out. The recipient therefore receives the sum net of tax. One
BASIC PRINCIPLES example of this is the Pay As You Earn (PAYE) system. The
employee receives the wage/salary net of income tax.
Round down figures to the nearest £ at each stage of the calculation.
The distinction between income and capital: INCOME TAX
When working through your problem question, start by collecting all Start by collecting all your figures and highlight them. Separate each
your figures and highlight them. figure into separate categories. Go back up to basic principles to see how
to do this.
Each figure will fall into one of four categories:
* Income receipts STEP 1: TOTAL INCOME:
* Capital receipts
* Income expenditure Next, we will calculate the Total Income.
* Capital expenditure
Add up all sources of income = Total Income.
Work out which category each of the figures will fall into. – any amount
will fall into one of these categories and cannot fall into more than one Exempt income: Gambling wins, Interest on ISAs / NISAs, Personal
category. injury claim damages, Redundancy pay-outs or damages max. £30,000
Income receipts: Not income: Gifts, Trivial benefits in kind max. £50 (except cash), capital
Receipt of money that originates from regular income generation. receipts from one-off sales which are capital receipts
Income: Salary, pension earnings, interest on savings, dividend, rental
Example: income, Benefits in kind (health insurance, company cars and low-
* Salary interest or interest-free loans above £10,000.)
* Trading profits of a business will be the income of the owner
* Interest charged on loans will be the income of the lender
(whether paid monthly or quarterly) STEP 2: LESS PENSION AND INTEREST ON
* Rental income paid to landlord will be the income of the QUALIFYING LOANS:
landlord.
Next, we will calculate the Net Income.
Other income that will fall in this category:
* Pension earnings Total Income – Pension contributions – Interest on Qualifying Loans =
* Interest on savings Net Income
* Dividend
* Benefits in kind provided by the company you work for (this may Pension contributions and Interest on Qualifying Loans are subject to Tax
be eg. health insurance, company cars and low-interest or Relief so they are deducted before taxing income.
interest-free loans above £10,000.)
Pension contributions:
Capital receipts: One may pay contributions into a pension scheme – either an
Falls into this category if there is an income receipt and that income is occupational pension scheme (set up by their employer) or a personal
due to a transaction that not part of a regular activity. Capital receipts pension scheme. Both types must be deducted from the Total Income.
are ‘one-off’ transactions.
Qualifying loans:
Example: 1. Loans to buy an interest in, contribute capital or make a loan to a
* Selling your car if you don’t sell cars as part of a business. partnership
* Selling a painting if you don’t sell paintings as part of a business. 2. Loans to buy shares in (or make a loan to) a ‘close’ company
3. Loans to buy shares in an employee-controlled company
Income expenditure: 4. Loans to buy shares in an employee-controlled company or invest
If the expense is incurred due to the day-to-day trading activities of a in a co-operative.
business, it will be classed as income expenditure.
Make sure that the loan you have in your scenario is a qualifying loan.
Example: Don’t deduct interest that comes from loans that don’t meet this
* Payment of rent (for business premises) criteria.
* Paying bills (eg. staff wages, heating, lighting, rent or
marketing/stationery expenses) STEP 3: LESS PERSONAL ALLOWANCE OF £12,570:
* Paying for repairs of business premises/business vehicle etc.
In step 3, we will calculate the Taxable Income.
Capital expenditure:
If you spend money on a new capital asset or enhancing an existing asset Net Income - Personal Allowance (£12,570) = Taxable Income
as part of the business, it is ‘capital’ expenditure. Capital expenditure is
a ‘one-off’ transaction. If Net income < £100,000:
Net income – £12,570 = Taxable income
Example:
* Buying new large equipment/machinery If Net income > £100,000:
* Buying new property £12,570 - (Net Income - £100,000) = Reduced allowance
* Spending money on enhancing existing equipment/machinery/ 2
premises
* Paying bills (eg. staff wages, heating, lighting, rent or If the reduced allowance is a negative number, then no allowance, and
marketing/stationery expenses) Net income will equal the Taxable income.
* Paying for repairs of business premises/business vehicle etc.
Assessment of tax: STEP 4: SPLIT:
Tax assessment for individuals – based on Tax year In step 4, we will split the Taxable income into different categories.
Tax assessment for companies – based on Financial year (although
companies may chose a different period for tax assessment purposes, Add up all income coming from dividends = Dividend Income.
called the accounting period) Add up all interest coming from savings = Savings Income.
Taxable income – Savings Income – Dividend income = Non-savings
Both the tax year and financial year are different to the calendar year. Income
Tax year: starts 6 April, ends 5 April the next year. £50,000 pa:
Financial year: starts 1 April, ends 31 March the next year. £10,000 pa dividend income
£10,000 pa savings income
How is tax collected? £30,000 pa non-savings income
1. HMRC collects tax from individuals and businesses via the self-
assessment system.
2. Some cases income tax is deducted at source, meaning that the
payer of a taxable sum deducts the tax and accounts for it to
HMRC on the recipient’s behalf before the net amount is paid
BLP Tax Revision Notes | Page 1 of 8
, STEP 5: IS SAVINGS ALLOWANCE AVAILABLE? SUGGESTIONS FOR PAYING LESS TAX:
In step 5, we will calculated the personal savings allowance. Transfer the money on deposit or the shares to spouse if they have:
* the personal allowance of £12,570 and/or
Interest on Savings: Personal savings allowance: * personal savings allowance and/or
For basic rate taxpayers - their first £1,000 – taxed at 0% * would only pay tax at a basic rate.
