Income Tax Basics

Income Tax Basics
UK Residency
for an individual to be liable to pay income tax to uk tax authorities he/she needs to be uk resident the includes children as well.
1
UK Residency
1. Does the individual fall in either the automatic resident or automatic non-resident criteria?
the first check to make in exam if individual fulfills criteria that automatically makes him/her resident or non resident
Automatic Resident
any individual who is in uk for more or equal to 183 days will automatically be considered a resident and therefore
▪ In UK for ≥ 183 days in a tax year have to pay tax to uk tax authorities on income he/she earned in tax year.
▪ Only home is in UK
▪ Carries out full time work in UK carries out all (job business etc)( does its work in uk) if any work ouside uk no matter how small work
then this condition is not met.
Automatic Non-Resident if automatic non resident he/she will not be liable to income tax.
▪ In UK for < 16 days in a tax year
▪ In UK for < 46 days in a tax year and non-resident during past 3 tax years
▪ In UK < 91 days in a tax year and works full-time overseas means only work outside uk not in uk any work in uk if then this
condition is not met
if nothing comes to conclusion form automatic tests then remember these two tests does not cover the whole scenarios in such circumstances hmrc has laid down additional guidelines in
form of residency table.
UK Residency
1. Does the individual fall in either the automatic resident or automatic non-resident criteria?
2. If not, refer to the Tax tables on residency. Check the in order to read guide lines (residency table) correctly you need to first establish
▪ Duration of the individual’s stay in UK, (how long individual has been in uk for given tax year)
▪ Previous residency status (then look into whether the individual was previously treated as uk resident or non resident)
▪ Number of ties he/she is required to possess, in order to be considered a UK resident

^(and then identify how many ties/links to uk he/she needs to possess in order to be considered to be uk resident for tax year in consideration.)
status
Residency
/ \
/ \
Days in UK Previously Resident Not Previously Resident

Less than 16 Automatically not resident Automatically not resident
16 – 45 Resident if 4 UK ties or more Automatically not resident
46 – 90 Resident if 3 UK ties or more Resident if 4 UK ties
91 – 120 Resident if 2 UK ties or more Resident if 3 UK ties or more
21 – 182 Resident if 1 UK tie or more Resident if 2 UK ties or more
183 or more Automatically resident Automatically resident
sub step 1 of step 2 from previous slide s u b s t e p 2 o f s t e p 1 o f p r e v i o u s s l i d e
Statutory Test
Based on following UK ties:
• Close family in UK – spouse, civil partner or minor children
• House in UK made use of during the tax year
• Doing substantive work in UK
• In UK for > 90 days in either of the previous 2 tax years
• Spending more time in UK than any other country

Thank you…
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Income Tax Basics
UK Residency - Examples
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Example
Joanne is self-employed as a painter. She has previously been resident in the UK, spending
more than 250 days here each tax year.
On 6 April 2022, Joanne purchased a property in Spain, and during 2022-23 she mainly lived
and worked there. However, she still has a house in the UK where her husband and family
live.
Joanne visits the UK on a regular basis, staying in the family home. During 2022-23, a total of
80 days were spent in the UK, of which 35 were for work.

Solution
Automatic Resident Automatic Non-Resident
▪ In UK for ≥ 183 days in a tax year ▪ In UK for < 16 days in a tax year
▪ Only home is in UK ▪ In UK for < 46 days in a tax year and non-
▪ Carries out full time work in UK resident during past 3 tax years
▪ In UK < 91 days in a tax year and works full-
time overseas
Solution
Days in UK Previously Resident Not Previously Resident

Less than 16 Automatically not resident Automatically not resident
16 – 45 Resident if 4 UK ties or more Automatically not resident
46 – 90 Resident if 3 UK ties or more Resident if 4 UK ties
91 – 120 Resident if 2 UK ties or more Resident if 3 UK ties or more
21 – 182 Resident if 1 UK tie or more Resident if 2 UK ties or more
183 or more Automatically resident Automatically resident
• In UK for > 90 days in either of the previous 2 tax • House in UK made use of during the tax year
years
• Spending more time in UK than any other
• Close family in UK country
• Doing substantive work in UK
Exam Question
Hana was UK resident in the tax year 2021-22. He worked full-time in Egypt throughout the tax
year 2022-23.
What is the maximum number of days which Hana can spend in the UK and be treated as
automatically not resident in the UK for the tax year 2022-23?
A. 15
B. 45
C. 90
D. 182
Solution
Focus on requirement:

Solution
Apply them to Hana’s specific scenario
▪ In UK for < 16 days in a tax year
▪ Could be although very few days
▪ In UK for < 46 days in a tax year and non-resident during past 3 tax years
▪ Cannot apply as Hana was UK resident in the previous tax year
▪ In UK < 91 days in a tax year and works full-time overseas
▪ Hana does work full-time in Egypt, so he can get away with spending < 91 days in the UK
Exam Question
Hana was UK resident in the tax year 2021-22. He worked full-time in Egypt throughout the tax
year 2022-23.
A. 15
B. 45
C. 90
D. 182
Thank you…
17
Income Tax Basics
Types of Income
the income tax definition is tax payable/paid by uk resident individual on his/he taxable income in a tax year.
in exam if it is not a requirement to determine the residency status of individually assume individual is uk resident and you can proceed with tax calculation so if you are dealing with a uk
resident individual and you have to calculate his/her income tax then we need to identify the taxable income individual has earned or received during the tax year
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Income
as per hmrc all these incomes are there are such types of income or sources of
taxable that is a person earning income income which are exempt ,which means tax is national saving and investment certificate =NSIC 0R nsic
through any of these means in the tax not payable on the income regardless of
year is required to pay tax on amount amount earned. Although list is longer following national savings and investment =NSI OR nsi
earned are commonly tested in exam.
national savings and investments account = NSIA OR nsia
Taxable Exempt
an individual running
▪ Trading profit the business would ▪ Interest received from National Saving &
have trading profit
Investment Certificate of bank had been purchased by individual , then interest earned on them is exempt.
nsi is a state owned savings bank in uk. Interest earned from nsia is taxable but if certificates of
▪ Rental income if he/she let out property their

will be rental or property income.
▪ Employment income
if individual is
working a job he/she
▪ Interest from Individual Savings Account (ISA)
will possess employment
income.
▪ Interest income he/she will earn interest income ▪ Competition prizes, national lottery, premium
on bank accounts
cash prizes won in competition, won national
also individual can earn bond prizes and betting winnings lottery, premium bond prized and gambling betting
winnings are all exempt
▪ Dividend income dividends income on their
shareholdings.
▪ Interest received on overpaid taxes

▪ Pension received additionally retired individual may
receive pension income
hmrc is liable to pay interest on any tax that has been overpaid by
individual. but this interest earned too is also exempt from further tax.
individual savings account = ISA OR isa
Individual Savings Account

out of list of exempt income sources isa is specifically highlighted in tax rate and allowances in exam. isa are long
term tax free saving account that hmrc has made tax free in order to encourage individuals to save. but there is a limit
to amount deposited or invested in this account that is tax free.
and this will be mentioned in tax rates and allowances

▪ For the current tax year, the limit of investment is £20,000 in total. table so an individual can either deposit 20,000 £ in an
isa or purchase stokes(shares) of isa up to this amount
and get away tax free.
▪ Can be a mixture of cash or stock ISAs ifnotanexceeded.

