SKANS School of Accountancy Multan
CHAPTER # 01
Basic Tax computation
INCOME TAX is paid by a taxable person on his taxable income in a tax year.
Taxable income: Income from all sources except exempt income, minus reliefs & personal allowance.
Tax Year: income tax is calculated on income earned during the tax year which runs from 6th April to
5th April. For examination concerned tax year 2022-23is tested which runs from 6th April 2022 to 5th
April 2023
Taxable Person: All individuals including children are called taxable person and pay income tax and
National insurance on taxable income earned during tax year.
Resident Status
Purpose of determine the status of resident of UK
All persons who are UK resident pay income tax on their worldwide income. Non UK resident pay tax
only income which he earned in UK in tax year
Residence status under the SRT:
You should take the following steps to ascertain your residence status under the SRT:
Step 1: Consider the three automatic overseas tests. If you meet one of these you are not UK resident. If
you did not; consider second step
o A person stays in the UK for fewer than 16 days during the tax year. or
o A person stays in the UK for fewer than 46 days during the tax year, provided they have
not been resident for any of the previous three tax years. or
o A person carries out full-time work overseas and his stays in UK is less than 90 days
Step 2: Consider three automatic UK resident tests. If you meet one of these, you are UK resident. If you
did not; consider third step
o A person that stays in the UK for 183 days or more during the tax year. or
o A person whose only home is in the UK and have no overseas home or
o A person that carries out full-time work in UK
Step 3: if the automatic residence tests are not met, then a person's residence status for a particular tax
year is determined according to the sufficient UK ties test
 For this test use the table and
- consider individual how many days individual stayed in UK
whether individual was previously resident (leaver) or not previously resident (joiner)
and determine the number ties required for resident
Days in UK
Previously resident
Not previously resident
Less than 16
Automatically not resident
Automatically not resident
16 to 45
Resident if 4 UK ties (or more)
Automatically not resident
46 to 90
Resident if 3 UK ties (or more)
Resident if 4 UK ties
91 to 120
Resident if 2 UK ties (or more)
Resident if 3 UK ties (or more)
121 to 182
Resident if 1 UK tie (or more)
Resident if 2 UK ties (or more)
183 or more
Automatically resident
Automatically resident
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There are five potential UK ties:
1. Having a spouse, civil partner or minor children resident in the UK. But not include parents
and grandparents
2. Having accommodation in the UK that is made use of during the tax year. The definition of
what counts as accommodation is quite detailed, but it generally does not include owning a
property that is let out, short visits with relatives, and stays in hotels. The person has a
place in UK available to live in for 91 days or more during that tax year and stays there for:
- At least one night; or
- At least 16 nights (if it is the home of a close relative).
3. Doing substantive work in the UK. This is defined as working for 40 or more days during
the tax year (a working day is as per previously defined).
4. Spending more than 90 days in the UK in either or both of the two previous tax years.
5. Spending more time in the UK during the tax year than in any other single country
Income Tax per forma
Non
Saving
Dividend Total
Saving
Trading income
Note-1
XXX
XXX
Employment income
Note-2
XXX
XXX
Pension incomeand Royalty income
XXX
XXX
Property income
XXX
XXX
Exempt income
Note-3
0
0
0
0
Joint income (spouse or civil partners) ×50% or actual
XXX
ratio
Note-4
Interest from loan notes or Gilts
Note- 5.2
XXX
XXX
Bank deposit interest
XXX
XXX
Building society interest
XXX
XXX
Other interest income (received gross)
XXX
XXX
Dividend income
Note-6
XXX
XXX
XXX
XXX
XXX
XXX
Total income
Less Reliefs:
 Losses (subject to rule)
(XXX)
(XXX)
(XXX)
(XX)
 Qualifying interests
Note-7
(XXX) 1 (XXX) 2 (XXX) 3
(XX)
XXX
XXX
XXX
XXX
Net income
Less: personal Allowance £12,570 Note-8
(XXX) 1 (XXX) 2 (XXX) 3 (XX)
XXX
XXX
XXX
Taxable Income
Calculation of tax liability
Note: Tax bands are extended if taxpayer made gift aid donation or personal pension
contribution with gross amount for calculation of income tax liability
Note - 9
Non saving income
Basic Taxpayer £1------- £37,700
20%
Higher Taxpayer £37,701-----£150,000
40%
Additional Taxpayer Above £150,000
45%
Saving income
Starting rate £1------£5,000
Note-5.3
(Apply only if saving income falls in first £5,000 taxable
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0%
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XXX
XXX
XXX
XXX
0
SKANS School of Accountancy Multan
income and if non saving >£5,000 starting rate does not
apply)
NIL Rate Band Basic tax payer £1000
Higher Taxpayer £500
Additional Taxpayer (nil rate band is not applicable)
Normal rates
Basic Tax payer
£5001------£37,700
Higher Taxpayer
£37,701----£150,000
Additional TaxpayerAbove £150,000
Important note:
 First apply starting rate band
 Second apply Nil rate band
 Third apply Normal rate band
Dividend income
NIL Rate Band is available for all type of taxpayer is
£2,000
Normal rate
Basic Taxpayer
£1------- £37,700
Higher Taxpayer
£37,701------- £150,000
Additional Taxpayer
Above £150,000
Important note:
 First Apply Nil rate band
 Second Apply Normal rate
Tax liability
Add: Child benefit
Note-10
Total tax liability
Less: marriage Personal Allowance (1260×20%)
Note-8.2
Less: (interest on loan of residential property ×100%
×20%)
Less: PAYE
Tax payable or (Refundable)
0%
0%
(N/A)
0
0
20%
40%
45%
XXX
XXX
XXX
0%
0
8.75%
33.75%
39.35%
XXX
XXX
XXX
XXX
XXX
XXX
(252)
(XX)
(XX)
X/(xx)
Trading Income Note – 1
Net profit as per accounting profit
Add:
 Expenditure not allowed for tax purposes included in profit and loss
 Taxable trading profit not credited in the accounts of profit and loss
Less:
 Expenditure not charged in the accounts but allowable for taxation purposes
 Income included in the accounts that is not taxable as trading
 Capital allowances
Tax Adjusted Trading profit after Capital Allowance
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£
Xxx
Xxx
Xxx
(xxx)
(XXX)
(xxx)
Xxx
SKANS School of Accountancy Multan
Employment income Note -2
Salary
Bonus
Commission
Taxable Benefits
Less: Allowable deductions as per tax rules
Total employment income
£
Xxx
Xxx
Xxx
Xxx
(xxx)
Xxx
Exempt income Note-3
The following is exempt and must not be included in the format (just state that it is exempt)
o Premium bonds winnings and Gaming, lottery
o Income received from a individual savings account (ISA)
o National saving and investment certificates interest
o Some social security benefits
o Scholarship income and state benefits paid in the event of accident, sickness or disability.
Jointly owned assets of a married couple, or by a couple in a civil partnership Note- 4
 When spouses/civil partners own income generating assets jointly,
- It is assumed that they are entitled to equal shares of the income and it is split accordingly
on a 50:50 basis between them.
- However they may make a joint election to HMRC to split the income according to their
actual ownership shares
 Spouse and civil partners are taxed as two separate people. When it comes to tax planning for a
married couple, or a couple in a civil partnership the availability of the savings income nil rate
band means that transferring income from the partner paying tax at a higher rate to the partner
paying tax at a lower rate.
 Note:
1. A joint bank account will always be taxed 50:50 regardless of who contributions what amount
2. If shares are owned, dividends are always divided according to the exact proportion to which
each is actually entitled, it is never assumed that it is in equal proportions.
Saving Income Note-5
5.1- Interest income received gross
The following income received without deduction of tax at source and gross:
o Bank interest and Building society interest
o Interest on debenture of unlisted unquoted companies (e.g. loan note interest)
o National saving and investment bank account interest (including income from NS&I investment
and NS&I direct investment)
o Interest on government securities (gilts),including Treasury Stock and Exchequer stock
o Interest on debentures of listed (quoted ) companies
(For F6 examination always assume all saving income are received gross)
5.2- Accrued Income Scheme
 It is applicable upon Govt. securities & debentures having value more than £5,000 at any time
during tax year.
 In this scheme interest is deemed to be accrued on daily basis (calculate on monthly basis in
exams) so the price of debenture is apportioned between interest & capital element.
 The interest is assessable to income tax
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 The scheme does not apply if the securities are transferred on death.

EXAMPLE
On 1 July 2022, Peter purchased £100,000 (nominal value) of gilts which pay interest at the rate of 3% for
£120,000. Interest is paid half-yearly on 30 June and 31 December based on the nominal value. Peter sold
the gilts on 30 November 2022 to Petra for £121,250 (including accrued interest).
The accrued interest included in the sale proceeds figure is £1,250 (100,000 at 3% x 5/12).
Peter/seller
Peter will include the accrued interest as savings income for 2022–23, even though he has not
received any actual interest .Peter will include interest as saving income of 5 months£1,250
(100,000 at 3% x 5/12) Petra/Buyer Petra will receive interest of £1,500 (100,000 at 3% x 6/12)
on 31 December 2022, but will only include £250 (1,500 – 1,250) as savings income for 2019–20.
5.3-Starting rate Zero rate
o With this saving income nil rate band, saving income can also benefit from the staring rate of
0%. However, the starting rate only applies where saving income falls within the first £5,000 of
taxable income. If non saving income exceeds £5, 000, then the starting rate of 0% for saving
does not apply
Dividend income Note-6
o Dividends received from a company are charged to income tax in the tax year in which they are
received. The receipt date is taken as the date on the dividend voucher.Dividends income is received
gross
o The first £2,000 of dividend income for tax year 2022-23benefits from a 0% rate. This £2,000 nil
rate band is available to all tax payers, regardless of whether they pay tax at basic, higher or
additional rate. However the dividend nil rate band counts towards the basic and higher rate
thresholds
Qualifying interest Note-7
If the loan is taken for the following purpose then the interest paid on such loan can be deducted from
total income in tax year in which the interest paid to calculate net income
Loan to Purchase of
Interest is allowed for three years form the end of the tax year in which the
plant and machinery
loan was taken for purchase plant and machinery which is used in
partnership business or employment. If plan or machinery is used partly for
private use , the allowable is apportioned
Loan to Purchase of
The company must be an unquoted trading company resident in UK with at
shares of employee
least 50% of the voting shares held by employees‟
controlled company
Loan or invest in
The investment may be contribution to the partnership capital or a loan to
partnership
partnership. The individual must be a partner (other than limited partner).
Relief ceases when he cease to be a partner
Loan to invest in co
The investment may be shares or a loan . the individual must spend the
operative society
greater part of their time working for the co operative
Personal Allowance Note-8
Personal allowance is an amount on which income tax will not be charged.If an individual makes income
above this allowance amount, then income tax will be charged on that additional income
Personal allowance is deducted from individual‟s net income to arrival taxable incomeFor the tax year
2022/23 the personal allowance is £12,570
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Definition of Adjusted Income
Total net income after deduction the reliefs
Less: personal pension contribution (Gross) Note -9
Less: Gift Aid Donation (Gross)
Note -9
Adjusted Net Income
ANT < £100,000
Adjusted Net Income
more than £100,000
Note – 8.2
Transfer of personal
allowance/ marriage
allowance/ marriage
tax allowance
£
XX
(X)
(X)
XX
Basic personal allowance available is £12,570 for tax year 2022-23
 Reduced personal allowance if Adjusted net income exceeds£100,000
 Where taxpayer‟s ANT exceeds £100,000,the personal allowance is
reduced by (ANT - £100,000) × 50%
 Effective marginal rate of income tax is 60%,.Where taxpayer has an
adjusted net income of between £100,000 and £125,140
 This 60% effective rate is made up of: Higher rate of 40% on income
plus additional 20% as result of withdrawal of Personal allowance
 .In this situation, it may be beneficial to make additional personal pension
contributions or gift aid donation to reduced ANT below £100,000
 It is now possible to elect to transfer a fixed amount of the personal
allowance to a spouse or registered civil partner.
 The transferable fixed amount is £1,260 for the tax year 2022/23,
 A transfer is not permitted if either spouse or civil partner is a higher or
additional rate taxpayer.
 The benefit is given to the recipient as reduction from their income tax
liability at the basic rate of tax rather than as an actual increase in their
personal allowance. The tax reduction is therefore £252 (1,260 x 20%).
 If the recipient‟s tax liability is less than £252, then the tax reduction is
restricted so that the recipient‟s tax liability is not reduced below zero.
 Election made by taxpayer:
 Before 6 April 2022 it will have effect for 2022-23 and subsequent tax
year unless it cancelled by transferor spouse / civil partner or
circumstance change
 After 6 April 2023, it must made within four years of end of tax year (i.e.
