CHAPTER 2

BASIC INCOME TAX

COMPUTATION
Lecturer: M.S. Nguyen Thuy Trang
F a c u l ty o f Ta x a n d C u s t o m –
Academy of Fianance

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MAIN CONTENTS
1) The principles of income tax
2) Taxable income
3) Personal allowance (PA)
4) Income tax liability
5) Income tax payable
6) Reliefs against total income
7) Charitable giving
8) Child benefit tax charge
9) Tax status of an individual
The principles of income tax
 Basis of assessment: Tax year is the year ended on 5 April
EX: The year from 06/4/2022 to 05/4/2023 is the tax year
2022/23
 Personal allowance (PA): an amount of tax free income
 Assessable persons:
- All individuals, including children
- All persons resident for tax purposes in the UK are
assessed to UK tax on their worldwide income
The principles of income tax
 Married couple:
- Special rules governing the allocation of income between
spouses (generally 50:50 excepting the case of election)
- Civil partners (same-sex couple registered as a civil
partnership) are treated in the same way as married
couple.
 Children: a child under the age of 18 is a taxable person
but generally no tax liability arises on their income
 Income tax computation - 2021/22 £
Trading income X
Employment income X

Taxable income Property income

Pension income
X
X
------
Non-savings income X
Savings income
Building society interest X
Bank interest X
UK dividends X
------
Total income X
Less: Reliefs (X)
------
Net income X
Less: PA (X)
------
Taxable income X
Taxable income
 Classification of income: non-savings income, savings income;
dividend income
 Non-savings income:
- Earned income: trading income, employment income and pensions
income
- Property income
 Investment income: savings income, dividends income
 Exempt income: interest from National Savings and Investment
(NS&I) certificates; Gaming, lottery and premium bonds winnings;
Income received from an individual savings account (ISA)
 Reliefs: are deducted from an individual’s total income
Personal allowance (PA)
 PA for the tax year 2022/23: £12,570 is deducted from the
taxpayer’s net income following the order:
(1) Non-savings income
(2)Savings income
(3)Dividend income
 Surplus PA is lost
 PA is not be set against capital gains
 PA can be transferred to a spouse or civil partner
Personal allowance (PA)
 Reduction of personal allowance of high income
individuals:
-Individuals with adjusted net income in excess of
£100,000
£
Net income X
Less: Gross gift aid donations (X)
Less: Gross personal pension contributions (X)
-----
Adjusted net income (ANI) X
Personal allowance (PA)
 Reduction of personal allowance of high income
individuals:
-The PA is reduced by: 50% x (ANI - £100,000) (rounded
up to the nearest pound)
=> Taxpayer with ANI in excess of £125,140 is entitled to
no PA
Personal allowance (PA)
 Illustration: Ethan received trading income of £112,800
in the tax year 2022/23. He also made gift aid donations
of £5,200 (gross). Required: Compute Ethan’s taxable
income for the tax year 2022/23.
=> Answer:
£
Trading income
Less: Adjusted PA
----------
Taxable income
 Personal allowance (PA) Basic PA
£ £

 Illustration: Adjusted PA (Ethan) Net income

Less: Gross gift aid donation
---------
Adjusted net income
Less: Income limit
---------

---------
Reduction of PA
---------
Adjusted PA
Income tax liability
 Strict order: (1) Non-savings income; (2) Savings
income; (3) Dividend income
 Rates of income tax – non-savings income
Level of income Non-savings income
Basic rate band
20%
(First £37,700)

Higher rate
40%
(£37,701 – £150,000)