individual opt then can go for a combination of both cash or stock isas provided limit of 20,000£ is
▪ Cash ISA interest income is exempt if deposited in cash isa interest income earned is exempt.
▪ Stocks ISA dividend income is exempt like wise dividend income earned from stocks isa is also exempt
tax implication of when an individual deposit more than 20,000£ in isa is not part of the syllabus.
Thank you…
21
Income Tax Basics
Taxable Income Calculation
in an exam scenario you will be provided with multiple sources of income for an individual in a tax year. To calculate income tax for individual you will first have to work out total taxable
income for him/her(individual subject to tax)
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Determining Tax Liability and Payable - Steps
steps to calculate taxable income include;
1. Collate income from all sources in a tax year. collating income from all possible sources in tax year.
2. Establish whether taxable or exempt establishing whether it is taxable or exempt.
3. Segregate income into Non Savings Income (NSI), Savings Income (SI) and Dividend
Income (DI)
4. Deduct interest paid on qualifying loan – IF ANY
5. Deduct personal allowance make adjustment for pa

this is recommended format to arrive at taxable income for an individual in a tax year.
Taxable Income Computation Format

Name of individual Non Saving Savings Dividend Total
Income tax computation: 2022/23 Income Income Income Income
£ £ £ £
Employment income
Trading income
Property Income
Other Investment income
Interest income received gross
Interest income net (? x 100/80)
Dividends received from UK companies
Other dividend income (? x 100/91.25)
Total income
Less : Qualifying interest
Less: Loss Reliefs
Net income
Less : Personal allowance
Taxable income
Name of individual Non Saving Savings Dividend Total over the course
of syllabus we
Income tax computation: 2022/23 Income Income Income Income will be recapping
tax knowledge
£ £ £ £ on how taxable
employment
Employment income x x income=ei or EI
Trading income x x trading income
or profit =tp/ti
Property Income x x or TI/TP, property
income = PI or
Other Investment income x x pi and other
investment income
Interest income received gross is calculated.
while also
Interest income net (? x 100/80) learning ATX
Dividends received from UK companies level concepts.

Total income
Less: Loss Reliefs
Net income
Taxable income
we will also be looking at details related to interest income, some of interest income is received gross while some it is received net from certain sources (net means deducted of tax)
(gross means before tax or not deducted tax or inclusive of tax)

Name of individual Non Saving Savings Dividend Total interest received
notes deals with
Income tax computation: 2022/23 Income Income Income Income two types of
interest income
£ £ £ £ in our tax
calculation
Employment income x x format.
Trading income x x
Property Income x x
Other Investment income x x
Interest income received gross x x
Interest income net (? x 100/80) x x
Dividends received from UK companies
Total income
Less: Loss Reliefs
Net income
Taxable income
interest received from following sources is received gross which means cash amount given in question can directly be inserted in taxable income computation.(remeber in our prescribed
format for calculation of income tax we will be using figures which are gross).
Interest Received Gross

sources include; bank and building society= BBS or bbs
▪ Bank and building society interest
▪ Interest on Government Issued Long Term Securities (GILTS)
▪ Interest from National Savings and Investment account (NS&I)
▪ Interest from quoted corporate bonds of UK resident companies
▪ Foreign interest received gross of any overseas tax deducted if any

interest received from following sources are deemed to be net that is post tax deduction at source.
IIP is a type of trust settlement where beneficiary is permitted an automatic right to income arising
from trust, but not necessarily the capital. The trustee is responsible for paying tax on income so they deduct
Interest Received Net 20% tax at source on any interest income being paid out of an IIP trust and 8.75% on any dividend income
being handed over.
▪ Interest from unquoted corporate bonds of UK resident companies
▪ Interest from an Interest in Possession (IIP) trust
Treatment
▪ These amounts are deemed to have been received net of 20% tax so the cash amounts
are grossed up The tax treatment for any interest amount received net is that the amount need to be grossed up by 20% and then included in taxable income
computation of the beneficiary
▪ Amount x 100/80 To gross up the amount simply multiply the figure in exam with fraction 100/80
The individual could have received dividends from uk companies, that could be included in income tax computation format.(dividdends received from uk companies)
Other dividend income could include dividend earned on IIP trust.

Name of individual Non Saving Savings Dividend Total
Income tax computation: 2022/23 Income Income Income Income
£ £ £ £
Employment income x x
Trading income x x
Property Income x x
Other Investment income x x
Interest income received gross x x
Interest income net (? x 100/80) x x
Dividends received from UK companies x x
Other dividend income (? x 100/91.25) x x
Total income
Less: Loss Reliefs
Net income
Taxable income
Other Dividend Income As mentioned in previous slide while introducing IIP trust trustees could have deducted 8.75% tax at
source. Therefore any amount of dividend given in exam needs to be grossed up.
▪ Dividends from an IIP trust (Cash amount x 100/91.25) by picking the amount or figure given in exam and multiplying it with fraction
100/91.25
Thank you…
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One of the adjustment that can be made to income of individual is a payment of any qualifying interest. This is not a compulsory payment and only need to de dealt with if it had been
mentioned in exam scenario.
Income Tax Basics

Qualifying Interest
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As we have already seen in income tax computation qualifying interest is adjusted against total income to arrive at net income amount and that eventually leads to taxable income figure
qualifying interest = QI or qi
qualifying interest income are adjusted against

against income in following order.
1) non savings income = NSI or nsi
2)savings income = SI or si
3) dividend income = DI or di
adjusted first and formost against nsi then against si and
the against di if any left over
Name of individual Non Savings Dividend Total

Income tax computation: Saving Income Income Income
2022/23 Income
£ £ £ £
Trading income x x
Property income x x
Bank interest x x
UK dividends received x x
Total income x x x x
Less : Qualifying interest (x)1 (x)2 (x)3 (x)
Net income xx xx xx xx
Qualifying Interest adjusted total income =ATI or ati
▪ Reasonable amount of interest paid on a loan taken by an individual for a qualifying
purpose. in real world qi can only be relived for a reasonable amount.
▪ Excessive amounts of interest paid i.e. interest paid over and above the commercial rate
is not normally allowed so any interest paid over and above the commercial rate is not normally allowed as an adjustment.
▪ HMRC have set a cap on reliefs, which applies on qualifying interest as well. qi is one of those relief on which
hmrc has laid cap
Cap is greater of: £50,000 or 25% of the Adjusted Total Income for the tax year
Qualifying interest cannot create a negative figure. qifigure

adjustment at most convert total income to zero it can not create a negative
Qualifying Purpose
loan taken for following purposes are termed as qualifying loan and interest paid on them is eligible for relief
purposes include
▪ Loan taken to purchase plant or machinery for use in employment
▪ Loan taken to buy plant or machinery for use in partnership or to make capital investment
in a partnership
▪ Loan taken to buy shares in a close trading company i.e. a company in which the
individual possesses atleast 5% ordinary share capital or owns < 5% but has worked as part
of the management of the organisation senior management
▪ Loan taken to purchase shares in an employee controlled company

Thank you…
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personal allowance = PA or pa
Income Tax Basics

Personal Allowance
qci only needs to be included in taxable income computation if it has been mentioned in exam scenario where as pa is a default tax free allowance available to all individual tax payers
while pa is not generally mentioned in exam scenario it does require adjustment for taxable income to be determined. Every individual tax payer in uk is entitled to this allowance.
difference between allowance and relief; while allowance is available by statue or government and to everybody equally relief is provided on something that had not been provided under
normal conditions and not to everybody has conditions attached to it and is provided according to individual circumstances. simply put financial or practical assistance given to those in
special needs or difficulty
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Personal Allowance
❑ The personal allowance for the current tax year is £12,570
06/04/XX – 05/04/XX Income
£ £ £ £
Trading income x x
Rental income x x
Bank interest x x
Less : Personal allowance (12,570) - - (12,570)
Taxable income xx xx xx xx
if an individual has multiple categories or sources of
income, then pa is also adjusted in order in which qi is
adjusted. The following is the order
Taxable Income Computation Format 1)nsi