5 April 2027) and only be apply for tax year 2022-23
In summary, if adjusted net income is
- <£100,000 then 100% full basic personal allowance is available to taxpayer£12,570
- ≥£ 125,140 then personal allowance is reduced to zero (nil available )
- £100,000 between £125,000 then personal reduced to the excess amount to half (adjusted net
income-£100,000) ×50%
Gift Aid donation and Personal pension contributions Note-9
When tax payer pays charity under gift aid donation or make a personal pension contribution then the
taxpayer only pays 80%(net) of the amount and remaining 20%is paid by HMRC. For example, if the
taxpayer wishes to pay £200 then he will only pay £160 and the remaining £40 will be paid by HMRC
If taxpayer pays donation under Gift Aid Donation scheme or personal pension scheme then tax benefit
will be given as following:-
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Step # 1
This amount paid by taxpayer will be grossed up by (net amount/80 ×100)
The basic rate band and higher rate band of the tax payer will be extended by the gross
amount e.g.
The tax payer paid
8000 (net)
Step # 2
(8000/80×100) = 10,000
Original Tax Band
Basic band
£1-------£37,500
ADD
Extended Tax Band
Basic band
£1-------£47,500
(£37,500 + £10,000)= 47,500
Higher band
£37,501----£150,000
ADD
Additional band
£150,001-----and above
Higher band
£47,501----£160,000
(£150,000 +£ 10,000) = £160,000
Additional band
£160,001-----and above
Child Benefit Income Tax Charge Note-10
o Child benefit is a tax free payment to parents of children irrespective of what level of taxpayer
they may be
ANI <£50,000
If taxpayer Adjusted net income is < £50,000 no tax is charge (exempt)
ANI between
Where adjusted net income falls between £50,000 and £60,000 the
£50,000 to £60,000 income tax charge would amount to 1% of the child benefit received for
every £100 of income in excess of £50,000.
(ANT - £50,000 )/100 × 1% = tax charge rate × child benefit
ANI >£60,000
Where Adjusted net income of individual is > £60,000 child benefit
amount is fully taxable
Tax application
The income tax charge on child benefit is added in deriving the income
tax liability of the taxpayer.
Payment of tax
If both partners have adjusted net income over £50,000 the partner with
the higher income is liable for the charge.
Where the charge applies the tax payer must complete a tax return and
the charge is collected through the self-assessment system
Avoid tax charge
To avoid child benefit tax charge, taxpayer can opt not to receive child
benefit at all so that the income tax charge does not apply
Individual Saving account
An ISA is a financial product available in the UK it is a tax efficient way of saving or investing. An ISA
investment will be free from UK income tax and capital gains tax
ISA component
ISA has two component
1. Cash ISAs:- This includes banks and building society accounts , as well as those National Saving
products where the income is not exempt from tax
2. Stocks and Shares ISAs:-Stocks and shares listed anywhere in the world
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Annual Subscription limits
 ISAs have annual subscription limit for 2022-23 of £20,000 per person which can be invested in a
cash NISAs or stocks and shares ISAs

There is no restriction on the proportion of the £20,000 limit that can be invested in either type of
account.
 Spouses and Civil partners each have their own limits
Investment in ISAs
Individual
Investment
Aged between 16 and 18
Open the Cash ISAs but cannot investment in
UK resident
Stock
Investment in cash ISAs and stocks and shares
Aged 18 and over
ISAs
Advantages of ISAs
The main advantages of ISAs are:
(a) Income is free of income tax
(b) Disposals of investments within an ISA are free from capital gains tax
(c) No minimum holding period - withdrawals can be made at any time
Individual Saving account and Nil rate band
 The availability of the saving income nil rate band for basic and higher rate taxpayers means that
there is no tax benefit to investing in cash ISAs for many individuals. However cash ISAs are
advantageous for additional rate taxpayers and for other individuals where their savings income nil
rate band is already utilised
 The availability of the dividend nil bands means that there is no tax advantage to receiving dividend
income within stocks and shares ISA for many individuals. However, chargeable gains made within
stocks and shares ISA are exempt from capital gain tax. Stocks and shares ISAs are therefore
advantageous where chargeable gains are made in excess of the annual exempt amount
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CHAPTER #02
Property income
Cash basis
The cash basis is now the default basis for
calculating property income for individuals and
partnerships
This gives automatic bad debt relief as rental
income is not taxed unless it is received.
Accruals basis
1. It is still possible to opt to use the accruals
basis, An election is made for the accruals basis
to apply (elect by 31 January 2025 for 2022/23
tax year which means 22 months after end of
tax year)
2. The accruals basis must be used if property
income receipts exceed £150,000.
Note:- 1- Limited companies continue to use the accruals basis.
2- Security deposits (these are returned to the tenant on the cessation of a letting, less the cost of making
good any damage, so they are therefore initially not treated as income).
The proforma computation shown below can be used to calculate the rental income assessment for an
individual.
UK property income
£
£
Rents received during the tax year(see Note 1 below)
X
Part of premium received on short lease(see Note 2 below)
X
XX
Less
X
Allowable revenue expenses (see Notes 3 below)
X
Pre letting expenditure
(see Notes 4 below)
X
Management expenses and agent‟s fee
X
Council tax, water rates (if paid by landlord)
X
Gardener‟s wages, cleaner‟s wages
X
Insurance for the property(see Notes 5 below)
X
Repairs
X
Painting and decorating
X
Impair debts or Debts written off(see Note 6 below)
Motor car expenses
(see Note 7 below)
X
Capital allowance
(see Note 8 below)
Interest on a loan to acquire or improve a let non-residential property.
X
100% allowable
X
Interest on loans in relation to the residential property only
X
(see Note 9 below)
X
Replacement furniture relief.(see Note 10 below)
(X)
Property income assessable
X
Property income
1- Rent income
Note-01
Cash basis: Under cash basis rent will be included Accruals basis:- Under accrual basis rent income
on a received basis (rather than a receivable basis), and expenses are included receivable and payable
with expenses (such as insurance) deducted on a basis during the tax year
paid basis (rather than a payable basis) during tax
year
In any examination question involving property income for individuals and partnerships, it should
be assumed that the cash basis is to be used unless specifically stated to the contrary
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2- Premium on short lease Note-02
A premium is a lump sum amount received by the landlord at the start of the lease in return for giving the
tenant the exclusive right to use the property for the period of 50 or less than 50 years of the lease. When
the lease terminates, the property reverts back to the owner.
The amount to be assessed as property income equal to amount is:
Premium
X
Less: Premium × 2% (n-1)
(X)
Premium
X
n= number of years
Property Expenses
 Expenditure is allowable if the property is available for letting. Therefore expenses are allowable if
incurred while the property is empty (e.g. repairs carried out in between old tenants moving out and
new tenants moving in)under accrual basis
 Allowable expenses must be incurred wholly and exclusively for the purposes of the property
letting business
Owner occupied property
.However, if the owners occupy the property at any time, expenses are not
Expenses
time proportionate allowable if incurred while the property is occupied by the owner. It may be
necessary to time apportion some expenses and only allow those incurred while the
property is available for letting.
Some expenses are not time apportion even owner occupied the property because
Expenses not
time proportionate which relate wholly to letting would be fully deductible. For example:
Advertisement ,Agents fee and commission
Revenue expenditure Note-03
 Capital expenditure is NOT allowed, only revenue expenditure are allowable, and however capital
expenditure to improve the property is not allowed and repair of property is allowable
Pre letting expenditure Note-04
 Expenditure incurred in the seven years pre letting, provided the expenses would normally be
allowed if incurred whilst letting property.i,e advertisement , management expenses etc.
Insurance expenses
Note-05
 Under the cash basis the whole amount of insurance paid during tax year is allowable expenses.
 Under the accruals basis, insurance premium is accounted as insurance is payable for letting period
during tax year.i.e.If Mr. Ali paid an insurance of £600 on 1st July 2021 for a year and of £1200 in
paid 1st July 2022 for a year
insurance expenses = (£600/12 × 3= £150 + £1200/12 × 9 = £900) =1050
Impaired debts/Irrecoverable debts Note-06
 Outstanding rents which are no longer recoverable (for example, due to a tenant leaving with no
contact details and without paying) are an allowable deduction under accrual basis and
 No relief is available in cash basis accounting
Motor Car expenses Note-07
Motor expenses incurred the taxpayer may now use the HMRC approved mileage allowances which will
be at 45p per mile instead of computing actual motor expenses incurred
Capital Allowance
Note-08
Capital allowances may be claimed for expenditure on plant and machinery used for the maintenance of
the property
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Finance cost or interest expenses for loan taken purchase or improve the property Note-09
If a loan is taken out to either purchase or repair a residential property(including
Purpose of loan incidental costs of obtaining the loan finance and any bank
overdraft interest in running the property)
Finance cost
Finance cost purchase or repair of property is not allowable as propertyexpense
onloan
but
for 100% finance cost is restricted to the basic tax rate.
residential
Restriction work in this way
(Interest expenses×20%) is deducted from the income tax liability as taxcredit
Property
expense
Restriction on
The restriction does not apply on
finance
cost on(1)
residential
property does not
Companies
(2) furnished holiday letting
apply
(3) Non- residential/commercial property
Instead of 100% finance cost is allowable expenses against propertyincome
Impact
restriction
The
of restriction has no impact on basic rate taxpayers. but will increasethe tax
ontaxpayer
liability
of a higher rate or additional rate taxpayer.
Replacement of furniture and furnishing reliefs
Note-10
 Furnishings include items such as beds, televisions, fridges and freezers, carpets and floor coverings,
curtains, and crockery and cutlery.
 If residential lettings are either partly or fully furnished, tax relief is usually given for the furniture
and furnishings by Replacement Furniture relief
 This relief is available for both individual and companies but not for furnished holiday letting because
the cost of furniture and furnishings in such properties qualifies for capital allowances.
 There is no relief for the initial cost of furniture and furnishings. But the relief is only available when
assets are replaced.
 Calculation of replacement furniture relief =
(Cost of replacement asset of same capacity – sale proceeds of old asset)
Aggregation of Expenses/Income if more than one property incomes:
When rent is generated from letting more than one property, all rents and expenses for all the properties
let out are pooled together and a simple amount is calculated.
Understand how Relief for Property Losses given:
1. All property income and expenses are pooled to give an overall profit or loss figure for the year.
The losses from running of one property are automatically offset against other property income.
2. If overall losses on all properties, the property income assessment for tax year will be NIL
3. Any surplus losses are carried forwarded to next year.
4. Losses carried forward may only be offset against profit from the property rental business. It is
necessary that property business must continue i.e. if property business ceases to exist the carried
forward losses are not allowed against any other income.
5. Any unrelieved losses are carried forward indefinitely period of time and off set against the first
available future property business profit.
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Furnished Holiday Letting (FHL)
The letting is treated as if it were a trade. This means that, although the income is taxed as income from a
UK property business some of, the provisions which apply to actual trades also apply to furnished holiday
lettings as follows:
 Capital allowances are claimed on the cost of furniture instead of claiming replacement furniture
relief if the accruals basis is used. If the cash basis is used then deduction is available for the capital
costs of the furniture when paid.
- 100% mortgage interest is allowable
The profit or loss is computed for tax years on a cash basis, Therefore, profits of FHL are not pooled with
other UK property income treated as if profits of a separate trade. The cash basis is default basis for
furnished holiday letting.
All the following condition must be met for letting to qualify for furnished holiday accommodation.
The lettings must be of UK or European Economic Area furnishedaccommodation
Commercial basis
made on a commercial basis with a view to the realisation of profit.
The accommodation must be available for letting to public generally for at least
Available for
210 days during the year.
letting
Actually Occupied The accommodation must be let to public generally for at least 105 days during
the year.
letting period
No one person occupies the property for more than 31 consecutive days. If one or
Pattern of
more persons does occupy the property for more than 31 consecutive days then
occupation
these periods of long letting must not exceed 155 days in the year
(Advantages /Differences from normal property)
Plant & machinery  Under cash basis a deduction is available on paid basis for plant and machinery
including furniture
acquired including furniture and furnishing
and furnishing
 Under accruals basis capital allowance are available in respect of plant and
machinery including furniture and furnishing
 Under both cash and accrual bases these deduction apply instead of replacement
of domestic items reliefs
Relevant earnings Relevant earnings when calculating the maximum amount that can be invested in a
for pension
registered pension scheme includes income from a furnished holiday letting.
Rollover relief
Rollover relief is available if the owner invests in another furnished holiday letting.
Gift relief
Gift relief is available on the gift of a furnished holiday letting.
Entrepreneur‟s
Entrepreneur‟s relief is available on the disposal of a furnished holiday letting
relief
Finance cost
100% of mortgage interest is allowable against FHL letting income
Losses of Furnished holiday letting
Losses of FHL are carried forward against future income of FHL only
More than one properties are letting
If a tax pay has more than one letting of which some are FHL while some are not than draw up two
separate profit and loss account as if they are two separate property businesses. This is so that profit and
losses treated as trade profits can be identified.
