schemes are
unlikely to be successful.
This was illustrated when the UK government ruled out a tradeable permit scheme for diffuse water, as water
pollution can have greater consequences in some locations than others. Allowing permit purchases to concentrate
their pollution in one area could be highly detrimental to the local environment, for example, phosphate pollution in
a slow-moving stream would have significantly more environmental impact than an equivalent size of emission to a
fast-moving estuary.
12.4.4 Overview of Tradeable Permit Schemes in the UK
As a member of the EU, the UK participated in the EU Emissions Trading Scheme (‘EU ETS’). EU Member states
agreed to a collective reduction in greenhouse gas emissions. A UK Emissions Trading Scheme (‘UK ETS’) has
replaced the UK’s participation in the EU ETS.
A cap is set on the total amount of certain greenhouse gases that can be emitted by the sectors covered by the
scheme. This limits the total amount of carbon that can be emitted. This will decrease over time and will contribute to
the UK’s Net Zero 2050 target.
Notes

The UK ETS will apply to energy intensive industries, the power generation sector and aviation. This will cover
activities involving the combustion of fuels in installations with a total rated thermal input exceeding 20MW (except
in installations for the incineration of hazardous or municipal waste) and sectors like refining, heavy industry and
manufacturing.
Within the cap, participants receive free allowances and/or buy emission allowances at auction or on the secondary
market which they can trade with other participants as needed. Each year, installations and aircraft operators
covered by the scheme must surrender allowances to cover their reportable emissions.
You should now be able to meet learning outcome three.
Notes

This module has considered some of the environmental taxes and reliefs you might encounter.
You should now be aware that:
• environmental taxation is used by governments to promote responsible environmental and social behaviour by
business;
• environmental taxes include: fuel duty and vehicle excise duty; air passenger duty; aggregates levy,
landfill tax; climate change levy and plastic packaging tax;
• tradeable permit schemes require polluters to control emissions to an agreed level. If this target is breached
then the polluter can choose to pay a penalty or purchase a permit from another business that will meet its
target; and
• environmental taxation is a relatively dynamic area of business policy that will have a significant impact on
many businesses. Advisors in business and practice need to be aware of the effects of changing legislation and
emerging environmental agendas.
Notes

North Kelvin will pay tax on the rock and gravel dug from their quarry. The soil and clay are exempt. The tax rate is
£2 per tonne, therefore the tax due is 390 x £2 = £780.
None of the aggregates are exported. If they were, the tax would be reduced.
Back to Activity
The rocks and soil are charged at the lower rate of £3.15 per tonne. The remaining waste (less the 1,250 tonnes
which is recycled) will be charged at the standard rate.
(1,200 x £3.15 per tonne) + (2,120 x £98.60 per tonne) = £212,812
Back to Activity
Notes

Module 13. Professional Conduct
Contents
13.3 Professional Conduct in Relation to Taxation 340
13.3.2 Layout 340
13.3.3 Fundamental Principles 341
13.3.4 The Standards for Tax Planning 342
13.4 Help sheets 343
13.4.1 Help sheet A Submission of tax information and tax filings 343
13.4.2 Help sheet B Tax advice 344
13.4.3 Help sheet C Dealing with errors 345
13.4.4 Help sheet D Request for data by HMRC 348
13.4.5 Help sheet E Member’s Personal Tax Affairs 348
13.5 Investigation of Tax Agents 349
13.6 Relationship with the Client 349
13.6.1 Practising Certificate (PC) 350
13.6.2 Change of Adviser 350
13.6.3 Engagement Letters 350
13.7 Managing Client Risk 352
13.7.1 Before Accepting Instructions 352
13.7.2 Providing Advice 352
13.7.3 Consultation and Second Opinions 353
13.8 Money Laundering 354

13. Professional Conduct
13.1 Introduction
As a tax professional, you must have an understanding of issues in relation to professional conduct. This should
help you to react in the most appropriate way to situations which you find yourself in and also to know when to seek
further assistance, perhaps from a partner in your firm with specific responsibility for ethical issues.
The Professional Conduct in Relation to Taxation document sets out the ethical standards required by
members of the accountancy profession. This module explains the content of the PCRT, which is mandatory,
as well as covering other ethical issues such as dealing with errors, responding to requests for data by HMRC
and money laundering.
1. describe the Fundamental Principles in ‘Professional Conduct in Relation to Taxation’ and the Standards for Tax
Planning;
2. identify any requirements that need to be met by a member when taking on a client;
3. describe the general requirements of a tax engagement letter;
4. describe the measures a member should take to manage client risk; and
5. describe the money laundering provisions that are relevant to the member
Achieving these learning outcomes will help you to meet the tenth learning outcome of the course as a whole, as per
the syllabus.
Notes

13.3 Professional Conduct in Relation to Taxation
13.3.1 Introduction
The Professional Conduct in Relation to Taxation (‘PCRT’), is prepared by the seven UK professional bodies
whose members work in tax (including ICAS, ICAEW, ACCA and the CIOT – Chartered Institute of Taxation). It
sets out the ethical standards which form the core of the three-way relationship between tax adviser, client and
HMRC. It supports the key role members play in helping clients comply with their tax obligations and their broader
responsibilities to society. The PCRT was last republished in a digital format in March 2019 and has been reviewed
and agreed by HMRC as providing an acceptable basis for dealings between members and themselves.
The document refers to the ‘member’ throughout as it is written for all members of the professional tax and
accounting institutes, including ICAS, in their dealings with the tax authorities (so for instance will include a
member’s personal tax affairs).
Compliance with PCRT is mandatory for members advising on UK tax matters.
Members have a range of potentially conflicting duties and responsibilities. There are obligations to clients
(who are entitled to confidentiality), their institute and its professional ethical code, HMRC and the public.
The foreword to the most recent version of the PCRT touches upon this range of duties:
‘Tax advisers operate in a complex business and financial environment, and a core purpose of the tax
system is to fund public services and to ensure the good health of our economy and society. Tax advisers
therefore have a responsibility to serve their clients’ interests whilst upholding the profession’s reputation
and the need to take account of the wider public interest.’
PCRT is designed to minimise conflicts of interest and to help members conduct their business in a professional
manner. The document sets out five principles which are applicable to all taxes and explains how members should
work with HMRC.
13.3.2 Layout
There are five fundamental Principles and a further five Standards for Tax Planning.
The core PCRT document is mandatory; the help sheets provide guidance. The PCRT both sets standards and
provides support for members in making difficult decisions.
Notes