2)si
3)di

06/04/XX – 05/04/XX Income
£ £ £ £
Trading income x x
Rental income x x
Bank interest x x
Less : Personal allowance (x)1 (x)2 (x)3 (x)
while pa amount is standard to all tax payer if a tax payer has very high income tax authorities impose restriction on amount of pa that the individual can claim in a tax year. Primarily
because individual can bear increased tax burden. To identify who is a high income earner the tax authorities has set up a cut off point of 100,000£
adjusted net income =ANI or ani
Personal Allowance
❑ Personal Allowance Restrictions:
Adjusted net income (ANI) Personal Allowance

if ani amount of an individual is less then equal to 100,000£ then individual is not
Adjusted net income ≤ £100,000 No restrictionconsidered high income earner and is entitled to entire pa of amount 12,570£
Adjusted net income > £100,000 Reduce personal allowance by £1 for every
increase of £2 above £100,000
^
if however individual ani is more than 100,000£
then hmrc require that a reduction be made to pa
amount using following formula.
amount of ani in excess of 100,000£*1/2
then deduct this amount from pa of 12,570£
the concept is to deduct the pa of 12,570£ by 1£
for every 2£ of ani in excess of 100,000£
ani is the net income amount picked up from the total column of income tax computation but it is adjusted for two items if they have been paid by tax payer in tax year under consideration.
Adjusted Net Income

net income = NI or ni
gross personal pension contribution = GPPC OR gppc

gross gift aid donation = GGAD OR ggad
Net Income (picked up from the Income Tax pro-forma)
less Gross Personal Pension Contribution (if any in the tax year)
less Gross Gift Aid Donation (if any in the tax year)
the concept is that if they have been paid these amounts reduce ni to establish ani amount. In case where these are not paid (gppc or ggad) then net income will be equal to ani itself ni=ani
It is important to note here that deduction from ni is a separate working, it is simply carried out to assess whether the individual is exceeding the income threshold of 100,000£ or not, they are not actual
deduction in taxable income computation.
since may(tax payer) has single source of income which is Tp and this is categorised as nsi and since she possess no other categorised of income, we can create a single column format to record the
amounts. So there is no qi so tp =total income as well as ni tp=ti=ni (in this case) next is pa, but now we must focus on fact that income amount is greater than 100,000£, so we need to eastablish what ani
amount is, because if after adjustments, the ani falls below 100,000£, then may(tax payer) will be entitled to complete pa amount. Calculating ani, this will be ni less gppc and less ggad. After doing ani,
however is still 107,000£ which is greater hen 100,000£ so pa reduction formula is applied. We identify by how much amount ani exceeds threshold of 100,000£. The excess of 100,000£ will be multiplied
Example by fraction of 1/2 and the amount arrived at will be deducted from pa of 12,570£. In this exam the amount to be reduced was 3,500£. This will be deducted from
12,570£ lead to a reduce pa of 9,070£. This 9,070£ is now deducted from ni to arrive at taxable income.
For the current tax year May has a trading profit of £159,000. During the year May made
gross personal pension contributions of £40,000 and a gross gift aid donation of £12,000.
Her taxable income will be:
NSI/ Total
£
Trading Profits 159,000
Total/ Net Income 159,000
Personal Allowance* (9,070)
Taxable Income 149,930
May’s Adjusted Net Income = 159,000 – 40,000 – 12,000
= 107,000
*Reduced Personal Allowance = 12,570 – [(107,000 – 100,000)/2] = 9,070
now if you look at the application of formula to arrive at reduced pa. A possible scenario to consider is what will happen if the amount to be deducted from pa is greater than pa amount of 12,570£
Personal Allowance
❑ Personal Allowance can be reduced to zero but cannot create a negative figure
please note a tax advantage which is what pa is, can at the most reduced to 0. But can not create a loss or negative figure
❑ Personal Allowance Restrictions:
Adjusted net income (ANI) Personal Allowance

Adjusted net income ≤ £100,000 No restriction
Adjusted net income > £100,000 Reduce personal allowance by £1 for every
increase of £2 above £100,000
Adjusted net income > £125,140 NO PERSONAL ALLOWANCE
if reduction in pa figure was greater then equal to 12,570£ then pa for tax payer will be 0. The examination team has given you shortcut to use in actual exam, if ani is greater than equal to
125,140£ simply put down pa to 0 with no need to show the working for reduction in pa. Just write zero (0) at pa to gain relevant marks, also give slight indication in working such as
since ani is greater than equal to 125,140£ so pa = 0
Example
For the current tax year May has a trading profit of £159,000. During the year May made
a gross gift aid donation of £12,000.
Her taxable income will be:
NSI/ Total
£
Personal Allowance 0
May’s Adjusted Net Income = 159,000 – 12,000
= 147,000
*Reduced Personal Allowance = 0 because ANI is > £125,140
Thank you…
46
having covered basic elements of taxable income computation, lets now move on to calculation of income tax liability of a uk resident individual for a tax year. To start we will focus on taxable information
arrived at using the taxable income computation format. you may recall that sources of income are categorsied as nsi , si and di due to different tax rates applicable on them.
Income Tax Basics

Income Tax Liability Calculation
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06/04/XX – 05/04/XX Income
£ £ £ £
Trading income x x
Rental income x x
Bank interest x x
Less : Personal allowance (12,570) - - (12,570)
these are rates applicable on each of the category of income. Note that this key piece of information will be made available to you in your live exam, in tax tables so memoristion is not necessary
although, its correct application is crucial in order for easy marks to be scored.
Applying Tax Rates on Taxable Income

lets first see how the table is read, in the left most column, we have income tax band name, then in second column from left we have band limit, and then three categorizes of income
this also refers to tax status of individual if

individual's taxable income fall in any of band range/limit Non saving Dividend
Income tax band Band limit Saving income
income income
Basic rate band: £1 - £37,700 20% 20% 8.75%
Higher rate band: £37,701 – £ 150,000 40% 40% 33.75%

