PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Ch. 2: Computing Taxable Income
When computing the tax of an individual, it is important to know and consider whether they are a
UK resident or not.
A UK resident would be taxed on their worldwide income while a non-UK resident is only liable
to UK income tax only on an income arising in the UK.
To find out whether somebody is a UK resident they will have to satisfy any of the automatic
UK tests. If they are a Non-UK resident, they will satisfy the automatic overseas tests.
1. Automatic Overseas Tests
This shows one is not a UK resident. They include:-
a) Spending less than 16 days in the UK in that tax year(6th April to 5th April) or,
b) Spending less than 46 days in the UK in that tax year and was not previously
resident in the UK during the previous three tax years or
c) Works full time overseas during that tax year during that tax year you should
spend less than 91 days in the UK in the tax year 2023/24.
2. Automatic UK Tests
This shows one is a UK resident. They include:-
a) Spend 183 days or more in the UK during that tax year; or
b) Their only home is in the UK; or
c) Working full time in the UK
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
3. Sufficient UK Ties Tests
If the individual does not satisfy any of the two tests above, they should consider the sufficient
UK ties tests.
There are five ties
a) They have close family in the UK (e.g. spouse/ civil partner, child under 18 years).
b) Has available UK accommodation in which the individual spends at least one night
during the tax year.
c) Does substantive (significant/important) UK work (at least 40 days working at least
3 hours a day)
d) Spends more than 90 days in the UK either or both of the previous two tax years.
e) Spending more time in the UK than in any other country in the tax year (only
relevant if the individual was UK resident in any of the previous three tax years).
Days in the UK Previously Resident Not Previously Resident
Less than 16 days Automatically not UK resident Automatically not UK resident
Between 16 and 45 days UK resident if they satisfy 4 UK Automatically not UK resident
ties (or more)
Between 46 and 90 days UK resident if they satisfy 3 UK UK resident if they satisfy 4 UK
ties (or more) ties (or more)
Between 91 and 120 days UK resident if they satisfy 2 UK UK resident if they satisfy 3 UK
ties (or more) ties (or more)
Between 121 and 182 days UK resident if they satisfy 1 UK UK resident if they satisfy 2 UK
ties (or more) ties (or more)
183 days or more Automatically UK resident Automatically UK resident
NB: `
A day in the UK is any day in which an individual is present in the UK at midnight.
The tax year or fiscal year or year of assessment runs from 6Th April to 5th April.
Example
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Example 2
Question
4. Proforma for Computing Taxable Income
Non Savings Savings Income Dividends Income Total
Income (£) (£) (£) (£)
Trade Income X
Employment X
Income
Pension Income X
Property Business X
Income
Bank/Building
Society Interest X
Other Interest (e.g.
gilt interest) X
Dividends - - X
Total Income X X X
Less: Interest Paid (X) (X) (X)
Net Income X X X X
Less: Personal
Allowance (PA) (X) (X) (X)
Taxable Income X X X X
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
All income received must be classified according to the nature of the income because each type of
income is computed differently.
4.1. Non Savings Income
This includes income from employment, pensions, property letting and profits from trades,
professions and vocations.
4.2. Savings Income
Savings Income is basically interest received from the bank and building society accounts, most
National Savings & Investments (NS&I) products, on Government securities (gilts) such as
Treasury Stock, and on company loan stock.
4.3. Dividend Income
This consists of dividends received as a result of ownership of shares.
5. Tax Exempt Income
Income from National Savings Certificates.
Statutory redundancy money.
Winnings (Including premium bond prizes)
Scholarships
Interest on damages for personal injuries
Local authority grants
Income from investments made through Individual Savings Accounts (ISA). The annual
subscription limit is £20,000 per tax year.
6. Deductible Interest
This is deducted from total income to get net income.
A person who pays the interest on a loan in a tax year is entitled to relief in that tax year if the
loan is for:-
a. Buying plant or machinery for partnership or for employment use.
b. Loan to invest in a partnership.
c. Loan to buy interest in an employee-controlled company
d. Loan to invest in a cooperative.