In addition to setting out the Fundamental Principles and Standards for members working in tax, the document also
includes a series of help sheets covering specific areas of members’ work.
• PCRT Help sheet A Submission of tax information and ‘tax filings’

• PCRT Help sheet B Tax advice
• PCRT Help sheet C1 Dealing with errors
• PCRT Help sheet C2 Dealing with errors for members in business
• PCRT Help sheet D Request for data by HMRC
• PCRT Help sheet E Members’ personal tax affairs
There is also topical guidance on the tax reliefs available to encourage R&D. (This will be covered in more
detail in TPS Business Tax)
13.3.3 Fundamental Principles
The PCRT sets out five fundamental principles that all members must follow:
• Integrity
To be straightforward and honest in all professional and business relationships.
• Objectivity
To not allow bias, conflict of interest or undue influence of others to override professional or business
judgements.
• Professional competence and due care
To maintain professional knowledge and skill at the level required to ensure that a client or employer receives
competent professional service based on current developments in practice, legislation and techniques, and act
diligently and in accordance with applicable technical and professional standards.
• Confidentiality
To respect the confidentiality of information acquired as a result of professional and business relationships
and, therefore, not disclose any such information to third parties without proper and specific authority, unless
there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the
member or third parties.
• Professional behaviour
To comply with relevant laws and regulations and avoid any action that discredits the profession.
The principles in the PCRT are based on the ICAS Code of Ethics. The PCRT aims to provide further information on
the principles in the Code to help members.
Notes

13.3.4 The Standards for Tax Planning
The concepts of tax planning, tax avoidance and tax evasion are discussed in Module 1. As stated there, it is clear
that tax evasion is illegal and, therefore, a member should never knowingly engage in activities linked to tax evasion.
Tax planning is an accepted practice and is often the reason a tax adviser has been engaged. Tax avoidance is a
less identifiable concept lying somewhere between planning and evasion although still operating within the letter of
the law. The definition of ‘avoidance’ can depend on the tax legislation, the intention of Parliament, interpretations in
case law and the varying perceptions of different stakeholders.
HMRC defines tax avoidance as ‘bending the rules of the tax system to try to gain a tax advantage that Parliament
never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce
this advantage. It involves operating within the letter, but not the spirit, of the law.’
The document sets out five Standards for Tax Planning. These build on the fundamental principles in the PCRT,
focussing on integrity, professional competence and behaviour.
• Client specific
Tax planning must be specific to the particular client’s facts and circumstances. Clients must be alerted to the
wider risks and the implications of any courses of action.
• Lawful
At all times members must act lawfully and with integrity and expect the same from their clients. Tax planning
should be based on a realistic assessment of the facts and on a credible view of the law. Members should
draw their clients’ attention to where the law is materially uncertain, for example when HMRC is known to
take a different view of the law. Members should consider taking further advice appropriate to the risks and
circumstances of the particular case, for example where litigation is likely.
• Disclosure and transparency
Regarding its effectiveness, tax advice must not rely on HMRC having less than the relevant facts. Any
disclosure must fairly represent all relevant facts.
• Tax planning arrangements
Members must not create, encourage or promote tax planning arrangements or structures that:
i. set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant
legislation; and/or
ii. are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.
• Professional judgement and appropriate documentation
Applying these requirements to particular client advisory situations requires members to exercise professional
judgement on a number of matters. Members should keep notes on a timely basis of the rationale for the
judgments exercised in seeking to adhere to these requirements.
Notes

13.4 Help sheets
13.4.1 Help sheet A Submission of tax information and tax filings
13.4.1.1 Taxpayers’ responsibilities
The taxpayer is responsible for submitting a tax return which is complete and correct to the best of their
knowledge.
The guidance makes it clear that this includes returns for all taxes, NIC and duties.
13.4.1.2 Members’ responsibilities
A member will file in their capacity as an agent using the faciltiies provided for agents to avoid knowing clients
personal access credentials. Firms should have policies on cyber security, anti-money laundering and data
protection (GDPR).
A member has a duty of confidentiality to their client and a duty to act in the best interest of their client. A member
should also act in good faith in dealing with HMRC.
Although a member is not required to verify information provided by a client, they should take reasonable care and
exercise professional scepticism to ensure that the facts presented are correct and that no attempt has been
made to mislead HMRC. It may be appropriate when communicating with HMRC to make it clear that information
has been supplied by the client or a third party.
13.4.1.3 Materiality
Taxable profits are to be computed in accordance with GAAP, which allows a ‘true and fair view’ to disregard non-
material adjustments. However, tax law does not specifically recognise the concept of materiality. Whether or
not an amount is to be regarded as material depends on the facts and circumstances of each case. Thus, an amount
which is not material for audit may be material for tax purposes. Where the cash basis is used, materiality is not
relevant.
13.4.1.4 Disclosure
It is likely to be in the client’s own interests to ensure adequate disclosure to HMRC. Their relationship with HMRC
is more likely to be on a satisfactory footing if they can demonstrate good faith and they will reduce the risk of a
discovery or further assessment and may reduce exposure to penalties.
Notes