Rent a Room Relief
Where an individual rents out furnished accommodation which is part of his main residence (e.g. rents
a furnished bedroom in his house or flat to a lodger), any rental income is assessed to income tax as
property income. Cash basis is defualt for rent a room.There are 2 methods under which the income
from letting this room can be assessed.One of the two methods below can be chosen
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 Method 1:If an individual lets a room, furnished, in their main residence – the gross rent up to
£7,500 is exempt.(or £3,750 if other person is a joint owner and also receives rent)
 Method 2: In which Rent a room treated Noraml property
Gross rental income
(before expenses and
allowances):
£7,500 or less
Gross rental income
(before expenses and
allowances)
More than £7,500
Property income
assessment
If a loss arises
Claim exemption of £7,500
(method 1)
If loss election are made for
normal property or ignored the
exemption is made and The
elections is made within 22
months end of tax year and only
valid for the tax year of that loss
Property income assessment
If a loss arises
If loss arises,
Lower of
Method -1 (rent a room relief)
treat normal
Rent received
X
property
Exemption £7,500or £3750 join property ( x)
xxx
Method-2 Normal property
Rent receivable
x
Less revenue expenses
(x)
Less: Replacement furniture relief
(x)
xxx
Note: When gross rent is >£7,500 then election of rent a room relief is made if rent rooms lower and
election is made within 22 months after end of tax year and election is binding until revoked,
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CHAPTER # 03 Employment income , National insurance contribution and PAYE System
Recognize the factors that determine whether an engagement is treated employed or self-employed
One important is to be applied in deciding whether a personal is employed or self employed is the nature
of contract between taxpayer and person who paying for the work done
Employment involve a contact of service whereas self-employed involves a contract for services
The factors that help to determine whether an engagement is treated as employment are self employed are
as below:
Basis of distinction
Employee
Self employed person
Employees are under the control
They have a greater degree of freedom
Control
of the employer to high degree.
to decide and plan their work
They have to report the work on
specific date, given times and
have obey instruction of
employer
Employees do not invest their
They invest money in business and so
Financial risk
own capital in business. So there
they to bear all losses and there
no financial risk for them
financial risk is involved
Equipment are necessary to carry Self employed persons have to use their
Equipment
out the work is provided to an
own equipment
employee by the employer
Employee is entitled to paid
Self employed persons do not get paid
Holidays
annual leave
annual leaves
Normally
employees
work
for
a
Self employed people generally deal
Number of persons
single employer company or firm with more than one company at a time
contracted with
An employee is protected under
There is no employment protection for
Employment
the contract of service i.e. there is self employed person
protection
a minimum period of notice
Employees are paid weekly or
Self employed individuals are paid per
Mode of payment
monthly
contract
Employees are under an
There is no obligation on self employed
Obligation
obligation to accept the work
individuals to accept every project
allotted to them by the employer
offered to them
Employment contract is personal
Generally self employed can allocate or
Substitution
to that individual; they cannot
delegate the work to their sub ordinate,
instruct someone else to perform
although they remain responsible for
their services
the work
Employment income
£
Salary
Bonus
Taxable benefit (including use own car – surplus mileage allowance)
Reimbursed expenses
Amount paid by employee for benefit
Allowable deductions
Expenses incurred wholly, exclusively and necessarily
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X
X
X
X
(X)
(X)
SKANS School of Accountancy Multan
Contributions to employer's occupational pension scheme
(X)
Subscriptions to professional bodies Charitable donations: payroll deduction scheme
(X)
Travel and subsistence expenses
(X)
Use of own car – deficit mileage allowance
(X)
Total employment income
XX
Basis of Assessment
Employment income is assessed on a receipts basis. This means that the individual is taxed on the income
in the tax year (i.e. 5 April to 6 April) in which the cash or benefit is received, not necessarily when it is
earned.
Meaning of Earnings
The term „earnings‟ includes not only cash wages or salary, but also bonuses, commission, round sum
allowances and benefits made available to the employee by the employer The word earning is used for
employment income
When are earnings received?
For Employee: The amount of bonus is taxed in the tax year according the earlier of the following
1. The date when payment is made
2. The date when an employee becomes entitled to payment
For directors:1. The date when payment is made
2. The date when an employee becomes entitled to payment
3. the date that the financial accounts are credited with an amount for the director on account of
earnings, and
4. where earnings are determined (for example, at a directors‟ board meeting):
− before the end of the accounting period, the last date of the accounting period, or
− after the end of the accounting period, the date the amount of earnings for that period is
Determined
Employment Taxable Benefits
GENERAL
 As a general rule cost of providing Benefits (mean Marginal or Additional cost) is
RULE
taxable to employees unless they are specific statutory rules.
 Where in-house benefits are provided (free air travel for employees of a airline
company) the amount assessed is the marginal cost incurred by the employer
All kinds of vouchers (e.g. cash vouchers, goods vouchers, lunch vouchers) provided to
Vouchers
employees are taxable on the cost to employer less any amount the employee pays the
employer for providing the benefit.
Living Accommodation
(1)
Job related
No taxable benefits arises if the property is job related (exempt)
Accommodation is job related if provided for:
- Proper performance of the employee‟s duties
- Better performance of the employee‟s duties
- Security arrangement for threat to employees‟ life.
Note:* Directors can claim exemption under first two points.
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(2)
Not job related
Rented (letting )
Owned
Cost of accommodation is
Cost of accommodation
Cost of accommodation
less or greater of £75,000
is > £75,000 (owned)
is < £75,000 (owned)
Annual value+ (cost
Taxable amount is higher of:
Taxable amount is higher of:
accommodation or market
 Annual value
 Annual value
value + improvement
 Ret paid by the
 Ret paid by the
expenditure up to the start of
employer (if any)
employer (if any)
the tax year- £75,000) ×
There is no concept of expensive
official rate of interest (2%)
or inexpensive accommodation in
this case. If property rented
Notes relating to living Accommodation
if accommodation was purchased six years before first being provided to
Accommodation
employee than market value of accommodation will be used in the formula in
more than six year
place of cost of accommodation
Subsequent capital subsequent capital expenditure for improvements after purchase of
accommodation up to start of tax year shall be added in the cost or market value
expenditure
where property is used part of tax year, then this benefit will be reduced by
Reduction benefit
(months/12),
where employee paid to employer toward living accommodation benefit, then
benefit will be reduced amount contributed by employee
Expenses related to accommodation (e.g. heating, lighting, gardeners bills, repairing, decorating
etc.
Lower of:
Accommodation
job related
 Cost of heating, lighting, repair bills + 20% of market valued of furniture
 10% of net earnings of employee (net earning includes all earning from
employment exclude ancillary services and use of furniture less allowable
expenses
Accommodation
Cost of heating, lighting, repair bills + 20% of market valued of furniture
not job related
Car benefits
Cars
Co 2 emission ≤ 50 Cars
Hybrid electric car
Co 2 emission 0%
Electric car
Co 2 emission >
50 Cars
Petrol car
Meet RDE2
Treated petrol
car
RDE2 means real driving emission 2
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Diesel car
Not Meet RDE2
Treated diesel car
add 4%
SKANS School of Accountancy Multan
Formula for
calculation of
car benefit
Electric Car
Hybrid electric
motor car %
calculation
Calculation of
percentage of
co2 emission
rate over 50
List price
Capital
contribution
More than one
car benefit
Pool car
100% business
use
Driver/chauffeur
of car
Other Benefit
relating to car
Reduction of car
benefit
17
£
List of price + Accessories cost – capital contribution by employee
X
(Maximum £5000) × CO2 emission appropriate % × months/12 (if car is
available for less than 12 months in tax year)
Less: employee paid to employer for the private use of car
(x)
Taxable Car benefit
X
The percentage of electric power car is2%
Hybrid electric motor care co2 emission between 1 and 50 grams per
Kilometre
Miles
% of Range
130 miles or more
2
70 to 129 miles
5
40 to 69 miles
8
30 to 69 miles
12
Less than 30 miles
14
CO2 %
Petrol %
Diesel Car %
51 grams to 54 grams per Kilometre
15
19
55 grams per kilometre
16
20
Each complete additional 5 grams
An additional 1% is added to the 16%
emission above 55 grams
Petrol car or 20% of diesel car ( not
meet RDE2) up to a maximum
percentage of 37%
Calculation of CO2 emission appropriate % =
(16% + Co 2 emissions of the car - 55 g/km co2 )
5
4% surcharge for diesel car only applies if car do not meet the real driving
emission 2 (RDE2) standards. if car meet the (RDE2) standard then petrol %
apply.
Official List price will be taken; actual paid price should be ignored
Capital contribution made by employee to purchase of car takes maximum up to
£5000
Where more than one motor car is made available to an employee, the benefit of each
motor car is simply based on its list price and CO2 emissions
 The car benefit will be exempt if the car is a pool car
 Pool car is car which is used by more than one employee. Such pool cars must
be used mainly for business purpose and private use is merely incidental. Such
car are not kept overnight near the residence of employee
If car used for business purpose than no benefit is arises (exempt)
If chauffeur is provided with the car count as additional benefits (fully taxable)
Other benefits associated with the cars which are insurance, repairs, maintenance,
vehicle licence are exempt
 The car benefit is proportionately reduced if a motor car is unavailable for
periods of at least 30 days of the tax year, and
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
Fuel for cars
Calculation of fuel
benefit
Pro rated fuel benefit
Exempt fuel benefit
where the employee makes a contribution to the employer for the use of the
motor car
£25,300 × % used for car × months/12
If fuel is not provided for the whole of tax year the benefit is pro-rated
No benefit arises if employee fully reimbursed or fuel is provided for
business use only
If employee does not fully reimbursed the cost of private fuel then fully
No reduction of fuel
benefit is taxable
benefit
Vans and heavier commercial vehicles benefit and fuel of Van
Van benefit
 Where private use is not insignificant the tax charge is £3,600 per annum this
benefit scale cover ancillary benefit such as insurance and services
 Van producing zero co2emission rate have zero benefit charge
 Where an employee uses an employer‟s van for journeys between home and
work and other private use is insignificant there is no benefit.
Fuel of van benefit
 An additional charge is made for fuel provided for unrestricted private use
equal to £688 per annum.
 There is no fuel benefit van producing zero co2emission rate
Time proportion the Both benefits are time apportioned if the van is unavailable to the employee for 30
benefit
days or more during any part of the tax year.
Equally divided
Both Van benefit & fuel benefit be divided equally if van is used by more than 1
employee.
Beneficial loans
This benefit arises when an employer gives an employee a loan at an interest rate that is cheaper
than the official interest rate (2% for 22/23) or free of interest
Both qualifying and non qualifying
Qualifying purpose
Non qualifying purpose
purpose
1-Allowable deduction
(1). If loan amount is less than
If the loan taken is partly for qualifying
against total income as
£10,000 then benefit is exempt
purpose and partly for some other
qualifying interest
(2.) If loan amount is greater
purpose then the taxable benefit is
2- No taxable benefit is than £10,000 then taxable benefit
calculated in normal on the whole loans
arises (exempt)
is calculated. There are 2 ways to
as described above but in the income tax
calculate the monetary value of the format the deductible interest will always
loan benefit.
be calculated on official rate in the
1. Average method
amount of loan taken for qualifying
2. Strict method
purpose
1- Average Method
Bal. outstanding at start of tax year + Bal. outstanding at end of tax year/2
×months/12×offical rate% (2 %)
Less: interest actually paid
Benefit
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X
(x)
X
SKANS School of Accountancy Multan
2- Strict or Accurate Method
Balance outstanding in months ×months/12 × Official rate% (2%)
X
Less: interest actually paid
(x)
Benefit
X
Note: 1- if no repayments have been made during the tax year, then both methods will produce the
same result
2- The average method applies automatically but the taxpayer or HMRC can elect for the strict
method if it is more beneficial for them e.g. the taxpayer will elect when the strict method produces
a smaller benefit figure and HMRC can elect of the strict method gives a MUCH higher benefit
figure.
any amount of loan write off by employer which is taken by employee from
Loan written off
employer is fully taxable benefit for employee
Example
Anna, who is single, has an annual salary of £30,000, and two loans from her employer.
(a) A season ticket loan of £8,300 at no interest
(b) A loan, 90% of which was used to buy a partnership interest, of £54,000 at 0.5% interest
What is Anna's tax liability for 2019/20?
Salary
Season ticket loan (non-qualifying): not over £10,000
Loan to buy partnership interest (qualifying): £54,000 ×(2 - 0.5 = 1.5.%)
Earnings/Total income
Less deductible interest deemed paid (£54,000 ×2 % × 90%)
Net income
Less personal allowance
Taxable income
Income tax
Tax liability £17,268 × 20%
£
30,000
0
810
30,810
(972)
29,838
(12,570)
17,268
3,453.60Use of A
Use of Assets (i.e. furniture, computer, TV, stereo system, camera........etc.)
Use of assets rule
Higher of
 Rent paid by employer
 Market value of asset when first provided × 20%
Time proportionate
this benefit will be reduced by (months/12), if asset was provided for less
than 12 month
Exempt asset
If employer give exempt asset to employee for use. The benefit of use
asset is also exempt .i.e. Bicycles provided for journeys to work, as well as
being available for private use, are exempt from the private use benefit
rules.