It is deducted from non-savings income first, then savings income and finally dividend
income.
6.1. Example
In 2023/24, Payal has taxable trading income of £43000, savings income of £1500 and dividend income
of £1000. She pays interest of £1370 on a loan to invest in a cooperative. What is her total net income?
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
7. Personal Allowance (PA)
It is deducted from net income to get taxable income and it reduces non-savings income first,
then savings income and finally dividend income if any amount of PA remains.
All individuals (including children) are entitled to a personal allowance of £12,570.
This changes though if the individual’s adjusted net income exceeds £100,000. When it
exceeds this amount, the personal allowance is reduced by £1 for each £2 by which the
adjusted net income exceeds £100,000 until the personal allowance is nil (which is when the
adjusted net income is £125,140 or more).
NB:
Adjusted net income= Total Net income – Gross personal pension contributions – Gross
gift aid donations
The individual should consider making personal pension contributions and/or gift aid donations
to reduce the adjusted net income to below £100,000.
QUESTION
Peter, in the tax year 2023/24 received employment income of £98,000, bank interest of £5,000
and dividends of £ 12000. Calculate Peter’s taxable income for the tax year 2023/24.
Question 2
Hannah is a banker with a certain bank in the UK. In the tax year 2023/24, she received income
from her employment calculated at £90,000. She had also invested some money in the bank and
the savings had incurred some interest of £18,000 in that year. At the same time, she had looked
to increase her source of income and found herself investing in the shares of a blue chip
company at the beginning of the year. At the end of the tax year 2023/24, she received dividends
of £20,000 from her investment. She was required to file in her tax returns, but she had to
compute her taxable income for that tax year. You were called to help her in the same.
8. Computing Income Tax Liability and Income Tax Payable
The income tax liability is the amount of tax charged on taxable income.
Income tax payable is the balance of income tax liability still to be settled in cash. (Income
tax liability- PAYE)
Name Limit (£) Non-Savings Income Savings Income Dividend Income
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Basic Rate Up to 37,700 20% 20% 8.75%
Higher Rate 37,701-125,140 40% 40% 33.75%
Additional Rate Above 125,141 45% 45% 39.35%
8.1. Savings Income Starting Rate- Applies to the Savings Income BUT is
affected by the Non Savings Income (Starting Income)
The rate is usually 0% for savings income up to £5,000 and only applies where the saving
income falls wholly or partly below this amount.
IMPORTANT: Since income tax is charged first on non-savings income, many a times non
savings income will exceed the savings income starting rate limit and the savings income
starting rate will not be available on savings income.
8.2. Savings Nil Rate Band- Determined by the type of a taxpayer you are
Here the tax rate is 0% for savings income, while the 2023/24 nil rate band is £1,000 if the
individual is a basic rate taxpayer and £500 if the individual is a higher rate taxpayer.
There is none for additional rate taxpayer.
Example
In 2023/24 Ben has trading income of £14,800 and bank interest of £10000. Calculate his tax liability
for 2023/24.
Example 2
In 2023/24 Joe has employment income of £48,200 and bank interest of £9200. Calculate his tax
liability for 2023/24.
8.3. Dividend Nil Rate Band
This also has a tax rate of 0% but only applies to dividend income.
The nil rate bands are £1000 for all taxpayers.
Example
In 2023/24 John has employment income of £35450, building society interest of £1500 and dividends of
£15,000. Calculate his tax liability.
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Example
In 2023/24 Julian has employment income of £148000, bank interest of £6250 and dividends of
£20000. Calculate his tax liability for 2023/24.
9. How to Compute Income Tax Payable
INCOME TAX PAYABLE= Income tax liability – PAYE (from employment income).
10. Accrued Income Scheme
If the owner of UK Government securities (gilts) sells them before a particular date, that
individual will not be entitled to the next interest payment. The new owner will receive it.
However, the sale proceeds received by the seller include interest accrued to the date of
sale.