1
Additional rate band: £150,000 & above 45% 45% 39.35%
now if you read the table you will see that basic rate covers income range from 1 £ to 37,700 £. If income falling with in this range is from nsi, then tax rate of 20% is applicable on it.
similar percentage applies if income is form si, of 20%. But if income falling in this range is from source of dividend income, tax rate applicable is 8.75%
income from 37,700 £ -150,000 £ is considered to be high rate band once again depending on which category the income falls in this range is coming from, tax rates vary. Tax rate
applicable on nsi in this band is 40%. similarly for si is 40% but for di is 33.75%
Finally additional rate band cover income in excess of 150,000 £, in this band rate for nsi and si is 45%,but for di is 39.35%.
do note that tax is calculated on differencial basis, This means that in case of nsi for eg 20% is applicable on first 37,700 £ of income 40% will apply on income from 37,701 £ to 150,000 £
and if an individual has more than 150,000 £ of taxable nsi then tax rate of 45% will apply on amount in excess of 150,000 £(150,001 £ and above).
Additionally bear in mind that when the examination team refers to an individual as basic rate tax payer. this implies that the total taxable income of individual in the tax year is less than
equal to 37,700 £ so stating a individual is higher rate or additional rate tax payer automatically means that his/her total taxable income is with in the relevant band range/limit.
One more consideration regarding the tax band is that the band can be utilised only once in the tax year and as the norm nsi get the first shot in utilising the band, once nsi has been fully
taxed, then si is pocked up and matched to tax band available and finally di is taxed.
Example
lets assume individual A has taxable nsi of 160,000 £ and there is no other category of income. To make the band utilsaton concept easy to understand
its best to work out the capacity of each bank. This will be the amount that the band range covers. This is simply worked out by netting off the upper limit
and lower limit of band. When netting off to find capacity, take lower limit 1 £ less then it is for eg in basic rate band take lower limit to be 0 £ and upper
limit to be 37,700 £ so capacity of each band comes like this and vice versa.
A has taxable NSI (i.e. amount after Personal allowance) of £160,000
Income tax band Band limit Capacity NSI rate
Basic rate band: £1 - £37,700 37,700 20%
Higher rate band: £37,701 – £ 150,000 112,300 40%
Additional rate band: £150,000 & above Unlimited 45%
▪ 37,700 out of 160,000 use up the basic rate band.
▪ Leftover amount is 160,000 – 37,700 = 122,300
▪ 112,300 out of 122,300 use up the higher rate band.
▪ Leftover amount is 10,000 that falls in the additional higher rate band
Example
Taxable amount £
37,700 x 20% 7,540
112,300 x 40% 44,920
10,000 x 45% 4,500
Tax Liability 56,960

Thank you…
52
Income Tax Basics Nil rate band =NRB or nrb
Nil Rate Band

nil rate band is a form of tax relief, available only on taxable savings income and dividend income. This relief does not apply to non saving income at all.
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Tax Bands: Savings Income
A special concession in case of si is that if si falls in first 5,000 £ of taxable income then up to 5,000 £ amount, then it is taxed at 0%. that is no tax is payable on it.
▪ If the first £5,000 of an individual’s taxable income is SI, then a “0” rate applies to it.
The amount of si in excess of 5,000 £ upto 37,700 £ is taxed at 20%.
▪ If first £5,000 is used up by NSI, then the starting rate of 0% for Savings Income is wasted.
incorprated this starting rate band relief of si in tax rate tables, this is how modification appears.
Do note that this is not how
information will be laid out in tax
Income tax band Band limit NSI SI tables available in exam.
Although a note stating that the
starting rate of 0% on fist
£1 - £5,000 0% 5,000 £ of si is mentioned.
Basic rate band: 20%
£5,001 - £37,700 20%
Higher rate band: £37,701 – £ 150,000 40% 40%
Additional rate band: £150,000 & above 45% 45%

An additional concession that is available to both si and di is the concept of nil rate band(nrb). But the rules for each category of income are slightly different.
Nil Rate Bands: Savings Income
▪ Basic Rate Taxpayer: NRB on the first £1,000 of Savings income Inincome
case of si, If a taxpayer total taxable income that is
from all categories/sources of income falls in the
basic rate band, then a nrb of amount 1,000 £ will apply
on the first 1,000 £ of si. This means no tax will be applicable
No tax will be applicable on the first £1,000 of SI
on the first 1,000 £ of si.
▪ Higher Rate Taxpayer: NRB on the first £500 of Savings income If total taxable income of taxpayer falls in higher rate band,
then a nil rate band of 500 £ will be applicable. This means
no tax will be applied on the first 500 £ of si, regardless of
band these 500 £ actually fall into.
No tax will be applicable on the first £500 of SI
There is however, no si nil band applicable
▪ Additional Higher Rate Taxpayer: No NRB applicable on Savings income, if a tax payer is additional high rate
taxpayer.
▪ The Nil Rate Band is in addition to the starting tax rate of 0% on the first £5,000 of SI
So if in a situation an individual si does fall in first 5,000 £ of basic rate band then it wil be taxed at 0% and then taking into account the tax status of taxpayer, an additional 1,0000 £ or 500 £ will also be
taxed at 0% because of the nil rate band.
▪ The amount covered by the NRB does count towards the utilization of the tax band
A very important aspect to note is that the amount of income covered by nil rate band is considered to have utilised the tax band.
lets understand the application of above points with this example.
Since total taxable income of individual amount to 8,900 £ he/she will be termed as basic rate ax payer, and will be able to avail additional 1,000 £ of nil rate band on si.
Example
B has taxable NSI (i.e. amount after Personal allowance) of £1,800 and taxable SI of £7,100
Tax bands utilization
▪ The 1,800 taxable NSI will use the basic rate band first and be taxed at 20%
In terms of dealing with actual tax calculation, we start by taxing the 1,800 £ of nsi, This amount is put into basic rate band and taxed at 20%, giving rise to 360 £ tax liabillity.
Example
Taxable amount £
NSI 1,800 x 20% 360
Tax Liability
Example
having dealt with nsi , we now shift our focus to si, before that we could also determine how much basic rate band is still available, after the utilistion by nsi, so out of 37,700 £ only 1,800 £ has been utilised
so 35,900 £ of basic rate band capacity is still available. We now move to si, and consider two things. First is the si amount part of first 5,000 £ of total taxale incoe, In this case answer is yes , becasue nsi
which is taxable is less then 5,000 £ so , 3,200 £ of first 5,000 £ is still available.
▪ NSI amount < 5,000
▪ Leftover amount of the starting band for SI is 5,000 – 1,800 = 3,200
▪ 3,200 of SI will fall in the starting rate band (only available for SI) and be taxed at 0%
Example
Taxable amount £
NSI 1,800 x 20% 360
SI (5,000 – 1,800) 3,200 x 0% 0
Tax Liability
Example tax rate band =TRB OR trb
▪ SI amount not covered is 7,100 – 3,200 = 3,900 the left over taxable si is 3,900 £
▪ Of this 1,000 is covered by Nil Rate Band and is taxed at 0% so now we consider teh nil rate band available on si. The nil rate band is
1,000 £ for basic tax payer and also for this. Since a basic rate tax payer
the next 1,000 £ will be covered by nil rae band and taxed at zero.
▪ SI amount not covered = 3,900 – 1,000 = 2,900This will leave behind 2,900 £ of taxable si amount.
▪ Basic rate band utilization = 37,700 – 1,800 (NSI) – 3,200 (SI starting rate) – 1,000 (SI NRB) =
lets carry out a quick working to establish how much of basic rate band was utilised to fully understand the relationship between nrb and tax rate band(trb). first 1,800 £ of nsi was put
31,700 in basic rate band then 3,200 £ of si which was also matched to starting rate band then we consider 1,000 £ of si that was covered by nil rate band. Even though the tax rate applicable
on this is 0%, we will still consider it to be utilising basic rate band. At the end we still have 31,700 £ capacity in basic rate band which remains un utilised.
▪ 2,900 falls in the basic band and is taxed at 20% but the income of individual B which required taxing was only 2,900 £ that is why it its taxed as falling in basic
rate band and taxed at 20%.
Example
Table below
This is how calculation working along with application of starting rate or nil rate band needs to be displayed. ultimately the total tax liability amounted to be 940 £ in this question.
Taxable amount £
NSI 1,800 x 20% 360
SI (5,000 – 1,800) 3,200 x 0% 0
NRB 1,000 x 0% 0
(7,100 – 3,200 – 1,000) 2,900 x 20% 580
Tax Liability 940

unlike si, There is no separate starting tax rate applicable on di. Although if you refer to tax tables you will see, while tax rate for nsi and si are same across the three bands, tax rates applicable on di are
completely different. However like si, di also possess a nil rate ban concession and it is application is quite straight forward.
Nil Rate Bands: Dividend Income
▪ Basic/ Higher/ Additional Higher Rate Taxpayer: NRB on first £2000 of dividend income
No tax payable on the first £2000 of DI

The first 2,000£ di is covered by nil rate band. This means that first 2,000£ of di will be taxed at 0%, regardless of tax status of tax payer
Tax status = basic, higher or additional rate tax payer.