For higher rate taxpayers - their first £500 – taxed at 0%
For additional rate taxpayers – no allowance. Client may try to increase their personal pension contributions to
benefit from tax relief and reduce their Net Income.
STEP 6: APPLY TAX BAND AND TAX RATES: Make contributions to tax-efficient savings vehicles such as ISAs.
In step 6, we will apply the tax bands and calculate the tax liability.
ASSESSMENT AND COLLECTION OF INCOME TAX:
* First, tax the non-savings income (tax year 2022/23, check if
still valid): Deduction at source:
1. The first £37,700 is taxed at 20% Employed individuals are not required to complete a self-assessment tax
2. £37,700 < x < £150,000 is taxed at 40% return because their tax is collected via the PAYE system (the tax is
3. Anything above £150,000 is taxed at 45% deducted at source – receives income net of tax).
£220,000: Self-assessment:
£37,700 taxed at 20% = £7,540 Directors and self-employed people are always required to complete a
£150,000 - £37,700 = £112,300 taxed at 40% = £44,920 self-assessment tax return. In this case, it is up to the individual to
£220,000 - £150,000 = £70,000 taxed at 45% = £31,500 calculate the tax bill and not HMRC.
Tax liability for non-savings income: £83,906 FULL EXAMPLE:
* Second, tax the savings income. Margaret is 48 and is a partner in a small consultancy partnership
Work out the tax band that you reached for non-savings income, business. She lives with her wife Amy, aged 46. The following
then tax the savings income in that band. If the total savings information relates to her income and tax affairs for 2022/23.
income amount spills over into the next band, tax the rest of it
at that rate.
1. Trading profits for tax purposes £160,000
£3,200: 2. Interest received on bank deposit £2,000
Elliot is an additional rate taxpayer. 3. Capital gains None
£3,200 taxed at 45% = £1,440 4. Contributions paid by Margaret into £5,000
a personal pension scheme
* Finally, tax the dividend income (separate rates apply!) 5. Interest paid on loan from Barkers 3,000 p.a.
Bank plc taken out by Margaret to
Rates for dividends (tax year 2022/23, check if still valid): enable her to invest in the partnership
1. For all taxpayers – their first £2,000 – taxed at 0% 6. Dividend on shares in Central Electricity plc £7,222
2. For basic rate taxpayers – above £2,000 – taxed at 8.75%
3. For higher rate taxpayers – above £2,000 – taxed at Margaret also received a gift of some shares from her father. Their
33.75% market value at the time they were received was £15,000.
4. For additional rate taxpayers – above £2,000 – taxed at
39.35% Amy does not work but is involved in voluntary work for a local charity.
£45,000: Questions:
£45,000 taxed at 39.35% = £17,707 (rounded down)
i.What is Margaret’s Total Income?
* Now add up the tax liabilities for non-savings, savings and ii.What is Margaret’s Net Income?
dividend income. iii.What is Margaret’s Taxable Income?
iv. Does Margaret have a personal savings allowance?
£83,906 + £1,440 + £17,707 = £103,053 is the tax liability. v. Apply the appropriate rates of tax to Margaret’s Taxable
Income for the tax year 2022/23. (NB: you must split Taxable
Example: Income into Non-Savings, Savings and Dividend Income before
applying the tax rates)
For 2022/23, TP has Taxable Income of £220,000 of which £20,000 is vi. What is Margaret’s total tax liability?
savings income and £25,000 is dividend income – Taxable income
means that the personal allowance has already been deducted. Trading profits £160,000
Bank Interest £2,000
Taxable Income – savings income – dividend income = non-savings Dividend income £7,222__
income (£220,000 - £20,000 - £25,000 = £175,000) TOTAL INCOME: £169,222
TP’s non-savings income £175,000 Less interest on qualifying loans (£3,000)
TP’s savings income £20,000 Less personal pension contrib. (£5,000)__
TP’s dividend income £25,000 NET INCOME: £161,222
We then need to consider whether the personal savings allowance is Personal allowance:
available. As some of TP’s Taxable Income is within the additional rate £12,570 – (£161,222 – £100,000) = a negative number
band, the TP will not have the benefit of the personal savings 2
allowance which means that the savings nil rate will not apply.
As the personal allowance equals to a negative number, no personal
Charge tax as follows: Tax due allowance is left to deduct from Net Income. Or also as the personal
allowance exceed £123,700, it tells us that none of the PA Is available.
Non-savings income (first slice)
20% on £37,700 £7,540 Less personal allowance (£0)_____
40% on £37,701 - £150,000 i.e 112,300 £44,920 TAXABLE INCOME: £161,222
45% on £150,001 - £175,000 i.e. £25,000 £11,250
Margaret is an additional rate taxpayer and therefore she is not entitled
Savings income (next slice) to a personal savings allowance.
45% on £20,000 £9,000
TAXABLE INCOME: £161,222
Dividend income (top slice) Less savings income (£2,000)
0% on 2,000 £0 Less dividend income (£7,222)__
38.1% on £23,000 (£25,000-£2,000) £8,763 . NON-SAVINGS INCOME: £152,000
Total tax payable £81,473
BLP Tax Revision Notes | Page 2 of 8