Additional rate
45%
(Excess over £150,000)
Income tax liability
 Illustration: Tony has taxable trading income of £21,165 and employment income of
£3,000 for the tax year 2022/23. He has no savings or dividend income. Required:
Calculate Tony’s income tax liability for the tax year 2022/23.
 Answer: £
Trading income
Employment income
----------
Total income
Less: PA
----------
Taxable income
----------
Income tax liability (……….. x 20%)
Income tax liability
Illustration: Thomas has taxable trading income of £135,000 and
employment income of £33,680 for the tax year 2022/23. He does
not have any savings income or dividend income.
Required: Calculate Thomas’s income tax liability for the tax year
2022/23.
Income tax liability
Answer: £
Trading income
Employment income
Total income
Less: Adjusted PA
Taxable income
Income tax £
Basic rate x 20%
Higher rate x 40%
Additional rate x 45%
Income tax liability
Income tax liability -
Marriage allowance
- Allowing the transfer to the other spouse (or civil
partner) of a fixed amount of PA (regardless the
amount of unused PA) of £1,260 for 2022/23.
- Income tax liability of the recipient spouse (or civil
partner) is reduced by a maximum of £252 (£1,260 x
20%)
Income tax liability -
Marriage allowance
Illustration: Kevin and Judy are married. Kevin is employed
and has employment income of £35,000 per annum. Judy
spends most of her time looking after their two children
but works on a Saturday, and has employment income of
£6,000. They do not have any other income. Judy makes an
election to transfer the MA to Kevin.
Required: Calculate Kevin and Judy’s income tax liability
for the tax year 2022/23.
Income tax liability -
Marriage allowance
Kevin Judy
£ £
Employment income
Less: PA
---------- ----------
Taxable income
---------- ----------
Income tax liability
Less: MA
---------- ----------
Income tax liability
Income tax payable
 Income tax liability: The total income tax due on the
taxpayer’s total gross income, after deducting reliefs
and PA.
 Income tax payable: The final tax bill to be paid self-
assessment after deducting, tax already paid on
employment income (PAYE)
=> Income tax payable = Income tax liability - PAYE
Income tax payable
Illustration: Akram has taxable trading income of £41,870
and employment income of £11,400 for the tax year
2022/23. He does not have any savings income or dividend
income. PAYE of £80 was deducted from his employment.
Required: Calculate Akram’s income tax payable for the
tax year 2022/23.
 £ £
Trading income
Employment income
---------
Total income
Less: PA
---------
Taxable income
---------
Income tax: £ £
Basic rate x 20%
Higher rate x 40%
---------
Income tax liability
Less: PAYE
---------
Income tax payable
Reliefs against total income
 Qualifying interest payments of loans incurred to
finance expenditure for a qualifying purpose,
including:
-Employees:
+ The purchase of plan and machinery by an employed
person for use in his employment
+ The purchase of shares in an employee-controlled
trading company by a full-time employee
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Reliefs against total income
- Partners:
+ The purchase of a share in a partnership, or the
contribution to a partnership of capital or a loan (the
borrower must be a partner in the partnership)
+ The purchase of plant or machinery for use in the
partnership, by a partner
 Loss relief (Chapter 9)

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Reliefs against total income
Illustration: A and B each have total income of £50,000 none of
which is savings or dividend income
They made the following payments during the tax year 2022/23:
- A made interest payments during the year total £2,000 on his
mortgage for his principal private residence
- B made interest payments of £2,000 on a loan to invest in a
partnership in which he is a partner
Required: Calculate the income tax liability for A and B for the tax
year 2022/23

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Charitable giving
 Normally in one of two ways:
- Donation under the gift aid scheme
- Payroll giving under the payroll deduction scheme
 Tax relief:
- The payments are made with basic rate tax deducted at source (20%)
- The basic rate tax is claimed by the charity from HMRC
- Higher and additional rate relief if obtained by adding gross amount of the
donation to the basic and higher rate bands in the income tax liability
calculation.
Charitable giving
Illustration: Brenda has employment income of £52,000
each year and makes a payment of £3,600 to the RSPB
under the gift aid scheme.
Required: Calculate Brenda’s income tax liability for the
tax year 2022/23.
 £ £
Employment income
Less: PA
---------
Taxable income
Income tax: ---------
Extended basic rate band x 20%
Higher rate band x 40%
---------
Income tax liability
Working: Extended basic rate band £
Basic rate band
Plus: Gross gift aid donation x 100/80
---------
Extended basic rate band