While there is no duty for anyone to provide any information to HMRC, other than what is requested in the tax return,
there may be situations where the member should consider providing additional disclosure/information in
situations where:
• HMRC has published its interpretation or has indicated practice on a point, but the taxpayer proposes to adopt
a different view; or
• there is inherent doubt as to the correct treatment of an item.
Such disclosure will be especially relevant where tax planning has been entered into. If the member is uncertain
whether or not to disclose an item they should consider taking further advice before reaching a decision.
13.4.1.5 Supporting documents
HMRC does not generally require taxpayers to provide supporting documents to back up the information in the
return. However, clients may wish to provide information in the “white space” of the return to minimise a later
discovery assessment and the member should consider if this is appropriate.
13.4.1.6 Approval of tax filings
Although the return may be prepared by the member, the client must review it prior to signing. The member
should draw the client’s attention to any judgemental areas in the return. A member should obtain evidence of the
client’s approval of the filing.
13.4.2 Help sheet B Tax advice
A member must balance their responsibilities to serve their clients with professional competence and due care,
including providing a reasonable degree of tax planning and tax saving opportunities, with their duties to comply
with the relevant tax laws and regulations and avoid any action that discredits the profession.
Where a member advises on tax planning, it is important that the basis for the planning is clearly identified and
documented to demonstrate that the advice complies with both the Fundamental Principles and Standards for Tax
Planning.
Notes

The help sheet lists a number of areas to consider, including:
• whether the engagement letter fully covers the scope of the planning advice
• whether the Standards for Tax Planning and the Fundamental Principles have been considered, i.e. whether it is
client specific and lawful, and whether all relevant facts are to be disclosed to HMRC
• whether the client made clear what they wish to achieve by the planning
• whether there are any risks associated with the planning and whether these have been discussed with the client
• whether a second opinion necessary/advisable
• whether the client understands the planning proposed
• whether the advice given and the reasoning behind it has been documented
Tax evasion may also be an issue for a member as a client may take actions such as understating income
or overstating expenses. Evasion may also occur as part of tax planning, for example attempts to cover up
‘implementation mistakes’ such as backdating documents purporting to represent compliance with the law.
Members must never knowingly be involved in tax evasion.
13.4.3 Help sheet C Dealing with errors
An error can be made by the client, the member, HMRC or another party in relation to a client’s tax affairs and may
range from an innocent error to fraud.
Where a client has overpaid tax, the member should ensure that the client is aware of the overpayment and the
reasons for it and advise about making a repayment claim.
Where the error results in an overpayment or under collection of tax there is still a duty to consider disclosure.
Where the error was caused by HMRC and the correction of it causes additional expense to the member and their
client, the client may be able to claim for additional professional costs incurred from HMRC.
It is important, when dealing with errors, that the member must act, and be seen to act, correctly from the outset. The
member must ensure that they do nothing to assist a client to commit a criminal offence or to conceal any offence.
Notes

Where a possible error arises, the guidance includes a flowchart setting out how the member should behave:
Unclear and
No
cannot be resolved Establish the facts -
is there an error?
Yes
Consider whether Yes

it is appropriate to Is it trivial? No further action
continue to act
No
Is specific authorisation No
by client required to Disclose to HMRC
disclose an error?
Yes
Does client authorise disclosure:

Yes
STAGE 1 – after initial request
STAGE 2 – if client is initially unwilling, after oral advice on consequences
STAGE 3 – if client remains unwilling, after written advice on consequences
No
YOU MUST CEASE TO ACT

• Advise client in writing that you no longer act for them in respect of any
tax matters and, if relevant, other client matters.
• Notify HMRC that you have ceased to act, if relevant.
• Consider if you need to advise HMRC that any accounts/statements
carrying a report signed by you can no longer be relied upon.
• Consider whether a report should be made to MLRO/NCA.
• Carefully consider your response to any professional enquiry letter.
At all times consider your obligation under anti-money laundering legislation and
whether you need to submit a Suspicious Activity Report.
Notes

The guidance makes it clear that the first step a member should take when they suspect an error may have occurred
is to establish the facts by discussing the issue with the client. This should allow the member to be clear on all
of the facts and make a decision.
The member should then consider whether the error is trivial in nature. This includes consideration of whether the
cost of remedying the error might exceed the tax involved. It is suggested that it is reasonable for a member to take
no steps to advise HMRC in the case of isolated errors where the tax effect is no more than £200.
Before making a disclosure to HMRC, the member must ensure that they have authorisation to do so. It may be
that the member has included such authorisation in the engagement letter with the client, but it is recommended that,
in all cases, the member considers whether it is appropriate to discuss the matter with the client.
If specific authorisation is requested, the member should also encourage the client to make a timely disclosure
and advise them of their potential exposure to interest, surcharges and penalties.
Where authorisation is not given specifically in a timely manner, the member should verbally explain the
consequences of non-disclosure and the benefits of making a disclosure. Consequences of non-disclosure
include the member having to put their advice to the client in writing, ceasing to act for the client and having to
respond in full to any requests for information from a new adviser.
If the client refuses to disclose, following both oral and written communication (Stages 1-3 in the flowchart), the
member is obliged to cease to act and:
• If relevant, inform HMRC of the withdrawal;

• Consider withdrawing reports signed by the member;
• Consider whether a money laundering report should be made to the firm’s Money Laundering Reporting
Officer/National Crime Agency; and
• Consider carefully their response to a professional enquiry letter (also known as a professional clearance letter)
that may be received from a successor adviser.
The above advice/information should be given in writing to protect the adviser.
The member must also then follow the money laundering rules discussed in 13.7 below and also in the Assurance
and Reporting course. Tax evasion is a crime and the client will be benefiting from the proceeds of crime.
Notes