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Gift of Assets
Higher of
Cost of asset
Less: benefit already assessed
Less: employee contribution
X Market value of asset when gift
X
(x)
(x) Less: employee contribution
(x)
X
X
The above rule does not apply to the gift of a motor car or van and bicycle, where the benefit is simply the
market value of the asset when gifted – the price paid by employee.
Exempt benefits
Reimbursed expenses
 Where an employee is reimbursed expenses by employer, the amount
received is taxable income. However such reimbursed expense are
exempt if reimbursement is related allowable expenses under
employment income for example contribution to ops, subscription to
professional body, expenses incurred wholly and exclusively for
employment.
 Where an expense is partly allowable and partly disallowable, then
exemption can be applied to allowable part. For example employee‟s
home telephone used both business and private
Mobile phone
 Cost of up to one mobile phone is exempt.
 The cost of second and subsequent mobile phone is taxable as
market value of mobile phone when first provided ×20% ×months/12
Running cost and top up
voucher for mobile
phones
Noncash award for long
service (given for service
of 20 years or more)
Staff parties:
Overnight expense on
business trip
Employee attending full
time course on employer
expense
Employer contribution
for additional house hold
cost incurred by
employee working partly
or wholly at home
Staff suggestion scheme
20
Running costs and top up vouchers of exempt mobile is exempt while all
the cost is taxable if incurred on second and subsequent mobile phones
Noncash award for long services
xx
Up to (£50 ×number of year of service) is exempt,
(xx)
excess is taxable
xxx
Cost per member per year is £150 or less than exempt, if exceed than whole
amount is taxable
Up to a maximum £5 per day in UK is exempt, if exceeds than whole
amount is taxable. Up to a maximum £10 per day in outside UK, if exceeds
than whole amount is taxable
Up to £15,000 is exempt if exceeds than amount is taxable
Home work‟s additional household expense of upto£4 per week or 18 per
month can be paid tax free without need nay supporting evidence, for
additional payment must have supporting documents as evidence expenses
reimbursed by employer when employee is away from home
Staff Suggestion Scheme first £5000 is exempt, excess is taxable
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Removal expenses
(Relocation expenses)
Trivial benefits
Use of subsidised on site
restaurant or canteen
facilities
sporting and recreational
facilities
Work place nursery
Recommended Medical
Treatment
Eye care tests
Medical insurance
Bicycle
Work place parking
Entertainment provided
by third party
Gift of goods from third
Assets provided for
performance of duties
Cost of work buses and
mini buses
Work related training
Welfare counselling
Employer provided
uniform
Employer contribution to
registered pension
scheme
Transport/overnight cost
where public transport is
disrupted by industrial
action
Employee insurance
liability related to work
21
Up to first £8000 is exempt, excess is taxable
An exemption has been introduced for trivial benefits which do not cost
more than £50 per employee provided these benefits are not cash or a
cash voucher.
Use of subsidised on site restaurant or canteen facilities provided
they are available for all employees (exempt)
sporting and recreational facilities provided to employees and not to
general public (Exempt)
Work place nursery or play scheme (Exempt)
An annual £500 exemption per employee has been introduced where an
employer pays for medical treatment. The exemption applies where medical
treatment is provided to an employee to assist them to return to work after a
period of absence due to ill-health or injury. If payment exceeds £500 in tax
year, they are whole taxable
Eye care tests and corrective glasses for VDU use at work place
(Exempt)
Private medical insurance premiums paid to cover treatment when the
employee is outside the UK in the performance of duties. Other medical
premiums are taxable.
Bicycle or cycling safety equipment provided to employee to get to and
from work or travel between one workplace and work place is exempt
Exempt
Entertainment provided by genuine third party (e.g. seats at
sporting/cultural events),even if it is provided by giving the employee
voucher
Gift of goods or exchange goods voucher from third party is £250 or less
then, exempt ,if exceed then all amount is taxable
Assets provided for performance of duties by employer (exempt)
The cost of work buses and mini buses or subsidies to public bus service
bearded by employer is exempt
Exempt
Exempt
Employer provided uniform which employee must wear as part of their
duties
Exempt benefit
Late nights taxi and travel cost incurred where car sharing arrangements
unavoidably breakdown.
Exempt
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The value of loan do not exceeds £10,000 at any time in the tax year is
exempt
If accommodation is given due performance of duties or improve the
Job related
performance of duties is exempt
accommodation
Residual charge/general rule (for the benefit for which no specific rule is available) :-Taxable
amount of benefit is the cost to the employer
Allowable deductions
Following expenses are paid by the employee himself then he can deduct them from his employment
income as allowable deduction:
Contribution to OPS
Employee made a contribution to occupational pension scheme
Subscription to
Employee mad e subscription to professional bodies (e.g. ACCA
professional bodies
,CIMA,ICAEW........etc)
Payment to charity
Payment to charity made under payroll deduction scheme operated by employer
Deficit Statutory
 When employee uses his own motor car for business purposes are
mileage
normally paid a mileage allowance by their employer.
allowance
 Where the payment to employee < the AMAP then difference = allowable
deduction from employee‟s employment income (See- Note_01)
Payment of
Payment for liability incurred due to his employment or Payment of premium
employment liability
for insurance to cover the liability to be incurred due to his employment
Travelling expenses
Travel expenses incurred necessarily in the performance of the duties of
employment (See- Note_ 02)
Capital Allowance
Capital allowances are available for plant and machinery provided by an
employee use plant and machinery performance of his duties
Cost of business
Cost of business telephone calls on private telephone is deductible but no part of
telephone calls
the line rent can be deductible.
General rule
The general rule is that expenses must be incurred wholly, exclusively and
necessarily in the performance of the duties of employment
Note: If the above mentioned expenses paid by the employer than it will be exempted benefit for the
employee.
Statutory mileage allowance
Note - 01
Employee who use their own motor car for business purposes are normally paid a mileage allowance by
their employer
Calculation of mileage Allowance
First 10,000
Above 10,000
miles
miles
£
Mileage Allowance paid by
X
Motor car
45 pence per
25 pence per mile
employer
and vans
mile
Approved mileage allowance
(X)
Motor cycle
24 pence per
24 pence per mile
mile
Taxable benefit /Allowable
X/(X)
Bicycle
20 pence per
20 pence per mile
deduction
mile
Note: Employers may also pay employees up to 5p per mile tax-free for each passenger carried on a
business trip.
Do nothing
Allowable deduction
Taxable benefit
if mileage allowance paid by
Where the payment to employee
Where payments made to the
employer = AMAP then no
< the AMAP then difference =
employee > the AMAP then
benefit arises
allowable deduction from
excess = assessed on the
employee‟s employment income employee as benefit
Cheap loan
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Qualifying travelling expenses
Note-02
Allowable travelling cost
Disallowable travelling cost
Travel expense for travel between home and
- Travel expenses for travel between home and
normal place of work (normal commuting cost) is
temporary place of work is deductible
- Temporary work place means where individual not deductible
Travelling between two separate employments is
continue stay is not more than 24 months
not deductible.
- Travel expenses for travel between normal
There is no relief for any cost related to the private
place of work and temporary place of work is
travel.
deductible
- Travel to visit different clients is allowable
deduction.
Disallowable deduction from employment income to employee
 The cost of evening meals taken when
 As a condition of his employment, an
attending late meetings
employee was required to attend evening
classes. The cost of his text books and travel
 The expense of joining a club that was virtually
was not deductible
a condition of an employment was not
deductible
 Journalists could not claim a deduction for the
cost of buying newspapers which they read to
 The cost of clothes for work is not deductible,
keep themselves informed, since they were
except for certain trades requiring protective
merely preparing themselves to perform their
clothing where there are annual deductions on a
duties.
set scale.
NATIONAL INSURANCE CONTRIBUTIONS and Employee Individual
Classes of NIC
Rules
Class 1 primary
Class 1 primary is Payable by employees above 16 years until state pension age for
or Class 1
men 65 years and women 60 years
employee
It is payable on cash employment income paid by employer only which includes:
Employee‟s cash earning are calculated as follow:
Cash earning for class 1 NIC
£
Salary/wages/overtime/sick pay including statutory sick pay
X
Bonus/commission
X
Any other cash receipts and cash benefits
X
(e.g. Excessive mileage allowance above 45p per mile subject to class
X
1 NICs)
Tips or gratuities paid or allocated by employer
Cash and non cash voucher (excluding vouchers exempted under
X
benefit rulese.g. child care voucher up to £55 per week)
Receipts of marketable assets that can be converted into cash
X
(e.g. gold bar fine wine shares diamond)
Cash earning for class 1 NIC
X
Note cash earning is not same as the employment income assessment, as it is
calculated before any allowable deduction (e.g. occupation pension contribution,
subscription to professional body)
Cash earnings also exclude the following:
Exempt benefit as per employment income rule
Non cash benefit (e.g. car benefit, living accommodation)
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Business expenses reimbursed by employer
Tips directly received from customer
Redundancy payments
Employer payment to registered pension is not earnings but NIC is due on non
registered scheme
Contribution by employee is calculated as follows.
Cash earning
Contribution rates
£12,570 per year
Nil
£12,571------£50,270 per year
13.25%
above£50,270 per year
3.25%
• Contribution is not allowable deductions for employee from employment income.
• It is Employer‟s responsibility to calculates NIC and deduct it from employee‟s
wages.
• Contributions are payable by 19th of each month while 22nd of each month in case
of electronic return.
Occasionally, a question will require class 1 NIC calculations on a monthly basis. For
exams in the period 1 June 2023 and 31 March 2024, should a monthly class 1 NIC
calculation be required, it will be assumed that the threshold of £12,570 applies
throughout the tax year 2022-23. The employee class 1 earnings monthly threshold
will therefore be £12,570/12 = £1,048.
It is payable by employer for employee on same cash earnings calculated for class 1
primary contribution.
• It is paid in respect of employees aged ≥16 until employee ceases employment.
• Class 1 secondary contribution is calculated as follows:
Cash earning
Contribution rates
£9,100 per year
Nil
Above £9,101
15.05%
Employment Allowance: No class 1 secondary NIC will be payable by employer if
amount of total class 1 secondary NIC of all employees is ≤5,000 per annum. If class
1 secondary NIC exceeds 5,000 then NIC above 5,000 will be payable to HMRC. For
example, if a business‟s total employer‟s class 1 NIC for the tax year 2022-23 is
£5,600, then only £600 (5,600 – 5,000) will be paid to HMRC.
The employment allowance is not available:
- To companies where a director is the sole employee; or
- Where employers‟ contributions are £100,000 or more for the previous tax year.
• Allowable deduction for employer against taxable trading profit
• Contributions are payable by 19th of each month while 22nd of each month in case
of electronic return.
It is payable by employer on taxable non-cash benefits (e.g. living accommodation
benefit, car benefit, fuel benefit, beneficial loan, use of asset, gift of asset etc.)
provided to P11D employee at the rate of 15.05%.
• It is allowable deduction for employer against it trading profit.
• It is paid by 22nd July, following the end of the tax year. 22nd July 2020 for 2022/23.
Class 1
secondary
Or class 1
employer
Class 1 A
PAYE system
24
PAYE stands for Pay As You Earn. It is the system for collecting income tax and
NIC from employment earnings during the tax year. It means that the employer are
required to deducts the amount of income tax and NIC from the employee‟s wages
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Parties in PAYE
Application of
PAYE
PAYE codes
How PAYE
works
Payment under
the PAYE system
25
or salary, and Pay the income tax and NIC to HMRC.
There are three parties involved in the PAYE process – HMRC, employer and
employee.
 Salary/wages, bonuses/commissions
 Any other cash receipts and cash benefits (e.g. mileage allowances that exceed
the authorised mileage allowance rates)
 Cash and non-cash vouchers, excluding vouchers exempted under the benefit
rules (e.g. childcare vouchers up to £55 per week)
 Receipts of marketable assets that can be converted into cash (e.g. gold bars,
fine ,wines, shares, diamonds)
An employee is normally entitled to various allowance under PAYE system an
amount reflecting the of these allowance is set against their pay and determine the
amount to set against their pay the allowance are expressed in the form of a code
Allowance
£
Deductions
£
Personal Allowance
X
Benefits
X
Allowable Expenses
X
Adjustments of overpaid tax
X
>£3,000
Adjustment of overpaid tax
X
Other income
X
Total Allowance
XX
Total deductions
XX
(Total allowances less total deductions) × 1/10
To obtain the code number the last figure is removed and replaced with a letter An
I.
L Tax code for people entitled to the full personal allowance
II.