Example
C has taxable NSI of £18,000, taxable SI of £14,000 and taxable DI of £10,000
▪ The 18,000 taxable NSI will use the basic rate band first and be taxed at 20%
Total taxable income of individual of c is 42,000£ which makes C a higher rate tax payer. This means C is only entitles to nil rate band on si of worth 500£, but nil rate on di is unaffected by tax status of C,
which C will be entitled to 2,000£ nil rate band on di. We start the tax calculation with nsi, The 18,000£ falls in basic rate band and is taxed at 20%.
Example This gives rise to taxable charge of 3,600£
Taxable amount £
NSI 18,000 x 20% 3,600
Tax Liability
Example
▪ Leftover amount of the basic rate band will be 37,700 – 18,000 = 19,700 left behind basic rate band capacity is 19,700£
▪ Since C is a higher rate taxpayer, 500 of SI will be taxed at 0% because of the NRB
▪ Leftover amount of the basic rate band will be 19,700 – 500 = 19,200 Remember the nil rate band also utilises tax band so
unutilised basic rate band amount wil now be 19,200£
▪ The balancing 13,500 (14,000 – 500) of SI will fall in the basic rate band and be taxed at 20%
Example
Taxable amount £
NSI 18,000 x 20% 3,600
SI [37,700 – 18,000] = 19,700
NRB 500 x 0% 0
(14,000 – 500) 13,500 x 20% 2,700 This will lead to a tax charge of 2,700£.
Tax Liability
Example
▪ Leftover amount of the basic rate band will be 19,700 – 500 (SI NRB) – 13,500 = 5,700
▪ This can be utilized by DI
▪ But 2,000 of DI is covered by Nil Rate Band and is taxed at 0%
▪ Leftover amount of the basic rate band will be 5,700 – 2,000 (DI NRB) = 3,700 also cover basic rate band and leave
and for 2.000£ of nil rate band this will
behind, 3,700£ of basic rate band
▪ So, 3,700 of DI will be taxed at 8.75% because 3,700£ falls in basic rate band.
▪ DI = 10,000 – 2,000 – 3,700 = 4,300 taxed in the higher rate band at 33.75% because this remaining di falls in
higher rate band this is taxed at
33.75%.
Example
NOTE: keep in mind that in answering calculation question in exam,
the final answer should be round to nearest £(pound sterling). A
possibility that a tax payer may face is that his/her si or di taxable
Taxable amount £ amount is lower than nil rate bands available, the Tax payer may have
no tax liability associated with either si or di. A nil rate band like any other
tax relief can not create a negative figure.
NSI 18,000 x 20% 3,600
SI [37,700 – 18,000] = 19,700
NRB 500 x 0% 0
(14,000 – 500) 13,500 x 20% 2,700
DI [19,700 – 14,000] = 5,700
NRB 2,000 x 0% 0
(5,700 – 2,000) 3,700 x 8.75% 323.75 This gives a tax charge of 323.75£
(10,000 – 2,000 – 3,700) 4,300 x 33.75% 1,451.25 and this gives tax charge of 1.451.25£
Tax Liability 8,075

Thank you…
69
Income Tax Basics
Income Tax Payable Calculation
The tax liability amount calculated is not necessarily the amount that has to be handed over to the tax authorities. The tax payable amount may differ.
70
Tax Payable
why tax liability differs from tax payable?. There can be 2 primary reasons for this,
▪ Tax Reliefs: HMRC approved reductions of the tax liability

If a tax payer is in a position to avail reliefs, that the tax authorities had approved as a deduction against the tax liability calculated.
▪ Example: Marriage allowance: Spouse or civil partner, transfers some of his/ her personal
allowance
Marriage allowance is when spouse or civil partner of the tax payer transfer his/her pa to taxpayer. the tax authorities allows the transferred allowance to be adjusted against tax liability at basic rate of tax
▪ Tax deducted at source: Tax already paid to HMRC on the earnings of the taxpayer
The tax payer may already have had deduction some of tax from his/her earning at source.
▪ Example: Pay As You Earn (PAYE) system: Employers deduct a tax amount from the
employee’s salary each month and pass it on to HMRC

PAYE is where tax is deducted from salary, before it is handed over to employee, then employer passes it on to HMRC and the tax authorities record the tax received under the tax payer name.
The adjustment to tax liability is reflected in the following manner.
Format
We deduct the tax relied that have been allowed by tax authorities as an adjustment against
Tax liability xxx the liability. We also adjust any tax deducted at source, and the amount left over is tax payable
amount, That the tax payer needs to hand over to tax authorities under self assesment system
Less: Tax reliefs
Marriage allowance (xx)
Investment schemes relief (xx)
Double taxation relief (xx)
Less: Tax deducted at source
PAYE (xx)
Tax payable xx
Thank you…
73
Income Tax Basics
Income Tax Payable - Example
lets look at an example to cover the process of collating the income in a tax year, determining the tax payable of an individual.
74
Example
For the tax year 2022-23, Joe has a salary of £46,700, savings income of £2,000 and dividend
income of £6,000.
During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer
deducted income tax of £6,826 under PAYE from his earnings.

The first step is to create an income tax computation format, and include all three categories of income in it,as joe has sources of income which cover all three categories . we then list
down the amount to be taxed from each source and work out the total income in all columns
Solution
Joe – Income Tax Computation NSI SI DI Total
£ £ £ £
Salary 46,700 46,700
Savings income 2,000 2,000
Dividends income 6,000 6,000
Total Income 46,700 2,000 6,000 54,700

then we make adjustment for qi in best order and since income of individual is far below 100,000£ threshold he is entitled to complete pa and is also adjusted in best order as qi
adjustment against nsi.
Solution
£ £ £ £
Salary 46,700 46,700
Total Income 46,700 2,000 6,000 54,700
Qualifying Interest (300) (300)

Solution
£ £ £ £
Salary 46,700 46,700
Total Income 46,700 2,000 6,000 54,700
Qualifying Interest (300) (300)
Personal Allowance (12,570) - - (12,570)
Taxable Income 33,830 2,000 6,000 41,830

now we have the total taxable income based on total(sum of all three categories of income) from the taxable amount of income of individual we can gage that Joe is a high rate tax
payer.
Applying Tax Rates on Taxable Income
Income tax band Band limit Non saving income Saving income Divided income
Basic rate band: £1 - £37,700 20% 20%* 8.75%
Higher rate band: £37,701 – £ 150,000 40% 40% 33.75%
Additional rate band: £150,000 & above 45% 45% 39.35%
*0% for the first £5,000 and 20% for £5,001 till £37,700
Savings Income Nil Rate Bands
Basic Rate Tax Payer £1,000
Higher Rate Tax Payer £500
Dividend Nil Rate Band £2,000
Looking at taxable income of joe this seems that he will be entitled to a nil rate band of 500£ on si and 2,000£ on di.
So we start with the taxation of income and just for reference purposed there is inserted a basic rate band availability column, The taxable nsi of 33,830£ falls completerly with in basic
rate band and is taxed at 20% giving rise to tax charge of 6,766£. The default capacity of basic rate band is reduced to 3,870£.
Solution
Tax Liability Calculation Total Basic Rate Band Availability