13.4.4 Help sheet D Request for data by HMRC
As a starting point, the member owes their client a duty of confidentiality. This is also the case with previous
clients, that is, the duty of confidentiality remains even if the member is no longer acting for that client. Generally, the
fact that a member acts as a client’s agent indicates the client’s consent to the disclosure of relevant information, but
express consent should still be sought.
In the help sheet, the term ‘data’ includes documents in whatever form (including electronic) and other information.
A request for information from HMRC may be an informal request (e.g., for additional information) or a statutory
request.
When dealing with an informal request, the member may only disclose information with the client’s permission.
Generally, the client will have authorised the disclosure of routine information but if there is any doubt the member
should ask for express permission from the client.
A statutory request for information may be addressed to the client or directly to the member. Where it is addressed
to the client, the member’s role is to advise the client how to comply with the request or any options open to the
client if this is not in the client’s interests. The right of appeal should be explained if relevant.
A lawful statutory request to the member is capable of overriding their duty of confidentiality to the client.
If complying with the request is in the client’s best interests and the member is not legally precluded from
communicating with the client, the member should seek the client’s permission to comply with the request. If the
request is legal, the member must comply with it whether or not the client gives their permission.
If a member is faced with a situation in which HMRC is seeking to enforce disclosure by removing data, the member
should consider seeking specialist legal advice before permitting such removal, to ensure it is the legally correct
course of action.
13.4.5 Help sheet E Member’s Personal Tax Affairs
The help sheet looks at tax compliance, disputes with HMRC and tax planning. A member should keep their own
tax affairs up to date. If not, this could raise doubts within HMRC as to the standard of the member’s professional
work and could bring the member or their professional body into disrepute. A member who is in dispute with HMRC
regarding their own tax affairs may wish to consider engaging an agent to represent them. A member should also
consider whether any tax arrangements with which they might be associated on their own behalf might bring the
member of the profession into disrepute.
Notes

13.5 Investigation of Tax Agents
HMRC has specialist units that monitor and investigate the standards of tax agents (i.e. tax advisors). HMRC
can impose civil penalties of up to £50,000 on a member if they can establish that the member has engaged in
dishonest conduct.
HMRC is permitted to obtain access to a member’s working papers where the member has been issued with a
‘conduct notice’ relating to dishonest conduct or has been convicted of an offence relating to tax that involves
fraud or dishonesty within the last twelve months.
Before a penalty can be imposed under the above provisions, HMRC has to prove that the adviser engaged in
dishonest conduct.
A member should not disclose confidential client information without the client’s prior consent; however, a member
may disclose confidential information to defend a criminal charge or to remove suspicion.
Where it is alleged by an HMRC investigator that a member’s standards are unsatisfactory, but the circumstances
fall short of the possibility of criminal proceedings or a civil penalty being imposed, the member should not provide
access to the client’s working papers without the client’s prior consent.
13.6 Relationship with the Client
A letter of engagement should govern the contractual relationship between a member and a client. The letter will set
out both the client’s and the member’s responsibilities.
A member should only act for a client on the basis that the client is prepared to fully disclose all information.
It is possible for a member to obtain a client’s authorisation to act on their behalf with HMRC and to allow HMRC
to exchange and disclose information to a member. This can be done on HMRC “Form 64-8 Authorising your agent”
or via an online authorisation system.
It is recommended that members keep detailed notes of all meetings and telephone conversations with their
clients, HMRC and any other parties. Where verbal advice is given, it is prudent to write to the client confirming this.
This will allow members to protect themselves if there is a subsequent dispute over what was said at the time.
Where a member finds themself having to advise on matters requiring specialist knowledge they should consider
whether or not they have this knowledge. This links back to the fundamental principle of Professional Competency
and Due Care.
Notes

Members need to exercise caution in giving advice on areas in which they do not always work. Issues may crop
up which a member would not normally cover as part of their work. For instance, a member who does not normally
offer advice on tax residence might be asked about the tax consequences of employees working from home in the
pandemic where home is outside the UK.
If providing advice would go beyond the member’s own level of competence, they should decline to act in this matter
or seek help from a specialist in the field.
13.6.1 Practising Certificate (PC)
When a member sets themselves up in practice to provide accounting and tax services to persons other than their
employer, they also need to apply to ICAS for a practising certificate.
This will include:
• Becoming a partner in an accountancy firm;

• Independently offering accountancy or related services to the public
13.6.2 Change of Adviser
If there is a change in a professional appointment, the new adviser should obtain the proposed client’s
authorisation to communicate with the previous adviser. A professional clearance letter is used to request
details of the new client’s previous returns and accounts, outstanding enquiries, any claims in place and any other
relevant information. Unless the prospective client agrees to the adviser contacting the previous adviser, the new
adviser should decline to act.
When a member receives a request for information from a new adviser, they should first seek permission from
the former client to disclose all relevant information to the new adviser. Where permission is given, the member
should provide any information honestly and unambiguously.
If permission is refused, the member cannot disclose information to the new adviser but can disclose that there has
been communication with the former client. In these circumstances the new adviser should decline to act.
13.6.3 Engagement Letters
When a member takes on a new client, it is good practice to set out the terms of the contractual agreement in
an engagement letter. This is not compulsory for tax. It is good practice to define the terms and scope of the
engagement. This is usually required for professional indemnity purposes.
Notes

There are a number of suggestions, including the following:
• An engagement letter should specify the general terms of business of the firm;
• Members may wish to consider the inclusion of a limitation of liability clause;
• The client should agree to the terms of the engagement in writing, usually by signing and returning a copy of
the engagement letter; and
• Any engagement letter for ongoing compliance and advisory work should be regularly reviewed and, if
appropriate, an updated engagement letter agreed. This should help to avoid misunderstandings about the
engagement.
It is helpful if an engagement letter also has a clause authorising the adviser to contact HMRC should an error
require to be disclosed to HMRC.
The provision of investment business services or corporate finance activities ordinarily requires the preparation of a
separate engagement letter.
A separate engagement letter should be agreed for each entity to which a compliance service is provided. For
example, separate engagement letters are required when the firm provides tax services to:
• a partnership and the individual partners;