M Tax code for people who are receiving £1,257 of personal allowance
from a spouse or civil partner
Under RTI, an employer is required to submit information to HMRC
electronically. This can be done by:
(a) Using commercial payroll software
(b) Using HMRC‟s Basic PAYE Tools software(designed up to nine employee)
(c) Using a payroll provider to do the reporting on behalf of the employer
The employer reports payroll information electronically to HMRC, on or
before any day when the employer pays someone (i.e. in „real time‟). This report
will normally be carried out by the payroll software (or the payroll provider) at the
same time that the payments are calculated and is called a Full Payment
Submission (FPS). The FPS includes include details of:
I.
The amounts paid to employees
II.
Deductions made under PAYE such as income tax and national insurance
contributions
III.
Details of employees who have started employment or left employment
since the last FPS
National insurance contributions are also calculated by the software in relation
to the earnings period
 Under PAYE income tax and national insurance is paid employer over on the
due date – by the 19th of the month (22nd of the month if electronically paid)
 Employers whose payments are, (on average), less than ￡1,500 per month are
allowed to make payments quarterly rather than monthly. Payment are due by
the 22nd of the month following quarters ending 5 July, 5 October, 5 January, 5
April
 Note that employers with 250 or more employees must make their monthly
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PAYE payments electronically on the 22nd of the month.
Interest
Penalties
Daily interest is charged on late payment of income tax and national insurance by taking
account number of days late. HMRC make charge after the end of tax year.
 Penalties are charged on a monthly basis, where a RTI submission is made late
Monthly submission which are
Penalties
late
1st late transmission in the tax
Nil
year
2nd late transmission in the tax
Number of
Monthly
year
employees
penalty
Up to 3 months late
1-------9
£100
10-----49
£200
50-----249
£300
250 or more
£400
More than 3 months late
An additional penalty of 5% of the tax and
NIC which should have been reported is
charged
PAYE settlement agreement are arrangement under which employer can make single
payments to settle their employees income tax liabilities on expenses payments and
benefits which are minor, irregular or where it would be impractical to operate PAYE
PAYE
settlement
agreement
PAYE Forms
Since information must be filed electronically, it is no longer possible to produce a payroll manually.
Employers must either run payroll software or use the services of a payroll provider.
The employer must send to HMRC the following:
Form
P 11D
P 60
P 45
26
Purpose
P11D include summary of the full cash equivalent of
all taxable benefits (other than those which are pay
rolled),
Alternatively, from 6 April 2016, the employer can
apply to HMRC to tax the benefit through the PAYE
system like other earnings. The employee will then
pay tax on the benefit throughout the year and is not
required to report the benefit on his tax return.
Likewise, the employer is not required to include the
benefit on a P11D.
This shows total taxable earnings for the year, tax
deducted, code number, NI number and the employer's
name and address.
Provided to employee when leave the employment and
shows the employee's code and details of his income
and tax paid to date
Timing
Provided by 6 July following
tax year
Provided to employee by 31
May following tax year
Provided to employee when
leave the employment
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CHAPTER # 04
income from self employment, National insurance contribution
Badges of trade
All trading profits of person who is UK resident are chargeable to income tax. When individual disposes
of assets, it is not always clear if those transactions constitute a trade or not. If an individual disposes of
an asset, should that transaction be treated as a capital gain or treated as trading income? The following
tests are used to establish if a series of transactions should be treated as a trade and taxed under tax
adjusted tradingprofit.
Subject matter of transaction:- There are three main reasons for purchasing an asset:
1. For personal use
2-As an investment
3-Resale at profit
The intentions of the purchaser at the time of purchase regarding the resale‟s of the article are relevant.
If assets are held as an investment or for personal use, any profit on a later sale will be treated as a capital
profit, if the asset is held neither investment nor personal use the any profit on its sale will be treated as
trading profit
Frequency of transactions:-The number of similar transactions and the frequency of those transactions
suggest that the activity constitutes trading. For example a taxpayer bought clothes at the local market
each week, and sold them at profit. The taxpayer is regularly performing the same transaction. This likely
constitutes trading
Length of ownership:- Assets purchased for personal use or as an investment are normally held for a long
period , where as asset purchased trading inventory are usually held for a shorter term so Where items
purchased are sold soon afterwards, the transactions are likely to be treated as a trade.
Profit motive:-The presence of a profit motive will be a strong indication that a person is trading.
Supplementary work and marketing:-When work is done to make an item more marketable, or attempts
are made to find purchasers, the transactions are more likely to be treated as a trade. For example if an
individual bought a number of old cars, and restored them prior to selling them. The activity is likely to
constitute a trade
Manner in which assets were acquired:-If acquired unintentionally (e.g. by inheritance) and then sold, it is
unlikely that trading has taken place.
The circumstance/Reason for sales:-The circumstance giving rise to the sale of the asset are also
important factors to decide if trading has occurred. If a person sold an asset due to personal financial
problems. It is unlikely to be regarded as a trade. For example an individual sells one of his three motor
cars to raise funds to pay for his mother‟s healthcare is unlikely to be regarding as trading
Adjustments of the profit as per Statement of profit or loss
Tax Adjusted Trading profit
converted into
Net profit / (loss) as per profit and loss statement
Expenditure including in profit and loss account
 Disallowable for tax purpose
 Allowed for tax purposes (no adjustment write simply zero)
Income included in profit and loss account
 Disallowable for tax purpose
 Allowed for tax purposes (no adjustment write simply zero)
Expenditure not charged in profit and loss account
 Expenditure not charged in the accounts but allowable for taxation
purposes
27
F6 Class notes F6 Muhammad Amjad Karim ACCA. M.com CA inter
Profit
£
+
Xxx
Loss
£
(xxx)
Add
0
(Minus)
0
(Minus)
SKANS School of Accountancy Multan

Expenditure not charged in the accounts but Disallowable for taxation
purposes (No adjustment simply ignored)
Income not included in profit and loss account
Income not included in the accounts that allowable for taxable as trading
income
Income not included in the accounts that is not taxable as trading income
(No adjustments simply leave it)
Capital Allowance
Total
Total Adjusted Trading Profit After Capital Allowance
Add
(Minus)
xxx
(xxx)
Xxx - (xxx) = XXX
Note:-This figure may be used to determine the tax year taxable trading profits or losses by
applying opening ,ongoing or closing year basis period rules.
Adjustment:-In trading profit and loss account.
1- Income included in the accounts that is not taxable as trading income: Capital Gains, Property Income, Interest Income and Dividend received. Interest received from overpaid
tax and income that exempt from tax
2- Allowable income under trading but not including in accounts:
Drawings by owner is allowable on selling price
3- ALLOWED AND DISALLOWED EXPENSES
Capital Expenditure
 Initial purchase price and improvement is capital expenditure are
and Revenue
disallowed.
Expenditure
 Where Replacement is subsidiary part of an asset with extended capacity
is disallowed and same capacity is allowable
 Where replacement is relate to entire asset is disallowed
 Repair to an asset is revenue expenditure and is allowable but cost initial
repair in order to make an asset usable is disallowable
Rental expenses and
 Any rent paid for the purpose of trade is allowable.
lease charges
 Leasing charge of car emitting 110 g/km Co2 or less is allowable.
 If CO2 emission of car exceeds 110g/km then 15% of Rental/leased
charges are disallowed.
Entertaining is disallowed, unless entertaining employees
Entertaining
Gifts and gifts to
 Gifts to employees are allowable
customer
 Gifts to customers are only allowable if

• Their cost less than £50 per person per year, and

• Gift is not food, drink, tobacco or vouchers exchangeable for goods
and services

• Gift carries a conspicuous advertisement for the business.
 If cost exceeds £50 per year then whole amount of gift is disallowed.
Subscriptions and
 Trade or professional association subscriptions are allowable
Donations
 Donation to a local charity is allowable and to National charity &
political parties is disallowed.
28
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
Legal and Professional
Charges
Lease premium
Bad Debts/Allowance
For Receivables
Recovery of bad debts
Drawings and
Appropriation of profit
Family member salary
Interest Expenses
Fine, penalties and
damages
Pre trading
expenditure
Depreciation
Proprietor expenditure
Redundancy, loss of
office and removal
expenses
29
Donations to other parties are allowable only if
• It must be wholly and exclusively for trading purposes.
• It must be reasonable in size in relation to the business.
• Charity must be working for educational, religious, cultural purpose
etc.
If donation not above condition then claim as gift aid donation
 Legal and professional charges are allowable if for trade and not capital.
i.e. legal fee chasing trade debts and defending the title of non-current
assets
 Cost incurred for new issue of shares is disallowed.
 Cost incurred for purchase of new assets is disallowed.
 Costs of obtaining loan finance for trade, renewing a short lease (50
years or less) or issuing debt finance and cost of registering patents are
specifically allowed by statute
 Cost of Initial grant of short or long lease is disallowable
 Cost of Renew of long lease is disallowable
 Premium paid on grant of short lease is allowable and is calculated as
follows:
Premium
x
Less: Premium× 2%(n-1)
(x)
x /n
n = number of years
if the premium had not been paid at the start of the accounting period this
deduction would be time apportioned for that year
 Bad debts and allowance for receivables relevant to trade are allowable
e.g. bad debts on credit sales.
 General provisions for bad debts are disallowed and specific provisions
are allowable.
 Non-trade bad debts are disallowed. (E.g. bad debt on loan given to
employees, customers and suppliers.)
Recovery of bad debts is taxable income
 Drawing by the owner in the form of salary, cash or goods are
disallowed.
 Interest on capital is disallowed.
 Excessive salary paid to owner‟s family member is disallowed.
 Qualifying (eligible) interest is disallowed.
 Interest paid on borrowings for trading purposes is allowable.
 Interest paid on overdue tax is not deductible
Fines, penalties and payment of damages are all disallowed unless car
parking fine paid on behalf of an employee but not by business owner
/director
Pre-trading expenditure is allowable if it is incurred in the seven years before
a business start to trade
Depreciation and amortisation is disallowed.
Expenditure relating to proprietors car, telephone ------ etc is disallowed.
Redundancy, loss of office and Removal expenses for employees allowable
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Insurance and royalty
National insurance
contribution paid by
employer
Employer contribution
to pension scheme
Loss on capital assets
Capital allowance
Insurance expense and Patent Royalties are allowable.
 Payment of class 1 (employee) NIC, Class 2 NIC, Class 4 NIC are
disallowed.
 Payment of class 1 (employer) NIC, and Class 1A NIC are allowable.
Employer contribution to pension scheme for employee is allowable
Owner used his for
business purpose
Where use his asset for business and private purpose then business purpose
of expense are allowable. (e.g uses a room in their private house as an office
the business portion of expenses are allowable)
Where expenses are wholly and exclusively for the trade that have been paid
by owner from private is allowable expenses
Business expense paid
by owner his private
fund
General rule
Loss on sale of noncurrent assets (capital losses) are disallowed.
Capital allowances are allowable.
The general rule is that expenditure is only allowable if it wholly and
exclusively for the purpose of the trade
Cash basis option for small businesses
small unincorporated businesses (sole traders and partnerships) may elect to
Cash basis option
use a cash basis option
available
If the business‟ turnover does not exceed £150,000. The business may
Condition for cash basis
continue to use the cash basis until the turnover exceeds £300,000.
Corporation and limited liability partnership
cash basis option is not
available
£
Trading profit (or loss) under the cash basis is therefore calculated as follow:
Cash sales received in the tax year
X
Cash sales of plant and machinery in the tax year (not car)
X
Less: Cash purchase of inventories in the tax year
(X)
Less: Cash allowable expenses in the tax year
(X)
Less: Cash purchases of plant and machinery in the tax year(ignored the purchase of car
(X)
but purchased of van is allowable)
Less: Authorised mileage allowance instead of actual Motor expenses (Note- 4)
(X)
Add; Private use of part of a commercial building (Note-5)
X
Tax adjusted trading profit
XXX
Notes:1. The business accounts for cash receipts and payments in the period of accounts
2. Receivable, payable and inventory are ignored
3. Purchase of motor car should ignore.
4. Actual running Motor car expenses are not allowable and replace it authorized mileage
Allowance
Actual motor car expenses
Flat rate expense adjustment
Allowable deduction is equal to use approved
mileage allowance for business mileage only
30
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10,000 mileages
= 45p
Above 10,000 mileages
= 25p
5- Premises used as both home and business premises such as a small hotel, guest house, bed
and breakfast or public house can elect for a flat rate private use adjustment to apply under
the cash basis in respect of private use of the property for such expenses as food and heat and
light rather than attempting to compute a business / private split of the expenditure. Note this is
an add back not a deduction
 The relevant flat rates will be provided in an examination question and are based on the number
of occupants
 The flat rate add back does not include other property expenses such rent or mortgage loan
interest or council tax and rates adjust them normally
Losses: (disadvantage of cash basis accounting)
A net cash deficit (i.e. a loss) can normally only be relieved against future cash surpluses (i.e. future
trading profits). Cash basis traders cannot offset a loss against other income or gains.