£
NSI 37,700
33,830 x 20% 6,766 (33,830)
3,870
The si taxable amount of 2,000£ will now fall entirely with in basic rate and since first 5000£ of basic rate band has been used by nsi the starting rate band is not available on si amount
however, becaseu joe is higher rate tax payer, first 500£ of si will be covered by nil rate band and will be taxed at 0% the balancing 1,500£ will now be taxed at 20% leading to a tax
charge of 300£ Post this we assess the basic rate band capacity and identifies that basic rate band can still accept 1,870£ of taxable income.
Solution

£
NSI 37,700
33,830 x 20% 6,766 (33,830)
SI 3,870
500 x 0 (SI Nil Rate Band) 0 (500)
[2,000 – 500] 1,500 x 20% 300 (1,500)
1,870
so now di is 6,000£ in total which is more than basic rate band capactiy abailable logically this measn that 1,870£ 6,000£ di will fall in basic rate band and excess will be assessed in higher rate
band, But di also have a nil rate band of 2,000£ so first 2,000£ of di amount will be taxed at 0% this means 1,870£ of basic rate will be covered by nil rate band of di and balancing
amount of 2,000£ of nil rate band will spill to higher rate band an be taxed at 0% from 6,000£ of di 2,000£ is covered by nil rate band and remaining 4,000£ will now fall in higher rate
and be axed at 33.75%
Solution

£
NSI 37,700
33,830 x 20% 6,766 (33,830)
SI 3,870
500 x 0 (SI Nil Rate Band) 0 (500)
[2,000 – 500] 1,500 x 20% 300 (1,500)
DI 1,870
2,000 x 0 (DI Nil Rate Band) 0 (1,870)
[6,000 – 2,000] 4,000 x 33.75% 1,350 Higher Rate Band Starts
Tax Liability 8,416
Solution
Since joe had already had paid 6,826 £ to hmrc under paye scheme he will adjust
the amount against the total tax liability computed, to find what amount needs to be
Income Tax Calculation Total handed over to tax authorities. If joe had not deducted any tax at source we would
be liable to pay entire 8,416 £ of tax.
£
NSI
33,830 x 20% 6,766
SI
500 x 0 (SI Nil Rate Band) 0
[2,000 – 500] 1,500 x 20% 300
DI
2,000 x 0 (DI Nil Rate Band) 0
[6,000 – 2,000] 4,000 x 33.75% 1,350
Tax Liability 8,416
Less: PAYE (6,826)
Tax Payable 1,590
Thank you…
84
Income Tax Basics
Allocation of Personal Allowance
Pa is default tax relief amount available to all individuals.
85
Personal Allowance Allocation
against income
❑ Normally PA is allocated in the following sequence:
^
▪ NSI
▪ SI
▪ DI
❑ Tax law requires that this be net off in the most beneficial basis
❑ So in certain cases to ensure better tax saving, sequence can be changed

Example
Alfred had the following gross income in the year 2022/23
NSI SI DI
Trading profits £6,000
Bank interest £4,500
Dividend income £20,000
Solution
In normal allocation pa is first set off against nsi, then si and any residue against di. however in this scenario we realize ( consider points below)
Normally
NSI SI DI
Less: PA (6,000) (4,500) Bal(2,070)
▪ The starting rate of Savings Income of £5,000 is not being utilised
▪ The Nil Rate band of SI is being wasted
▪ The Nil Rate band of Dividend income will be available regardless

Solution
NSI SI DI
Less: PA (6,000) - (6,570)
Taxable Income 0 4,500 13,430
▪ NSI used up first as it doesn’t have a NRB and is taxed at higher rates
6,000 £ can be used against nsi because nsi does not have any nil rate bad and it is taxed t higher rate.
▪ Since Savings Income can be covered by the NRB and starting rate band of tax, we will allocate the PA to
being covered by starting and nil rate band means that 4,500 £ of si will be taxed at 0%.
▪ Dividend income which also has £2,000 of NRB, leading to a tax liability of £11,430 x 8.75% = £1,000
the balancing amount of 6,570 £ is allocated to di and out of balancing taxable di 2,000 £ will be covered by nrb on di and after taxing at nil rate band the following amount
of 11,430 £ can now be taxed at basic rate 0f 8.75% because they fall in basic rate band.
Thank you…
90
gift aid donation =GAD OR gad
personal pension contributions= ppc or PPC
Income Tax Basics

Gift Aid Donation and Personal Pension
Contributions
91
Gift Aid Donation
▪ Charitable donation GAD is basically a charitable donation.
of these types
▪ To encourage the donation,^ HMRC set up gift aid scheme
▪ Available for taxpayers only so if you are not a tax payer your charitable donation wil not fall under gad and you can not enjoy the benefits associated with it.
▪ Contribution of taxpayer is considered to be 80% of the total donation

The first impact of gad is that regardless of amount contributed by tax payer, the cash paid by him/her is just considered to be 80% of total donation.
▪ Balancing 20% is donated by the HMRC

with hmrc pittching in with the remaining 20%
▪ Individual taxpayer gets tax relief for the gross amount

and the tax payer ends up getting relief on gross amount which is inclusive amount which he/she did not even contributed.
personal pension scheme = personal pension contributions =pps or ppc =PPS or PPC
Personal Pension Scheme

approved
▪ To encourage savings for retirement, HMRC offers tax relief on any ^ personal pension
contribution made
▪ Available for taxpayers only tax advantage will be enjoyed by tax payer only.
▪ Contribution of taxpayer is considered to be 80% of the total donation
▪ Balancing 20% is contributed by the HMRC
▪ Individual taxpayer gets tax relief for the gross amount

not only the individual get relief on the gross amount but his/her pension contributions that they will be enjoying later in life increases.
Tax Implications: GAD or PPC
▪ The gross amount is used to determine the Adjusted Net Income amount, which may
affect the Personal Allowance (need to identify whether pa needs to be reduced or not).
for the year in which contribution was made

The relief is provided by allowing the tax payer to extend
▪^ The upper limit of the basic rate band^ is extended by the gross amount of the Gift Aid
payment or/ and personal pension contribution.
▪ This results in a lower rate of tax being applied on the taxable income.
A person who pays tax at the higher rate, this would automatically leads to tax savings, as more of individuals taxable will fall in basic rate band instead of higher rate band,
Example
For the current tax year, May has a trading profit of £159,000. During the year, May made
net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her
income tax liability is: To calculate income tax liability we will start with layout.
NSI/ Total
£
Personal Allowance* (9,070)
May’s Adjusted Net Income = 159,000 – (32,000 x 100/80) – (9,600 x 100/80) =
159,000 – 40,000 – 12,000 = 107,000
*Reduced Personal Allowance = 12,570 – [(107,000 – 100,000)/2] = 9,070
When working out may total/net income(which is both same in this case) we find that it is > than 100,000£ threshold so we need to compute ani to see if any reduction in pa is required, it is possible
that after adjusting gross gad and ppc ani falls below 100,000£ threshold, so in a separate working we will compute ani of of may by picking up 159,000£ of net income and less gross gad and
ppc. gross ppc and gad is found by taking the amounts of gad and ppc in question and multiplying them with fraction of 100/80.this give ani of 107,000£ which is still
greater than required threshold. So we work the reduction in pa by 1£ for every 2£ increase in income in excess of 100,000£ threshold. So we work out excess of ani
over the treshold and multiply it with fraction 1/2 and resulting amount is reduced from default amount of pa and reduction in pa in this case was 3,500£.
New Tax Bands
As part of tax relief may can now extend the basic rate band by gross amount contributed the total amount which will be used to extend basic rate band is 52,000£ denominated as ppc worth of 40,000£
and gad of 12,000£.
Income tax band Band limit New Band Limits NSI SI DI
Basic rate band £1 - £37,700 £1 – (£37,700 + 52,000) 20% 20% 8.75%
Higher rate band £37,701 – £ 150,000 £37,701 – (£150,000 + 52,000) 40% 40% 33.75%
Additional rate band > £150,000 > £? 45% 45% 39.35%