• a company and its shareholders;
• a company and its directors; or
• a husband and wife/civil partners unless they both agree to be dealt with together.
The contents of an engagement letter should address the following points:
• Identify the first tax year for which the adviser is responsible;
• The extent, if any, to which the adviser will be responsible for tax years prior to the appointment;
• The responsibility of the taxpayer to furnish all relevant information to the tax adviser on a timely basis;
• The scope of the tax adviser’s responsibilities;
• The tasks for which the tax adviser has been appointed;
• Fees and billing arrangements; and
• The requirement to report to the National Crime Agency (‘NCA’) any suspicions, knowledge, or reasonable
grounds for suspicions or knowledge of money laundering from the proceeds of any crime. This includes the
proceeds of tax evasion.
The ICAS Code of Ethics requires all fee arrangements to be confirmed in writing, either in the engagement letter or
in a separate fee letter.
A sample engagement letter is provided on myCABLE.
Notes

13.7 Managing Client Risk
When acting for a client, a member places their professional expertise at the disposal of that client and, in so
doing, the member assumes a duty of care towards the client which is recognised in law. A member must exercise
reasonable skill and care when acting for a client. A failure to do so may result in the member being liable for a claim
of professional negligence. The member must understand their duties and responsibilities in respect of the client
and the risks associated with a failure to adequately discharge those duties and responsibilities. The member must
manage the risks associated with advising a particular client.
13.7.1 Before Accepting Instructions
Before accepting instructions to act for a client, a member should consider:
• whether the client will be an acceptable client in terms of the risks which will be brought to the practice from
acting for that client and whether the member has the capability to manage those risks. In assessing the risks,
the member should consider the client’s personal circumstances and business situation, financial standing,
integrity and attitude to disclosure in regard to compliance with taxation law; and
• whether the member and firm will have the skills and competence to service the client’s requirements during
the course of the engagement. (In essence, don’t do what you don’t do.)
Before starting work on any assignment for a client, the member should understand and agree with the client the
scope of the assignment, having first assessed the risks, and be satisfied that the relevant skills and experience to
handle the work are available or accessible.
13.7.2 Providing Advice
A member should advise a client only when they have an adequate understanding of that client’s personal and
business circumstances and tax position. In addition, the member should fully understand the issues under
consideration and the objectives of the advice.
If it is intended that a client should place reliance on taxation advice, the advice should be sufficient for the purpose
and normally be given in writing. However, frequently, a member will give impromptu advice in meetings or by
telephone, endeavouring to be responsive to the needs of the client. It is for the member to decide whether to
confirm in writing advice given verbally, particularly where the client is not a fellow tax professional. In any event,
the member should make and keep a dated note on their file of the discussion and advice given.
Notes

The Professional judgement and appropriate documentation Tax Planning Standard notes that members are not
required to complete paperwork for their own sake. However, they should be prepared to identify, support and where
appropriate defend any judgements. Where the judgements made are reasonable, notes taken on a timely basis
are likely to be the most convincing way of demonstrating compliance with the principles.
An advice letter should normally set out:
• the background facts and assumptions on which the advice is based;

• the alternatives open to the client;
• the risks associated with the advice; and
• relevant caveats and exclusions.
A member should make it clear that the advice given is current and may be affected by subsequent changes in
the law. Unless the contract provides otherwise, a member is under no duty to inform a former client that advice
previously given is affected by a change in law or practice which occurs after the relationship of client and adviser
has ended.
Unless the contract provides otherwise, a member is under no duty to advise a new client on matters on which
advice given by a predecessor is incorrect in the area of the member’s retainer.
When formulating advice, the member should refer to the relevant taxation legislation and the practice of HMRC.
Due regard should also be given to case law.
A written record of how the advice given is reached should be retained on the client file so that a member is able
to defend an allegation of negligence. If work is delegated, the member should exercise sufficient supervision to
confirm that the work performed is adequate.
13.7.3 Consultation and Second Opinions
A member is encouraged to consult with fellow professionals when advising clients, particularly to ensure that
appropriate skill and judgement is applied. It is a matter of judgement for the member whether consultation is necessary
in any particular situation. If a member relies on the consultation, evidence of it should be retained on the client file.
A member who is giving a significant opinion (see below) to a client should consider taking a formal second
opinion to support the advice. This may be obtained by requesting formally an independent view from a partner in
the firm, or by instructing another member or tax counsel. In addition, in any case where the risks for the member,
assessed in terms of professional reputation or financial exposure of their practice, of giving wrong advice are high,
the member should consider taking a second opinion. If a member relies on a second opinion, evidence of it should
be retained on the client file.
Notes