Basis of assessment
A trader using the cash basis can, like any other trader, prepare his accounts to any date in the
year. The basis of assessment rules which determine in which tax year the profits of an accounting period
are taxed apply in the same way for accruals accounting and cash basis traders
Advantages of cash basis Accounting
 Simpler accounting requirements as there is no need to account for receivables, payables and
inventory
 profit are not accounted for and taxed until it is realized and therefore cash is available to pay the
associated tax liability
National Insurance contribution andSelf employed individuals
Class of
contribution
Class 2
Class 4
31
Basis of assessment
Payable when individual is at age of 16 or over
If accounting profits of the business in the tax year
exceeds the small earnings exception of £12,570
Self-employed earners pay a flat rate contribution of
£3.15 per week
Disallowable expenses when employer calculated tax
adjusted profit
Disallowable deduction when individual calculating his
personal tax liability
The contributions cease when the employee reaches 60
(women) and 65 (men) at the start of relevant tax year
The self employed also pay Class 4 contributions which
are based on trading profit after deducting trading losses
but before the personal allowances
The rate of Class 4 is 10.25% and is payable on trading
income between £12,571 and £50,270
For trading income in excess of £50,271, a rate of
3.25% is payable
(Note:5)
Person
liable to pay
Due date of
payment
Self
employed
Due
Under self
Assessment
31-1-2024
Selfemployed
Due
under self
assessment
31-1-23
31-7-23
31-1-24
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Contributions begin if the self-employed is 16 at the
start of the relevant tax year but contributions cease,
when the tax payer is older than 60 (women) or 65
(men) at the start of the relevant tax year
Disallowable expenses when employer calculated tax
adjusted profit
Disallowable deduction when individual calculating his
personal tax liability
Note: 5 Trading profit for class 4 NIC
The starting point for profit calculation is the trading income assessment for tax year in normal way (e.g.
applying current rule, opening year or closing year rules) this adjusted as shown below:
Calculate the profit for class 4 NIC Purposes
£
Trading income assessment for tax year
X
Less: trading losses
(X)
Profit for class 4 NIC
X
For class 4 NIC calculation use tax adjusted trading profit that are assessed for income tax liability
after deducting trading losses (if any)
Note that profits for class 4 NIC are before deducting the individual‟s personal allowance that is
available for income tax purpose
32
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Chapter # 05 Capital Allowance
Purpose of capital
allowance:
Who may claim
capital Allowance:
Qualifying
expenditure
Plant and
Machinery
33
The purpose of capital allowances are provided to give business tax reliefs for
capital expenditure on qualifying assets
Capital allowances are available to persons who buy qualifying assets for use in a
trade or profession
Capital allowances are available for expenditure on plant and machinery
Plant is generally defined as assets that perform an active function in the businessas
opposed to the setting in which thebusiness is carried out. Plant comprises of goods
or chattels(not sock in trade) kept for thepermanent employment in the business
Apparatus of trade Qualifying as plant – Capital allowances given as per case
law
- Swimming pool installed by owners of a caravan park
- The law books of a barrister
- Moveable office partitioning
- Light fittings, décor and murals of a hotel and pub business
- Free-standing screens used in a window display by building society.
Setting Not qualifying as plant – No capital allowances given as per case law
- Laboratory and gymnasium of a school
- Canopy over petrol station
- Ship used as a floating restaurant
- Football club‟s spectator stand
- False ceiling containing conduits, ducts and lighting apparatus
- Lighting in department store.
Assets deemed to be plant
Assets deemed as plant:
There are certain types of expenditure that not plant using above definition
but are treated as plant by specific legislations
Any expenditure on altering buildings to accommodate plant or machinery
qualifies as part of the cost of the plant and machinery for capital allowances and
purchase cost of computer software
Assets not deemed as plant:-land and building and walls, floors ceilings, doors
windows and stair cannot be plant for capital allowance purposes
Exceptions treated as plant Qualifying as plant
- Fire regulation expenditure
- Thermal insulation of industrial building
- Sports ground safety requirement expenditure
- Expenditure on a security asset, such as alarms, bullet proof windows to
improve personal security of those under special threat, e.g., from terrorists.
Qualifying as plant
It includes not only the obvious items of plant and machinery, but also such items
as movable partitions, office furniture and carpets, heating systems, motor vehicles,
Computer, telecommunication and surveillance systems, including wiring, etc, lifts
and escalators and any expenditure incurred to enable the proper functioning of the
item such as reinforced floors or air conditioning systems for computers.Safes and
burglar alarm systems, Advertising hoardings, signs and displays, etc
.Refrigeration/cooking, washing machine, future and furnishings, equipment,
washbasins, sinks, sanitary ware and Display equipment, counters and checkouts
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Lifts ,decorated assets provided for the enjoyment of the public in a hotel
Plant &
Machinery and
value added tax
(VAT)
VAT and Sales
proceeds
Basis periods for
capital allowances
Recoverable VAT
If VAT is recoverable than capital
allowance charged on only cost
plant and machinery.
Irrecoverable VAT
If VAT is irrecoverable then cost of
VAT become cost of Plant and
machinery and capital allowance is
charged on
Cost of P&M= cost of P&M + VAT
If purchased is used both business and
private then no input is recoverable
If purchased card is used 100% for
business purpose then input is
recoverable
Note:-Not all capital allowances questions will require you to consider VAT. Take
care, if the question mentions VAT inclusive or exclusive amounts or states that the
trader is VAT-registered, that you make the appropriate VAT adjustments when
performing capital allowances calculations. Cal
If business charged VAT on the sales of assets which business have to pay HMRC.
So sale figure in capital allowance computation net of VAT
Capital allowances are calculated for a period of account. They are then treated as
an allowable expenditure, and deducted from the tax adjusted trading profits of that
period.
£
Tax adjusted trading profit before capital allowance
XXXX
Less: capital allowance
(XX)
Tax adjusted trading profit after capital allowance
XXX
Basis period rules are apply on tax adjusted trading profit after capital allowance to
calculate taxable trading of tax year on which tax liability is calculated.
Calculating the Capital Allowances
General Pool or Main pool The main includes following items of plant and machinery
Plant and
 Computer &laptop
 Bicycle
 Any expenditure on
Machinery
altering buildings
 Equipment
 movable partitions,
to accommodate
 Shelving
 Table and chair
plant or machinery
 Vans and lorries
 Photocopier
 Advertising hoardings  burglar alarm systems
Second hand cars with Zero CO2 emissions are included in main pool
Second hand low
emission car
Both new and second hand Cars emitting CO2 between 1 g/km to 50 g/km are
Standard emission
included in main pool.
Cars
Special rate pool: special rate pool includes the following items
it includes P&M with a working life of ≥ 25 years or more and annual running cost
Long life asset
of ≥£100,000.
The following items are not treated as long assets:
 Plant and machinery in dwelling houses, retail shops, showrooms, hotels and
offices.
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High emission car
„Integral features‟ of
a building
Thermal insulation
Private use of Assets
Private use asset by
owners or partner
Private use of asset
by employee
Balance charge or
allowance
Short Life assets
Definition of short
life asset
 Car
Motor cars (both new & second hand) with Co2 emissions > 50 g/km
 Electrical & general
 Cold water
 Space or water
lighting systems
systems,
heating systems,
 Powered systems of
 cooling or air
 Lifts and escalators
ventilation
purification
Thermal insulation of building
If owner uses an asset for private purposes, capital allowances are given only on
business proportion. Every private use asset is kept in separate column.
Private use of an asset by an employee has no effect on capital allowances. It means
full capital allowance is calculated
On disposal of asset, balancing charge (if profit) or a balancing allowance (if loss)
will arise which is then reduced to business proportion.

Plant& Machinery except cars which individual wishes to sell or scrap within 8
years of the end of the period of account in which asset is purchased are called
short-life assets. Every short life asset is kept in separate column.
 AIA and WDA are available as normal.
The election (written notice to HMRC) must be made for short life asset 22 months
Election made for
after end of tax year in which period of account of expenditure ends
short life asset
Balancing allowance or charge arises on disposal within 8 years after the accounting
Balance charge or
period of purchase.
allowance
Transfer to general If no disposal takes place within eight years after the accounting period of purchase
the remaining balance is transferred to the general pool immediately.
pool
Length of ownership in the accounting period
 The WDA is never restricted by reference to the length of ownership of an asset within the
accounting period. If a business‟s accounting period is for example, the year ended 5 April 2022 the
same WDA is given if an asset is purchased on 6 April 2022 or on 5 April 2023.
 But WDA is pro-rated according to the length of period of account
SALE OF PLANT AND MACHINERY
On disposal of Plant and Machinery deduct the lower of the sale proceeds and the
Lower of cost
original cost from the total of; TWDV brought forward on the pool plus Additions to the
or sale
pool.
Balancing Allowance or balancing charge: On the sale of a plant or machinery profit (Balancing charge) or loss (balancing allowance) will be
calculated.
 Normally profit (balance charge) or loss (balance allowance) will be calculated for sale of asset on
private use of asset and short life asset column but main pool and special rate pool rules given below
under heading o balancing adjustments on the main or special rate pool
Balancing charge
when the tax written down value of an asset is < gross sales proceeds (profit)
Balance charge reduce the capital allowance claim for the period
Balancing allowance
When the TWDV of the asset is > sales proceeds. (Loss)
balance allowance is added in capital allowance
Balancing adjustments on the Main or Special Rate Pools
35
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Balancing charge
Balancing
Allowance
Capital
allowances
Cessation of trade
No capital allowance
Purchase and
disposal
A balancing charge can arise at any time on the main pool or special rate pool if
disposal proceeds exceed the balance on the pool. If a net balancing charge arises
on the capital allowances computation this would be added to the adjusted trading
profit of the accounting period.
A Balancing allowance can only occur on the main pool and special rate pool on
cessation of the trade
No AIA, WDA or FYA are available in the final accounting period of the business
Not FYA, AIA and WDA is available in last year of trade and Calculate
balancing allowance (if loss) or balancing charge (if profit) as appropriate.
Add addition and deduct disposals made in last period of account from the
relevant pool.
Capital Allowance
Annual
 It is allowance of £1000,000 p.a. on new purchased Plant and Machinery other than cars.
investment
 Value of new purchased P&M which exceeds £1000,000 p.a. will be transferred to
allowance
relevant pool and WDA of 18% or 6% may be claimed.
 £1000,000 limit is prorated for short and long period of accounts.
 No AIA is available in the year of cessation of trade.
 Taxpayer has the option to claim full or partial AIA or even no AIA if it does not want
to. However any unused AIA will be wasted.
 It is most beneficial to claim the AIA in the following order:
 a) Special rate pool b) General pool c) Short life assets d) Private use assets
Written
 WDA is available on net value (TWDV b/f plus addition less disposal).
down
 WDA of 18 % on reducing balance method is given each year on “Main Pool".
allowance
 WDA of 6% on reducing balance method is given each year on “Special Rate Pool".
 Full WDA is given in year of purchase and no WDA is given in the year of disposal.
 WDA of 6% or 18% is prorated where a period of account is ≤ 12 or >12 months.
 WDA will be restricted to business proportion if there is a private use of the asset.
Small pool
 If the Balance in the main pool or special rate pool remains less than £1000 than all
written
amount in the pool is written off and transferred to allowance column.
down
 £1000 limit is for 12 month period so it must be prorated for short and long period of
Allowance
accounts.
First year
 FYA of 100% is available in the year of purchase on Purchase of new Zero emission
Allowance
cars.
 Taxpayer has the option to claim full FYA, partial FYA or even NO FYA. However if
partial FYA is claimed then remaining amount will go to main poll but no WDA will be
given in that year.
 FYA is not time apportioned if accounting period is short or long than 12 months.
 No FYA is available in year of cessation of trade.
Note: Remember if Period of account exceeds 18 months then it must be split in two periods of account 1st
of 12 moths and 2nd of remaining months. Capital allowances are calculated for each period of account
separately.