By doing this we will be extending the capacity of basic rate band but to avoid reducing the capacity of higher rate band(higher rate band has capacity of 112,300£) a similar amount extension is carried
out in upper limit of higher rate band As a result new bands will be as following(given in table). Regardless of capacity of basic rate you can work out that the capacity of higher rate band does not
increase (it is 112,300£). so tax relief is only available at the basic rate.
New Tax Bands
Income tax band Band limit New Band Limits NSI SI DI
Basic rate band £1 - £37,700 £1 – £89,700 20% 20% 8.75%
(£37,700 + 52,000)
Higher rate band £37,701 – £ 150,000 £89,701 – £202,000 40% 40% 33.75%
(£150,000 + 52,000)
Additional rate band > £150,000 > £202,001 45% 45% 39.35%
To calculate income tax liability for may and simply highlight the effect of extension we pick original amount 37,700£ and tax at 20% but then we also use the extended 52,000£ and tax them at 20%
If may had not made gross contributions to ppc and gad. This 52,000£ amount would have been taxed at higher rate of 40% so may is effectively saving tax at 20%.
The amount in excess of extended basic rate falls in higher rate band and is subject to tax at 40%
Total
£
Income Tax:
37,700 x 20% 7,540
52,000 (Note 1) x 20% 10,400
[149,930 – 37,700 – 52,000] 60,230 x 40% 24,092
Tax Liability 42,032
Note 1:
The basic and higher rate band for May will both be extended by £52,000
This is the sum of the gross gift aid donation £12,000 and gross personal pension
contribution £40,000 amounts
Thank you…
99
There are special rules laid out for married couples or civil partners.
Income Tax Basics

Spouses or Civil Partners
100
Tax View
▪ Each will be required to pay tax on his/her individual share of income

Married couples or civil partners are treated as separate tax payer for hmrc. so income tax computation is carried out individually for each spouse/partner and is based on his/her
own set of income.
▪ Each is entitled to their own individual personal allowance amount
however tax authorities recognise that there are certain scenarios where the treatment of married couples or civil partners require additional tax guidance.
Joint Income
▪ Income from joint sources is split equally between spouses or partners
▪ Unless ‘actual basis’ of split, opted for

If a couple has a joint source of income like joint ownership of a house or bank account. The former will lead to property income and latter to interest income. So which of the so which of
the two from the couple should be taxed and on what share. As per tax guidance any such jointly earned income will by default be equally split between spouses or partners. However if
a couple decided that they would like to pay tax on the share of income they are actually entitled to because of their actual ownership ratio, then can fill out a tax form to opt this declaration
and send it to tax authorities along with evidence of actual owner ship split. As a result they can include the income from joint source split on actual basic.
Illustration
lets assume a couple purchased a house in which individual A has contributed 70% and B has contributed 30% during the tax year the house was let out and property income of 20,000£ were earned
The default treatement would be the husband and wife will share 10,000£ each as property income and show in income tax computation format., But if they elect to split the income in ownership ratio
the individual A will recgnise 70 of 20,000£ as property income while individual B will recognise residue 30%.
A B
Actual ownership
70% 30%
Joint Income: £20,000

Default split 50:50
£10,000 £10,000
Election for ‘Actual Basis’

Split 70:30
£14,000 £6,000
Joint Income
▪ Useful for tax planning – to save tax as a couple

If the couple is aware of this rule, it will be beneficial for tax planning.
Considering the above example, if individual A from the couple is already paying tax at higher rate recognisng property income on actual basic, that is higher rate recognising property
income on actual basis that is higher amount would mean a higher tax payment. If individual B from couple is basic rate tax payer, then in this case it would be better to recognise the
income on default basis that is income is equally split between A and B. By doing so the individual A tax share will be reduced and the couple as a unit will end up sabing tax. Do note
that once the election for actual basis is made it stays in effect till time there is a change in ownership.
marriage allowance = marriage tax allowance= MA or ma =MTA or mta
Another tax support available to a couple is transferable pa amount
Transferable Amount of Personal Allowance
▪ Also known as the marriage allowance or marriage tax allowance
▪ Election to transfer a fixed amount of personal allowance to a spouse or registered civil
partner. This allows one partner or spouse to elect to transfer some of his/her pa to his/her spouse or partner
▪ Not possible if either spouse or civil partner is a higher or additional rate taxpayer.
but this is only possible if both individuals are basic rate tax payer.
▪ A transfer is beneficial where one spouse or civil partner is not making full use of their
personal allowance. TAX PLANNING

question lies why would this option be exercise?
ideally in a situation ( as per slide). In this situation rater then wasting pa it could be transferred or other spouse or partners. So this is an element of tax planning.
however amount of pa to be transferred can not be decided by individual couple it self.
▪ The transferable amount is £1,260 for the current tax year. this is only allowed by hmrc.
▪ The transferor’s personal allowance is reduced by the amount £1,260.

so when the election( to transfer) is made the pa mount of person making the transfer decrease by 1,260£
▪ The recipient’s tax liability is reduced by the basic rate of tax applied on the transferred
amount i.e. a reduction of £252 (1,260 at 20%).

On the other hand instead of adding to pa amount of recipient individual his/her tax liability is reduced by basic rate of tax applied to amount transferred that is 20% of 1,260£ which is
252£ reduction in tax liability of recipient individual.
▪ If the recipient’s tax liability is less than £252, the tax reduction is restricted as tax liability
cannot be negative. because negative figure will imply a refund,

before started working lets look at tax planning aspect first check whether condition to transfer pa is met, that is yes because after pa deduction both paul and ravi will be termed as basic
rate tax payers. While rai will have taxable income after pa paul will have none infect paul pa will be slightly wasted as it is net income is just 10,000£ and allownace default amount is
12,570£.now paul pa is reduced by 1,260£ and comes down at 11,310£ which is still sufficient to cover net income and leave no tax income for tax charge and rai the other spouse will
Example
get a------------------------------reduction in tax liability by amount 252£
Paul and Rai are a married couple. For the current tax year, Rai has a salary of £38,000
and Paul has a trading profit of £10,000. They have made an election to transfer the fixed
amount of personal allowance from Paul to Rai.
Solution:
Paul’s personal allowance is reduced to £11,310 (12,570 – 1,260)
Because this is still higher than his trading profit of £10,000 he does not have any tax
liability.
we work out rai taxable income .After claiming standard pa and then we compute his tax liability at basic rate band and transferred pa without deduction of transferred rai tax liability would
have been 5,086£ and after deduction it only needs to pay 4,834£ so couple has saved tax.
Rai’s income tax liability is:
£
Employment Income 38,000
Personal Allowance (12,570)
Income Tax:
25,430 x 20% 5,086
Personal allowance tax reduction (1,260 at 20%) (252)
Tax Liability 4,834
▪ If the election is made by the end of the same tax year, it remains applicable till withdrawn.
in order for the transfer to take effect an election needs to be made that is the tax authorities need to be notified in writing by the end of tax year in which the couple wants the transfer
once elected the transfer will be considered taking place every year till such time that the couple again notify hmrc in writing that they wish to discontinue the transfer of pa
▪ Election can be made retrospectively but applies only to the year for which the election is
being made.
A couple can also make an election for a past year but then it would only be applicable for that particular year and not all the past years.
▪ For 2021/22, the election can be made by 5 April 2026 (4 years from the end of the relevant
tax year) but the election will only apply to the tax year 21/22.
and if the deadline is missed then this transfer can not be executed.
Thank you…
110
child care benefit =CCB or ccb
Income Tax Basics