A significant opinion is one in respect of which either:
• the amount of tax at stake, or potentially at stake, in relation to the matters advised on is significant for the
client and there is a real risk that a contrary view to that reached by the member on those matters could be
reached;
• the matters advised on are, for some other reason, (e.g., the advice given may have a bearing on whether the
client is exposed to criminal liability) of sufficient importance to the client to merit obtaining a second opinion; or
• there is aggressive tax planning.
13.8 Money Laundering
Money laundering involves the possessing, concealing or dealing with the proceeds of any crime. This is covered in
detail in the TC Assurance and Reporting course. There is legal guidance in place for all accountants in relation to
the criminal activity of money laundering. In addition, there are more stringent money laundering requirements and
additional offences to consider for those working in a ‘regulated sector’. It is important to note that tax advisers are
included as working in a regulated sector and, therefore, are required to adopt additional procedures when dealing
with their clients.
Before accepting instructions to act for a client, a member must be satisfied that the client is not involved in any
activity which constitutes money laundering and that the member will not be drawn into assisting the client in money
laundering.
The member needs to be alert to situations where their client is, or may have been, involved in tax evasion (in any
jurisdiction) which is, by its nature, criminal conduct and which could give rise to a money laundering offence. A
tax offence is criminal conduct, and members must be fully aware of their responsibilities in relation to the money
laundering regulations and the potential dangers to which they are exposed in their position as tax advisers.
Details of the regulations are examined in TC Assurance and Reporting, and will not be repeated here. Students
should ensure that they are comfortable with this content, as it is important both for future studies, and for working
within the tax profession.
Given the wide-ranging offences created by the legislation, it would be prudent for a member who thinks they may
be exposing themselves to the threat of prosecution to obtain expert advice.
ICAS has a confidential helpline for reporting and discussing potential offences in this area.
Notes

You should now be aware of:
• The fundamental principles discussed in ‘Professional Conduct in Relation to Taxation’ and how these may
apply in practice:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour
• The Standards for Tax Planning
• The Help sheets
• The need to specify the terms of any engagement
• The steps to be taken in order to manage client risk
• The requirement to consider money laundering regulations and that they apply to members
Key Concepts
Taking on a new client
• Ask – do we have the necessary skills to act for this client?

• Ask – is this a client we would want to be associated with?
• Be clear about exactly what you are being asked to do
• Document in engagement letter – see below
• Liaise with previous adviser:
• Ask client if you can contact previous adviser
• If not, decline to act
• Previous adviser should ask client if they can disclose information to you
• Decline to act if information not forthcoming
• Set up form 64–8 (client to confirm that you are their agent and that you may receive copies of any
correspondence from HMRC re their affairs)
Notes

What to include in an engagement letter
• Precise nature of work to be carried out:

• Must have separate letter for each client if acting for husband/wife, civil partners, two partners in
partnership etc
• Include start date of work, for example, first return you will prepare
• Scope of services
• Scope of responsibility for any queries raised by HMRC on prior years’ work
• Fees/billing arrangements
• Client obligations, for example, information they are to provide, timely provision of information
• Money laundering rules
The steps to take if you discover client errors can be followed using a flow chart published in the help sheets. You
should now be able to meet all the learning outcomes of this module. Should you not be able to do so, go back and
read the relevant section(s).
Notes

Module 14. Tax Law and Legislation
Contents
14.3 Types of Legislation 358
14.3.1 Primary Sources – Legislation and Case Law 359
14.3.2 Secondary (or Delegated) Legislation 362
14.3.3 Administrative Quasi-Legislation 363
14.4 Summary and Conclusion 364
Appendix 1 – Finance Bill to Finance Act 365

14. Tax Law and Legislation
14.1 Introduction
In this module, we will examine the main sources of tax law and the legal basis for the levying and collection of
taxes. Without such a legal basis the government cannot raise taxes. It is therefore important that you understand
not only the tax rules covered in previous modules, but where these can be found and what their legal standing is.
This module describes the main sources of tax law and legislation before giving a brief overview of some other
secondary sources.
You are permitted to use the tax rates sheets in your exam. As your studies progress, you will also be allowed to use
other materials such as the Tax Legislation Handbooks. Knowledge and use of the legislation, case law and how
these work is a key skill for a tax professional.
1. describe the primary statutes and other sources of tax law;

2. list the different types of primary, secondary and quasi-legislation and explain their importance to the tax
professional.
Achieving these learning outcomes will help you to meet the first learning outcome of the course as a whole, as per
the syllabus.
14.3 Types of Legislation
There are a number of different sources of tax law, split into three main categories:
• Primary;
• Secondary; and
• Administrative quasi-legislation.
Notes

14.3.1 Primary Sources – Legislation and Case Law
Primary sources of tax law are the legislation (statute) and precedent which is derived from case law.
Taxes cannot be raised unless there is legislation which specifically states that a tax is to be charged. The main
UK tax legislation is derived from the annual Finance Bill which becomes the Finance Act and, from time to time,
is consolidated into updated Acts. The Finance Bill is released following the government’s budget statement each
year. The budget statement and the subsequent Finance Bill puts forward proposed changes in tax for the tax year
starting 6 April following.
Appendix 1 outlines the progress of a Finance Bill (delivered at the time of the Budget) as it becomes a Finance Act.
During this process the Bill will undergo changes as it passes through the various stages of parliamentary process.
It is common for concepts to be announced as part of the government’s budget statement and to be included in
the Finance Bill but then to be dropped before the Bill becomes the Finance Act. The government needs sufficient
support in parliament for the Finance Act to be voted through. It is only once it becomes a Finance Act that the
legislation becomes legally binding. You should review Appendix 1 of this module now.
These notes are updated based on the Finance Bill 2022, which received Royal Assent in February 2022 to become
the Finance Act 2022. The Finance Bill 2022 was presented on 4 November 2021, after the Autumn Statement in
October 2021.
The annual budget process has been disrupted in recent years, with the calling of a general election in mid-
December 2019 and the COVID-19 pandemic in 2020. The election postponed what would have been an Autumn
budget in 2019 to March 2020, while the pandemic resulted in a planned second budget in Autumn 2020 not going
ahead. Instead, draft legislation was published, with the budget delayed to March 2021. As such, the budget has
been held in the spring for a couple of years. Before this, there had been a trend for an Autumn budget, allowing
for a longer gap between the budget and the start of the tax year. The government has now reverted to Autumn
budgets.
There is at least one Finance Act per annum, although in some years there may be two (or even three). This can
occur, for example, on a change of government or in a general election year.
Although the main UK tax legislation is derived from the annual Finance Act, from time to time the information on a
particular topic (e.g., Income Tax) from all the Finance Acts will be consolidated into one Act, for example, Income
Tax Act 2007.
Notes