However, if securities are sold on or after a particular date, they are sold excluding interest and
the original owner is entitled to the whole of the next interest payment and will be taxed on
it under the usual income tax rules. However, the sale proceeds will exclude interest
accruing after the date of the sale so that this accrued interest effectively goes to the
purchaser.
The accrued income scheme only applies where the seller holds securities with a nominal
value exceeding £5,000 during the tax year in which the interest period ends.
Where gilts are transferred at a price which includes interest, the accrued interest reflected
in the value of gilts is taxed as savings income on the seller. This is because the seller is
treated as entitled to the proportion of interest which has accrued since the last interest
payment.
Example
Question
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
11. Gift Aid
One off and regular charitable gifts of money qualify for tax relief under the gift aid scheme
provided the donor gives the charity a gift aid declaration, which can be put in writing, orally
over the phone or electronically through the internet.
It must not be repayable and must not give any more than a minimal benefit on the donor.
A gift aid donation is treated as if it is paid net of basic rate tax (20%).
Additional tax relief for higher rate and additional taxpayers is given in the personal tax
computation by increasing the donor’s basic rate limit and higher rate limit by the gross
amount of the gift.
No additional relief is due for basic rate taxpayers because it is irrelevant increasing the basic rate
limit for a taxable income that is below the limit.
Example
Ahmed earns a salary of £70000 but has no other income. He paid £8000 (net) under the gift aid scheme.
Compute her tax liability.
Example 2
Roger has trading income of £186,000. He made a gift aid donation of £12,000 (net). Compute his tax
liability.
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Question
12. Child Benefit Income Tax Charge
One is charged if they receive child benefit and have an adjusted net income of over £50,000 in
a tax year.
A ‘partner’ is a spouse, civil partner or an unmarried partner, where the couple is living
together as though they were married or civil partners.
If the taxpayer has adjusted net income over £60,000, the charge is equal to the full amount
of the child benefit received.
If they have an adjusted net income between £50,000 and £60,000, the charge is 1% of the
child benefit amount for each £100 of adjusted net income in excess of £50,000.
Round down the calculation to the nearest whole number at all stages.
If both partners earn above £50,000, the partner with the higher adjusted net income is liable for
the charge.
You can opt out from receiving child benefit to avoid submitting tax returns on it which is time
consuming and costly since it is collected through the self-assessment system.
Question
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
David and Mary are not married but live together as if they are married. They have a year old son of
which they receive a child benefit of £1066. David has an adjusted net income of £52,000, while Mary
has none. Calculate David’s child benefit income tax charge.
Question
Jane is a widow with two children. She has net income of £56,000 and made personal pension
contributions of £4500 (gross) and receives child benefit of £1771. Calculate child benefit income tax
charge.
13. Tax Reducers
They do not affect income; they reduce tax on income.
The relevant tax reducers for Taxation are:
a. Transferable PA.
b. Property business financial costs.
Tax reducers are deducted in computing an individual’s income tax liability. The tax
liability can only be reduced to zero; a tax reducer cannot create a repayment.
14. Transferable Personal Allowance
An individual can elect to transfer £1,260 (12600*10%) of their personal allowance to their
spouse/civil partner if certain conditions are met. This is sometimes known as marriage
allowance.
These conditions are neither the spouse/civil partner making the transfer nor the
spouse/civil partner receiving the transfer can be higher rate or additional rate taxpayer.
The spouse/civil partner is entitled to a tax reducer of £1,260 x 20%=£252 which reduces the
individual’s tax liability.
The election for transfer of the personal allowance is made to HMRC online by the
spouse/civil partner. For the tax year 2023/24, if the election is made before 6 April 2024 it
PART B: INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS (NIC)
will have effect for 2023/24 and subsequent tax years unless it is cancelled by the transferor
spouse/civil partner or circumstances change (e.g. divorce).
Example
Question
15. Joint Property
If property is held jointly by a married couple or civil partners, the income arising from that
property is taxed as if it was shared equally between the members of the couple (50:50) even if
the property is not owned in equal interest, unless they make a joint declaration to HMRC
specifying the actual proportion to which each is entitled.