Child Care Benefit
111
ccb is a cash amount that can be claimed from uk government by individual for children. The amount of ccb for child care is based on number of children of couple or parent have and is
treated as tax free or exempt. But since this is primary a support system set up for parents struggling to provide for their children the tax authorities feel that the earnings of both or either
one of partner is sufficient then they can impose a tax charge on the benefit being received.
Child Care Benefit

▪ For individuals with children, the Government normally pays a tax free amount when
claimed.
▪ Earnings threshold of individual claiming the child benefit or his/ her spouse or civil partner is
ANI of £50,000. set up by hmrc, and the rules are laid out in the table below
Adjusted net income (ANI) Tax treatment

ANI ≤ £50,000 if ani received is < or equal to 50,000£ Exempt then child care benefit amount received is exempt from tax.
ANI between £50,001 - £60,000

if ani is between this limit then a tax charge is imposed. A percentage is applied
Tax charge* = Childcare amount x ?%
on the child care benefit amount received to work out the total tax charge and this
% is determinded by working out how much ani is exceeded threshold of 50,000£
1% of child care benefit for each £100 of income over
and difference is divided by 100. The tax charge is directly added to tax payable
amount of individual.
£50,000 or [ANI – 50,000]/100
ANI > £60,000 ifcare
an exceeds this limit then whole of child
amount received is taxable and then
Tax charge* = whole amount of child benefit
this tax charge is added to tax payable amount
basically the government collect backs the amount
they have given to parent.
*The tax charge is directly added to the tax payable

in this example ani is between £50-60)*1000£ so a tax charge will be imposed.
Example
We need to work out the % applicable on the child care amount and to determine this we will use the formula ani less threshold and divide by 100£ then so as given in bracket % comes out to be 60% this applies to childe care amount and
brings us to tax charge of 1,054£ added directly to mavis tax payable for the tax year.
Mavis has a trading profit of £56,000 and received child benefit of £1,752 during the year.
Solution:
Mavis’ adjusted net income of £56,000 is between £50,000 and £60,000.
The child benefit income tax charge is therefore
(56,000 – 50,000)/100) = 60%
£1,752 x 60% = £1,051

Example
Cecil has a salary of £64,000 and he received child benefit of £1,056 during the year.
Solution:
Cecil’s adjusted net income of £64,000 exceeds £60,000
The child benefit income tax charge will be the whole amount of child benefit received i.e.
£1,056
Thank you…
115
Income Tax Basics
Taxation of Children
all individuals earning income in uk are subject to uk income tax including children if of course the have any source of income.
116
Introduction
▪ If a child has income – tax will be payable on it unless it is covered with some form of exception.
▪ A child is entitled to the standard personal allowance amount although his/ her tax returns,
if required have to be completed by the parents/ guardian

Parental Disposition
▪ This is a capital deposit made by a parent from which the income is earned by the child
if source of income is parental disposition that is capital deposit made by parent on behalf of the child and from which child is earning income. Then who pay tax on this earned income on capital depends on the following points.
▪ If the child is unmarried, < 18 years old and the income from the deposit is > £100 per
annum, it will be taxable on the parent
▪ If the income is < £100 per annum, then it is taxed on the child
Thank you…
119
Income Tax Basics
Income Tax Planning
As part of atx examination you will be provided with scenarios where you will have to provide advice to tax payer with best possible course of action, and that means saving tax in the most beneficial way possible.
120
Tax Planning Pointers
▪ Maximum utilization of personal allowance and nil rate bands
Increase NSI to fully utilize personal allowance if SI and DI are nil

If an individual si and di is just sufficient to be covered by nil rate band then perhaps it would be advisable for them to increase their nsi to extent to fully utilise pa and still not have any left over to utilise si and di in order to save nil rate band.
▪ Withdraw dividends instead of profits from a shareholder managed business to avail the
£2,000 dividend Nil Rate Band

If an individual has a share in share holder managed business then instead of withdrawing profits individual could consider withdrawing dividends in order to fully utilise 2,000£ nil rate band.
▪ Married couples or civil partners can decide to go for an equal split of income or declare
actual ratio of ownership based on what maximises tax saving
▪ Transfer personal allowance where it will be more beneficial

In atx exam you can not secure marks by simply listing pointers( on slide above) the advise you propose has to be relevant to given scenario so you need to pick and choose which of the pointers will work.
Thank you…
122

Income Tax Basics

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Income Tax Basics

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Income Tax Basics

▪ In UK for < 16 days in a tax year

▪ Number of ties he/she is required to possess, in order to be considered a UK resident

Days in UK Previously Resident Not Previously Resident

Based on following UK ties:

• Close family in UK – spouse, civil partner or minor children

• House in UK made use of during the tax year

• Doing substantive work in UK

• In UK for > 90 days in either of the previous 2 tax years

• Spending more time in UK than any other country

more than 250 days here each tax year.

80 days were spent in the UK, of which 35 were for work.

Automatic Resident Automatic Non-Resident

▪ Only home is in UK ▪ In UK for < 46 days in a tax year and non-

▪ In UK < 91 days in a tax year and works full-

Days in UK Previously Resident Not Previously Resident

automatically not resident in the UK for the tax year 2022-23?

automatically not resident in the UK for the tax year 2022-23?

Apply them to Hana’s specific scenario

▪ In UK for < 16 days in a tax year

▪ Could be although very few days

▪ Cannot apply as Hana was UK resident in the previous tax year

▪ In UK < 91 days in a tax year and works full-time overseas

automatically not resident in the UK for the tax year 2022-23?

▪ Rental income if he/she let out property their

▪ Interest received on overpaid taxes

Individual Savings Account

and this will be mentioned in tax rates and allowances

▪ Can be a mixture of cash or stock ISAs ifnotanexceeded.

2. Establish whether taxable or exempt establishing whether it is taxable or exempt.

4. Deduct interest paid on qualifying loan – IF ANY

5. Deduct personal allowance make adjustment for pa

Taxable Income Computation Format

Other dividend income (? x 100/91.25)

Taxable Income Computation Format

Interest Received Gross

▪ Bank and building society interest

▪ Interest on Government Issued Long Term Securities (GILTS)

▪ Interest from National Savings and Investment account (NS&I)

▪ Interest from quoted corporate bonds of UK resident companies

▪ Foreign interest received gross of any overseas tax deducted if any

▪ Interest from unquoted corporate bonds of UK resident companies

▪ Interest from an Interest in Possession (IIP) trust

Taxable Income Computation Format