The legislation most frequently referred to in the CA syllabus comes from some of these consolidating acts:
• Stamp Act 1891 SA 1891

Containing details of stamp duty tax
• Taxes Management Act 1970 TMA 1970
Details of responsibilities of taxpayers, administrative deadlines, filing dates, enquiries, penalties and interest
• Taxation of Chargeable Gains Act 1992 TCGA 1992
Covering capital gains tax for individuals and calculation of chargeable gains for companies
• Value Added Tax Act 1994 VATA 1994
Covering the levying and collection of VAT, responsibilities for businesses and the powers of HMRC
• Capital Allowances Act 2001 CAA 2001
Details of capital allowances (used in both income and corporation tax)
• Income Tax (Earnings and Pensions) Act 2003 ITEPA 2003
Legislation containing details of employment and pension income
• Income Tax (Trading and Other Income) Act 2005 ITTOIA 2005
Legislation covering an individual’s trading, property and other income
• Income Tax Act 2007 ITA 2007
Legislation covering income tax and details of an income tax computation
• Corporation Tax Act 2009 CTA 2009
Main taxable profit provisions for corporation tax including the rules on quantifying trading and other income
(property, NTLR, intangibles, etc.).
• Corporation Tax Act 2010 CTA 2010
Legislation covering the corporation tax calculation, associated companies etc.
The above Acts are all consolidation Acts, pulling together information on one subject area.
In future you may have to look up a rule in the legislation. It is helpful when doing this if you have an idea of the
subject you are dealing with and therefore which act to look in first. For example, if you are unsure on the rules on
the personal allowance for income tax purposes you would need to look in ITA 2007 as it deals with the income tax
computation. If, however, you were looking for the rules on replacement of domestic items relief for rental properties
you would look in ITTOIA 2005 as it relates to an individual’s trading, property and other income.
Although the Taxes Management Act is dated 1970 and self-assessment was not introduced until the 1990s, the Act
remains relevant, although it has undergone various amendments over the years. The dates of the Acts indicate the
year in which the Act was last completely updated. However, every Act will also be updated by the annual Finance
Acts ensuring it is up-to-date for the current fiscal year. The full name for TMA 1970 should, therefore, be Taxes
Management Act 1970 (as updated by subsequent Finance Acts).
Notes

You will encounter legislative references throughout your tax materials. These references generally take the form of
an acronym followed by the year of the particular piece of legislation. References will also be prefixed by a section
number (and sub-section if application). If the information is found in a Schedule to the Act (an appendix found at
the end of the main Act), the reference will be prefixed by a paragraph and schedule number e.g. ‘para 4, Sch 24 FA
2007’ refers to paragraph 4 of Schedule 24 to Finance Act 2007. ‘s4 FA 2007’ refers to section 4 of Finance Act 2007.
The PoT notes have legislative references to allow you to refer to them during later studies when you will be using
the legislation handbooks. You are not expected to learn these references for the PoT exam.
The second source of primary law that you will encounter is legal precedent which is derived from case law.
Precedent is defined as ‘rules of law deduced from judges’ decisions’. Although Scotland and England have
different legal systems, the law in each country is based on a ‘mixed’ system of legislation and precedent. Case law,
therefore, has an important part to play in interpreting the appropriate tax treatment in many situations.
The courts can become involved where two parties (generally the taxpayer and HMRC) cannot reach agreement
on the interpretation of legislation or its application to a particular scenario. Initial disputes are heard by HMRC (see
Module 1, 1.6.3) but this may progress on to the tribunal system and eventually the courts if the dispute involves a
‘point of law’.
The courts involved in tax cases in the UK are as follows:
Scotland Rest of UK
Court of Session Court of Appeal

then then
Supreme Court Supreme Court
Historically, it has also been possible for cases to be heard in the European courts, particularly in relation to VAT.
Now that the UK has left the EU, this is no longer the case.
When we refer to legal ‘precedent’ this means the collective body of judicial decisions relating to an issue. Judges
decide disputes in accordance with a rule or principle. The only part of the decision that is binding is the part known
as the ratio decidendi – the legal reason for the decision, that is, the rule upon which the case has been decided.
The ratio decidendi of the case is to be distinguished from obiter dicta – other words, asides, things said along the
way which may be persuasive in future cases but do not have to be followed.
Decisions of the tribunals and courts are published with a copy of the legal reasoning behind the decision included.
Lower courts will be bound by the previous decisions of higher courts.
Notes

Where a decision is reached that is different from existing precedent the court will generally seek to show that the
facts/circumstances are different, hence establishing a separate precedent based on the facts they face.
Case law is important to the study of tax and this course will refer to case decisions, where appropriate. Many of
these cases involve disputes over the interpretation of legislation.
Often the case law referred to in the course appears dated but this is partly because the first case in which a
legal principle is established will then be referred to in subsequent cases unless the subsequent case can be
distinguished on its facts or the legal principle is overturned (see the point on ‘precedent’ above). It is not uncommon
for current day tax cases to be decided with reference to case law from the late 19th and early 20th century.
When providing information to a client it is rarely necessary to know or quote case names, but you will need to refer
to, and understand, precedents (or principles) set by case law. When studying for the exam therefore, you need to
understand case law and its relevance but you do not need to learn the case names.
14.3.2 Secondary (or Delegated) Legislation
This is legislation providing additional tax rules or detail. The primary legislation (an Act) delegates authority to
Ministers to create such legislation in various areas. The most common types of secondary legislation are Statutory
Instruments (SIs) and Regulations. Typical areas of secondary legislation are VAT and payroll/PAYE administration.
The main Acts in these areas contain a broad framework and the detail to this framework is added to by SIs.
Statutory Instruments can also be used to allow the provisions of an Act to be brought into force or altered without
Parliament having to pass a new Act.
SIs therefore do not have the full parliamentary scrutiny that an Act is subjected to.
Statutory instruments will have a full title, for example The Income Tax (PAYE) Regulations 2003, but are more
commonly denoted by the year in which they are made and the sequential number within that year. The PAYE
Regulations are more commonly known as SI2003/2682, being the 2,682nd SI of 2003.
Notes