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Pro forma capital allowance computation---unincorporated businesses
Capital Allowances for period of Account
£
TWDV b/f
Additions
Not qualifying for AIA or
FYA
Second hand car (up to 0%
g/km)
Car (1---50g/km)
Car (over50 g/km) (n-1)
Car with private use
Qualifying for AIA or FYA
Special rate pool expenditure
(n-2)
Less: AIA(MAX £1000,000
in total)
Transfer bal. to special rate
pool
General
pool
Special
Rate pool
£
XXX
£
XXX
Asset with
personal
use ---30%
£
XXX
Short life
Assets
Capital
Allowance
£
XXX
£
X
X
X
X
X
(X)
X
(X)
X
X
X
X
(n-3)
Plant and machinery
Less: AIA(MAX £1000,000
in total)
Transfer bal. to general pool
Disposal (lower of original
cost or sales)
Balancing charge or
Allowance(n-5)
Small pool WDA ( n-4)
WDA at 18%
WDA at 6%
WDA at 6%/18%(depending
on emission)
Additions qualifying for
FYAs:
(New Cars up to 50)
Less: FYAs at 100% (n-1)
(X)
(X)
X
X
(X)
X
X/(X)
X/(X)
(X)
X
X
(X)
(X)BU%
X
X
(X)
X
TDWV c/f
X
X
X
Total Capital Allowances
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Notes to the pro forma capital allowance computation
1. Motor car
 New car with CO2 emissions up to Zero grams per kilometre 100% FYAs
 Car with CO2 between 1 and 50 grams per kilometre
18%
 Car CO2 emission over 50 grams per kilometre
6%
 Car with private use are included in separate column regardless their CO2 emissions and only
business proportion of allowance can be claimed but WDA is charged according to CO2 emission
of car
2. Allocate the AIA to the special rate pool expenditure in priority to general pool plan and
machinery assets as a WDA of only 6% is available on the special rate pool as opposed to 18%
available on general pool
3. Expenditure qualifying for AIA in general pool which exceeds the level of AIA available is
eligible for a WDA of 18%
4. Small pools WDA can claim up to maximum balance before WDV of ≤ £ 1,000 on the general
pool and/or special rate pool only
5. Balancing charge: when the tax written down value of an asset is < gross sales proceedsBalancing
allowance: when the TWDV of the asset is > sales proceeds. This can never be created on pools
unless the business ceases
Structures and Buildings Allowance (SBA)
Introduction of SBA
 A Structures and Buildings Allowance (SBA) was introduced for qualifying
expenditure incurred on or after 29 October 2018.
 The allowance is 3% of cost from April 2020 on a straight-line basis for 33 1/3 years
 The building or structure must be used in a qualifying activity.
 The claimant must have an interest (freehold or leasehold) in the land where the asset is
constructed.
 The relief is available from when the structure or building is brought into use for the first
time for a qualifying activity.
 Where an accounting period is less than a year the allowance is reduced.
 There are no balancing adjustments on sale.
 As with other capital allowances a claim for the SBA must be made in the tax return.
What type of expenditure qualifies for the SBA?
Capital expenditure on renovations or conversions of existing commercial
structures or buildings.
Repairs incidental to the renovation or conversion of existing commercial
structures or buildings.
Construction and associated costs and fees for new properties:
Where an unused building is purchased from a builder or developer, then the qualifying
expenditure will be the price paid less the value of the land.
What are qualifying activities?
SBA applies to capital expenditure on structures and buildings used for qualifying activities.
 A trade, profession or vocation.
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
Property letting
Structures and buildings include:
Offices, retail and wholesale premises.
Walls, bridges and tunnels.
Factories and warehouses.
All above structure and building are qualify for SBA
Can I claim the SBA on expenditure on dwellings and land?
No. Expenditure on residential property and other buildings that function as dwellings
will notqualify:
What if my expenditure qualifies for other capital allowances?
 Qualifying expenditure can only be claimed once.
 Where parts of a structure or building qualify for allowances as Plant and machineryor
as Integral features and fixtures the expenditure is not allowed under the SBA.
How do I deal with qualifying expenditure which has multiple uses?
 Where a structure or building has multiple uses, an appropriate proportion of
expenditurewill qualify for relief.
Do renovations and later additions to the property qualify?
 Capital expenditure after the date when the building enters into use qualifies for a
separate allowance with its own 33 1/3 years (this was 50 years prior to Finance
Act 2020) period.
o Expenditure must be tracked per year to ensure the correct allowances are
claimed.
What about changes in the use of the structure or building?
 Where a structure or building originally used for a qualifying activity has a
change of use and becomes a dwelling SBAs cease to be available for the period
for which it is in use as adwelling.
What about when the building or structure is sold?
 Where an asset qualifying for relief is sold, the new owner can claim the
allowance if it is used for a qualifying activity.
 There are no balancing adjustments on disposal.
 Where the SBAs are transferred to a new owner, the amount of the original
expenditure may need to be verified if SBA is not already being claimed (via an
Allowance statement).
What is an Allowance statement?
 An allowance statement must be provided by the first owner and to all future
owners to enable them to claim the allowances or the qualifying expenditure
will be treated as nil.
 An allowance statement is a written statement.



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Examples of structure building allowance
Example # 01
Hipster Ltd prepares accounts to 31 March. On 1 July 2022, the company purchased a newly constructed
factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1
September 2022.
Answer
The qualifying expenditure for SBA is £360,000 (470,000 – 110,000). The factory was brought into use
on 1 September 2022, so the SBA for the year ended 31 March 2023 is £6,300 (360,000 at 3% x 7/12).
An allowance of £10,800 (360,000 at 3%) will be given in subsequent years.
Example # 02
 Relief is also given for the cost of subsequent improvements, or where a building is renovated or
converted
Ballpoint Ltd prepares accounts to 31 March. The company renovated a disused warehouse (originally
purchased in 2011) at a cost of £82,000, with the warehouse subsequently brought into use on 1 January
2023.
Answer
The renovation expenditure qualifies for relief. As the warehouse was brought into use on 1 January 2023,
the SBA for the year ended 31 March 2023 is £615 (82,000 at 3% x 3/12).
The original cost of the warehouse does not qualify for the SBA, being purchased prior to 29 October
2018. Even if it had qualified, the SBA for the renovation expenditure would have been kept entirely
separate from the SBA on the original cost.
Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or
structure) that has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3%
allowance for the remainder of the 33⅓ year period based on original cost.
However, on a disposal, the allowances that have been claimed are effectively clawed back by adding
them to the sales proceeds in order to determine the chargeable gain or allowable loss arising.
EXAMPLE 03
Hipster Ltd prepares accounts to 31 March. On 1 July 2022, the company purchased a newly constructed
factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1
September 2022.
Hipster Ltd sold its factory to Gentrified Ltd on 31 March 2023 for £500,000 (including land of
£120,000). Gentrified Ltd also prepares accounts to 31 March.
Answer
The sale of the factory will not affect Hipster Ltd‟s SBA claim for the year ended 31 March 2023. From
the year ended 31 March 2024 onwards, Gentrified Ltd will claim £10,800 (360,000 at 3%) annually
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based on the original cost to Hipster Ltd. The SBA will run for the remaining 32 years and nine months of
the 33⅓ year period that commenced on 1 September 2022.
Hipster Ltd‟s sale proceeds of £500,000 will be increased by the allowance claimed of £6,300. The
chargeable gain on the disposal will therefore be £36,300 (500,000 + 6,300 – 470,000).
You should assume that for any question involving the purchase (as opposed to a new construction) of a
building, the SBA is not available unless stated otherwise.
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Chapter # 06 Basis Periods
Purpose of basis period
Individuals have to pay tax according to tax year which runs from 6 April to 5 April, but do not have
same period of accounts. Thus there must be a link between a period of account of a business and tax
year.Rules for matching tax adjusted profits of business with tax years are called basis period rules.
Opening year Basis period rule
Closing date of 1st period of account falls in tax year.
Ends before first 5
April (same tax year
2n tax Year
3rd tax year
st
or 1 Tax year)
Year
Basis of assessment
1st Basis period will be
1st year 1st Basis period will be 1st Basis period will be from start of
from start of trade to
trade to following 5th April.
from start of trade to
following 5th April.
following 5th April.
Check length of 1st period of account
Basis period will be 2nd
2nd year Ongoing rule or
current basis rule
Tax Year
≥ 12 Months
< 12 Months
Basis Period will
Basis period will Next 6 April to 5 April
be 12 month back be first 12 month
from closing date
of trade
of 1st period of
account.
Ongoing basis or current basis rule
3rd year Ongoing basis or
Basis period is 12
current basis rule
months to end of
period of account
Ongoing basis or current basis rule
Ongoing basis or
4th year Ongoing basis or
current basis rule
current basis rule
Current year or ongoing rule
In ongoing rule same period of account is basis period. Or basis period is the accounting year ending in
the year ofassessment (i.e. the tax year). For period of account ending 31 December 2022, profit will be
taxable 2022-23
Closing year rules
If last two period of account end in the same tax If the last period of account ends in separate tax
year
year
 Basis period is combine the two period of
 The basis period is period of account itself and
account and relieve the overlap profit
relieve the overlap profit
Factors influencing the choice of accounting date
The choice of accounting date is important for a sole trader for tax purposes as it affects the amount of
overlap profit s and the delay between earnings the profits and making the final tax payment (the
balancing payment is due 31 January after the end of the tax year)
31 March accounting date end
 No overlap profits on commencement
 Application of the basis period rules will be simplified
 Time between earning the profits and the balancing payment is minimised (10 months)
 The maximum period of assessment in the final tax year will be 12 months
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30 April accounting date end
 Maximum period of overlap with no relief until cessation
 Time between earning the profits and the balancing payment is maximised (21 Months)
 The period of assessment in the final tax year could be up to 23 months long less any relief for
overlap profits
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Chapter # 07 Partnership
Comparison between sole traders and partnerships
Definition of
A partnership is a single trading entity. Each individual partner is effectively
partnership
treated as trading in his own right and is assessed on his/her share of the
adjusted trading profit of the partnership.
No of person
A partnership is a number of sole traders in business together with the overall
objective being that the business should make a profit
Partner status
 Each partner is an owner of the business and cannot be an employee of their
own business.
 Each partner is self-employed and has Trading Profits.
Capital allowance


Profit & loss sharing
Profits/losses (after capital allowances) of the business accrue evenly over the
accounting period and must be divided between the partners according to the
profit sharing arrangements during the accounting period.
Capital allowances are given to the business.
Capital allowances must be restricted to the business use if a partner uses an
item of plant and machinery for private use.
The partnership agreement is often drawn up by a solicitor and may talk about:
partner getting a salary = share of profits
interest on their capital account balances = share of profits
Any balance of the partnership profits/losses must be shared in the profit
sharing ratio (PSR).
Steps involve in calculation partner tax liability
Calculate Tax Adjusted Partnership‟s tax adjusted profits or loss for an accounting period is computed
trading profit of
in the same way as for a sole trader and Partners‟ salaries & interest on capital
partnership firm
are not deductible: these are an allocation of profit.
Capital allowance
 After calculation of tax adjusted trading profit calculated capital allowance
same way as sole trader
 Remember the partners are owners of the business and the capital
allowances must be restricted if assets have private use by the
owners/partner
 Deduct the capital allowance from tax adjusted profit to arrive tax trading
profit after capital allowance is distributed among the partners
Allocations of trading Split the tax adjusted accounting profits or losses between the partners in the
profit sharing arrangements during the accounting period.
profit/trading loss:
 A partner joining or leaving is treated like a change in the profit sharing
ratio (psr) . If the profit sharing agreement is changed during a period of
account, the profit must be time apportioned before change and after
change sharing arrangement
 Profit and loss should be distributed according to old and new arrangement
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Profit and loss is distributed in same way
Partner A
Partner A
Salary of
partners
Partner A
Total
Interest on
capital account
balance
Balance shared
in the profit
and loss share
-
--------------
Basis period rules
Change in members of
partnership
Trading loss
45
------------------------------------------ The profit is allocated between the partners for accounting periods and
then the assessment rules are applied.
 Each partner is effectively taxed as a sole trader on his/her share of the
adjusted trading profit
 Rules of basis period are same as sole trader
• Continuing partners will be assessed using ongoing rules
• When a new partner joins a partnership, he is treated as commencing
a new trade and hence the opening years rules apply
• When an old partner leaves a partnership he is treated as ceasing a
trade and hence the closing years rules apply
• Each partner has his own overlap profit available for relief
Tax year
Basis period/taxable
Taxable trading
Taxable
period
profit
trading loss
Until there is at least one partner common to business before and after the
change, partnership continues. Commencement or cessation rules apply to
individual joining or leaving partnership.
Each partner can reliefs trading losses same way as sole trader
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Chapter # 08 Trading Losses
Definition of Trading losses
A trading loss arises when the normal tax adjusted trading profit computation gives a negative result.
A trading loss can occur in two situations, as follows:
£
£
Tax adjusted trading profit / (loss) before capital allowances
X
(X)
Less: capital Allowance
(X)
(X)
Trading losses
(X)
(X)
Tax year of loss
Step # 1: calculate tax adjusted trading profit /(loss) and capital allowance
Step # 2: calculate trading losses as calculated in above heading definition of loss
Step # 3: calculate tax year of loss by making basis period according to trade cycle as ongoing or
closing or opening years
Step # 4: Make loss reliefs according to available possible option or as per requirements
If the basis period has a trading loss, the trading profit assessment to include in the income tax
computation is nil. Note: remember in basis period profit overlapped but trading loss can never be
overlapped.
Loss relief options ongoing years
Ifan individual makes a trading loss in the ongoing years, they initially have to decide whether to claim
relief against total income or carry forward all of the loss
Loss relief in
ongoing years
Optional
Relief against
Total income
Optional
Automatic (if no claim made)
Carry forward
trading losses
Relief against
same trade
Relief against
Chargeable gain
Carry forward of trading losses
Trading loss may be carry forward and set-off from first available future trading profits from same
trade.
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


Losses may carry forward for indefinite number of years until all the loss is relieved.