14.3.3 Administrative Quasi-Legislation
Other material can also be found in legislation books that does not fall into the above two categories. This includes:
• Statements of Practice (SPs)

These set out HMRC’s interpretation of particular issues, outlining how issues will be dealt with in practice.
• Extra Statutory Concessions (ESCs)
These set out a position contrary to the legislation which, as a concession, HMRC is prepared to accept.
• Press Releases (PRs)
These cover many topics and are issued by HMRC throughout the year.
• Revenue Interpretations (RIs)
As for a Statement of Practice above.
• HMRC Manuals
Although not published in the legislation books, these internal manuals used by HMRC staff are often referred
to in footnotes to the legislation. They are available on the HMRC website and can be a very useful point of
reference.
You should now be able to meet learning outcomes one and two.
Notes

14.4 Summary and Conclusion
Students should now be able to:
• describe the primary statutes and other sources of tax law:

• Primary sources
• Acts of Parliament – legislation created through the parliamentary process
• Legal precedent (case law) – rules of law deduced by judges
• Secondary sources
• Statutory Instruments and Regulations – secondary or delegated legislation with the full force of law.
Power to create is delegated by primary legislation
• Quasi-legislation
• Administrative Quasi-Legislation – not legally binding but useful documents in guiding the practice of
HMRC, taxpayers and professionals.
• list the different types of legislation and their importance to the tax professional.
Notes

Appendix 1 – Finance Bill to Finance Act
Progress of Finance Bill to Finance Act
1. Draft Bill Based on manifesto and political decisions.

prepared by the
Cabinet approves the Draft Bill, for example Finance Bill 2022.
government
2. Budget Made by the Chancellor of the Exchequer where he puts forward his proposed
Statement changes in tax for the tax year starting 6 April following.
3. First Reading of A mere formality and then it is published as the Finance Bill and becomes publicly
the Bill available.
4. Second Reading A debate on principle, usually political in nature. No amendments.
5. The (Standing) Detailed consideration by around 20 to 25 MPs reflecting the political composition of
Committee the House of Commons. The most important stage where amendments are made.
6. Report Stage The Committee reports back to the House of Commons on amendments and seeks
approval.
7. Third Reading Brief final consideration. No further amendments possible.
8. House of Lords Similar process but there is no power to amend as the Speaker of the Commons will
have certified the Bill as a ‘Money Bill’ (dating from 1911).
9. Royal Assent Queen gives formal assent and the Bill is now an Act, for example, Finance Act 2022.
Must become law before 5 August. (Provisional Collection of Taxes Act 1968 allows
continuation of tax collection for four months from start of tax year, whilst legislation is
being finalised).
Notes

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TC – Principles of Tax 2022/23 3

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 5

Income Tax Allowances

Basic personal allowance £12,570 £12,570

Income level for restriction of personal allowance £100,000 £100,000

Marriage allowance transferable amount £1,260 £1,260

Blind person’s allowance £2,520 £2,600

Property income allowance £1,000 £1,000

Rent-a-room relief £7,500 £7,500

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 6

Income Tax Rates 2021/22 2022/23

Main and savings rates

Starting rate for savings income only 0% 0%

Basic rate for non-savings and savings income 20% 20%

Higher rate for non-savings and savings income 40% 40%

Additional rate for non-savings and savings income 45% 45%

Income Tax Bands

Basic rate on income up to £37,700 £37,700

Higher rate on income £37,701 - £150,000 £37,701 - £150,000

Additional rate on income over £150,000

Savings income starting rate band £5,000 £5,000

Personal savings allowance:

Basic rate taxpayers £1,000 £1,000

Higher rate taxpayers £500 £500

Additional rate taxpayers Nil Nil

Dividend allowance at 0% £2,000 £2,000

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 7

Scottish income tax rates 2021/22 2022/23

Starter rate 19% 19%

Basic rate 20% 20%

Intermediate rate 21% 21%

Higher rate 41% 41%

Top rate 46% 46%

Scottish income tax bands 2021/22 2022/23

Starter rate on income up to £2,097 £2,162

Basic rate on income £2,098 - £12,726 £2,163 - £13,118

Intermediate rate on income £12,727 - £31,092 £13,119 - £31,092

Higher rate on income £31,093 - £150,000 £31,093 - £150,000

Top rate on income over £150,000 £150,000

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 8

Available for letting (days per annum) 210 210

Actually let (days per annum) 105 105

Longer term occupation (continuous days let to same person) 31 31

Longer term occupation total days 155 155

Individual Savings Account 2021/22 2022/23

Investment limit £20,000 £20,000

Junior ISA £9,000 £9,000

Lifetime ISA limit £4,000 £4,000

Pension scheme limits 2021/22 2022/23

Annual allowance £40,000 £40,000

Minimum allowance £4,000 £4,000

Lifetime allowance £1,073,100 £1,073,100

TC – Principles of Tax 2022/23 – Tax Rates 2022/23 9

Annual exempt amount £12,300 £12,300

CGT rates for individuals

Gains in remaining basic rate band 10%* 10%*

Gains exceeding basic rate band 20%* 20%*

Principal Private Residence (‘PPR’) Exempt Periods 2021/22 and 2022/23

Actual Occupation Deemed Occupation

Official Rate of Interest

1. Supplement for diesel = 4% (capped at 37%)