Partial claim is not allowed.
Claim must be made to carry forward trading losses within 4 years from the end of year of loss.
E.g. until 5 April 2027 for losses arising in 2022/23.
 It is disadvantageous from perspective of cash flow, time value of money, uncertainty about future
profit and relief may take long time to materialise.
 It is advantageous for taxpayer can carry forward losses for indefinite period of time if trade will
continue
Loss relief against total net income
Trading Losses may be set-off from total net income of
(a) Current year only OR ( b) Previous year only OR (c) Current year and then previous year OR (d)
Previous year and then current year.
• Partial claim is not allowed.
• Remaining loss after claim against total income may be:
– Set off against capital gains or
– Set off against future trading profit.
• CAP limit apply both Current and previous total income: Maximum loss that can be deducted from
total income of the year is CAP limit (as formula given below) plus year trading profit.
CAP is equal tohigher of:
– £50,000
– 25% of Adjusted total income(ATI = total income less gross personal pension contribution )
Note: Above CAP rule is not apply on trading profit both current and previous year
Claim for loss relief must be made by 31 January which is 22 months after the end of tax year of loss. E.g.
until 31 January 2025 for losses arising in 2022/23.
Performa of trading loss reliefs
Trading profit
Less: Trading losses brought forward reliefs
Employment income
Property income
Interest incomes
Dividend income
Total income
Less. Trading loss reliefs current
Trading income
Higher
- £50,000
– 25% of total income less gross personal
pension contribution
Net income
Personal allowance
Taxable Income
2020-21
X
2021-22
X
2022-23
NIL
X
X
X
X
XX
X
X
X
X
XX
X
X
X
X
XX
(x)
(X)
(x)
(x)
x
(x)
x
x
(x)
x
X
(X)
X
Relief of trading losses against capital gains
• Under this section current year trading loss can be set off against the chargeable gains of:
a) Current year only OR b) Previous year only OR
c) Current year and then previous year OR
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X
(X)
X
X
X
X
XX
X
(x)
X
SKANS School of Accountancy Multan
d) Previous year and then current year.
The trading loss is first set against total income of the year of the claim, and only any excess loss is
set against capital gains. The remaining unrelieved trading loss may be set off as a deemed capital loss
against the taxpayer‟s gains for the year; after setting off current year capital losses against current
year capital gains. It takes precedence over both the annual exemption (a level of tax free gains and
currently £12,300) and any capital losses brought forward4
• Partial claim is not allowed.
Claim for loss must be made by 31 January which is 22 months after the end of tax year of loss. E.g.
until 31 January 2025 for losses arising in 2022/23
Taxable Gain for tax year
£
Chargeable gain in tax year
Less: capital losses in tax year
Net chargeable gain
Less: trading losses relieved is
Lower of:
- Remaining losses
or
- Chargeable gain in the year after deducting Current and brought forward capital
losses
Less: Annual exemption for tax year 2022/23
Net chargeable gain for year
Less: capital losses brought forward
Taxable gain
Relief for trading losses in the opening years
Loss relief in
Optional
Opening years
Automatic if no specific
claim made
Optional
Special 3-years
carry back-relief
Carry forward
Relief against
Optional
Relief
Total income
Remaining loss
Relief against
Chargeable gain
The procedure to adopt for dealing with an opening year loss is as follows:
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(X)
X
(X)
(X)
X
(x)
X
SKANS School of Accountancy Multan
Step 1: Trading income assessments for each tax year
 The opening year basis of assessment rules are applied to both profits and losses in the normal way.
However, where an overall net loss arises (i.e. where the calculations give a negative figure), the
trading income assessment for that tax year is £Nil. Losses never overlap in basis period.
 A loss may only be relieved once. If, in the opening years, a loss has been taken into account in
computing the assessment of one tax year, it is treated as nil when calculating the next assessment
Step 2: The loss relief available, the tax year to which the losses relate and the options available for
loss relief
 If an individual makes trading losses in the opening years is calculated in Step 1,he has to decide
whether to claim normal relief against total income, special opening year loss relief or carry
forward
Step 3: Prepare the income tax computations and keep a record of the losses
 In answering an examination question, read the requirements carefully. Some questions require
losses to be claimed in a specified way; other questions require losses to be utilised in the most
tax-efficient manner. Tax planning is considered later.
Relief of trading losses incurred in early years of trade (opening years loss relief)
• Trading loss incurred in any of the first Four Tax years of trade then this loss may be set off against total
income of previous 3 years on FIFO basis. Relief is on a FIFO basis means (i.e. the earliest year must be
relieved first and then the next year and the year after that, in date order). i.e. opening loss of 2022-23 is
set off in this order: firstly 2019-20 Secondly 2020-21 and Thirdly 2021-22
• Early years trading loss can be relieved through:
a) Opening year loss relief OR b) Relief against total income OR c) From Capital gains OR d) From
future trading profit
• Partial claim is not allowed.
• Claim for loss relief must be made by 31 January which is 22 months after the end of tax year of loss.
E.g.until 31 January 2025 for losses arising in 2022/23.
Terminal loss relief
Loss relief in closing year
Optional
Terminal loss relief
carry back against
trading profits
Relief against
total income
Optional
Relief against
Chargeable gain
If an individual makes a trading loss in the closing years, they have to decidewhether to claim relief
against total income (and then possibly offset againstgains) or claim terminal loss relief against trading
profits.
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Terminal Losses
Terminal loss: If trade ceases then Loss of last 12 month of trade may be set off against trading income of
previous 3 years on LIFO basis. Relief is on a LIFO basis means The most recent year must be relieved
first and then the previous year, and so on, in reverse date order. i.e. terminal loss of 2022-23 relieved in
the following order :firstly 2021-22 secondly 2020-21 and 2019-20
The terminal loss is loss of the final 12 months of trade, calculated as follows:
£
6 April before cessation to the date of cessation
Actual trading loss in this period (ignore if a profit)
X
If profit Nil
Plus : Overlap profits not yet relieved
X
Plus: 12 month before cessation to 5 April before cessation
Actual trading loss in this period (ignore if a profit)
X
If profit Nil
X
Terminal loss
Note: that loss can only be relieved once. Therefore terminal loss cannot include the loss that have been
relieved under the another provision. In the other word loss relieved against the total income or capital
gain, if any must excluded
Claim must be made within 4 years from the end of year of loss. E.g. until 5 April 2027 for losses arising
in 2022/23.
The procedure for closing year loss relief
The procedure to adopt for dealing with a closing year loss is as follows:
Step 1: Identify the last tax year. Work out the trading income assessments for
the final year and preceding three tax years
The closing year basis of assessment rules are applied to both profits and losses in the normal way.
However, where an overall net loss arises from applying the rules (i.e. the calculations give a negative
figure), the trading income assessment for that tax year is £Nil.
Step 2: Work out the amount of loss relief available, the tax year(s) to which the loss(es) relate, and
the options available
If an overall net loss is calculated in Step 1, Consideration should be given as to whether to relief against
total income or relieves against total income and capital gain is desirable.
For a decision, look at the income tax computations set up and determine whether a higher rate of relief
is obtained by making a relieves against total income and possibly of capital gain claim, rather than
carrying back the loss under terminal loss reliefs
The terminal loss then needs to be calculated, taking account of total income and capital gain claims to be
made, if any. This calculation should be done in a separate working.
Step 3: Complete the income tax computations
Relieve the terminal loss on a LIFO basis, and keep a record of the utilisation of losses for all tax years
involved.
Partnership Losses:
1. Losses are allocated between partners in the same way as profits.
2. Loss relief claims available are the same as for sole traders.
3. A partner joining the partnership may claim under opening yearsloss relief, forlosses in the first four
tax years of his membership of the partnership.This relief is not available to existing partners.
4. A partner leaving a partnership may claim under terminal loss relief. This relief is not available to
partners remaining in the partnership.
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Partnership investment income: Interest and dividend income is kept separate from trading profit but
are shared among partners according to their profit sharing ratio. After sharing income each partner is
taxed independently.
Limited Liability Partnership: If partnership is limited liability partnership then the partners share the
trading loss among themselves up to maximum of capital they have contributed in the partnership.
Chapter # 09 Pension
Pension meaning:-Pension of scheme is fund of asset set up with the intention of providing lump sum
benefits and regular income (pension) for members of scheme on their retirement and or benefits
dependants after their death
Type of pension:1- Occupational pension scheme: Occupation pension scheme is a scheme operated by employer
for solely the benefit of his employee. This scheme is only relate to employee.
Type of occupational pension schemes
I.
Defined benefit scheme: the benefit obtained on retirement are linked to the level of earnings of
the employee
II.
Money purchase scheme: the benefits obtained depend upon the performance of the invests held
by the pension fund
2- Personal pension schemes:-Personal pension scheme is a pension scheme managed by taxpayer
himself through some financial institutions like an insurance company
Personal pension plan do not relate to particular job, trade or profession they are personal
to individual taxpayer and are set up for the duration of life, regardless of his employment
status
Tax consequence of pension
1 - Tax relief for contribution made by individual (both PPS and OPS)
Lower of two
1- Higher of
 100% relevant earnings of the taxpayer, being mainly employment income and/or trading
profits plus any profits fromfurnished holiday lettings, and Note-1
 £3,600 of gross contribution
2- Total gross pension contribution paid
Relevant earnings NOTE -1
1. Net relevant earnings of an individual who is not working
Individual who are not working, he will not have no net relevant earning and therefore his maximum
(gross) contribution is £3,600
1- Net relevant earnings of working individuals
Where individual is working his net relevant earnings depend on whether he is employed or selfemployed and it is calculated as follow:
Employed individual
Self-employed individual
£
£
Employment income (including benefit)
X
Trading income
X
Profit form Furnished holiday letting
X
Less: trading losses
(X)
Profit form Furnished holiday letting
X
Net relevant earning
X
Net relevant earning
X
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Methods of reliefs
Personal Pension scheme contribution
When an individual contributes into a personal pension scheme, so the tax relief is given as follows:
1. Basic rate tax relief is paying net of 20% – For example, if an individual want to make a personal
pension contribution of£1,000, he needs to pay 80% and HMRC will make the remaining
20%contribution on his behalf.Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Higher rate and additional rate taxpayers achieve higher and additional rate relief by Increase the
basic and higher rate bands by the gross personal pensioncontribution.
3. Gross personal pension contributions are deducted from net income to arrive atadjusted net
income.ANI is used to determine the amount of personal allowanceavailable.
4. Any amount contributed by the employer for employee shall be exempt benefit
I.
Occupation pension contribution:
1. Any amount contribution by the employee himself shall be deducted from his salary as Allowable
deduction
2. Any amount contributed by the employer for employee shall be exempt benefit
3. Any amount contributed by employer in OPS is allowable deduction from his trading profit
Annual Allowance
Annual
 Individual can contribute any amount into pension scheme but relief is available on
Allowance
maximum annual allowance. Annual limit is 40,000 for 2022-23
 If the total of all contributions (by the individual, their employer and third parties) on
which tax relief has been obtained exceeds the annual allowance (AA), a tax charge
is levied on the individual exceeds amount know annual allowance charge
Tapered
– If individual AI (Adjusted Income) is more than £240,000 then the CURRENT year
Annual
Allowance is a tapered allowance
Allowance
– It means that the normal annual allowance of £40,000 is reduced by £1 for every£2 by
which a person‟s adjusted income exceeds £240,000, down to a minimum tapered
annual allowance of £4,000.
 Formula for Tapered Annual Allowance =(AI -£240,000)×50% but subject to
minimum allowance £4,000

 Definition of Adjusted income for pension
Employed individual
Self-employed individual
£
£
Net income (after deduction of trading X Total income
X
losses and qualifying interest)
Plus: Employee contribution to OPS
X Less: trading losses
(X)
Plus: Employer contributions to
Less: qualifying interest
(X)
occupational and /or personal pension
schemes
Adjusted total income
X Adjusted Income/net income
X
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Annual is an allowance given to individuals every year. The individual can use the
allowance yearly, and the amount unused is carried forward for 3 years but only if they
are a member of registered pension scheme in those years. Therefore, at any particular
time, an individual can use their current year allowance plus 3 years brought forward
unused annual allowances on a FIFO basis. The gross contributions are deducted from
the annual allowances first from current year
Calculation of annual allowance table
Tapered annual allowance
Annual Allowance
Used Annual
Tax
Annual
If ATI >£150,000 minimum
for
Allowance
year
Allowance
tapered annual allowance of
tax year
previous year
£10,000
2022-23
40,000 -(AI-240,000) × 50% =
22/23
40,000
Not Applicable X
first used
subject to minimum AA £4,000
40,000 -(AI-240,000) × 50% =
19/20
40,000
(X)
X
Second used
subject to minimum AA £4,000
40,000 -(AI-240,000) × 50% =
20/21
40,000
(X)
X Third used
subject to minimum AA £4,000
40,000 -(AI-240,000) × 50% =
21/22
40,000
(X)
X
4th used
subject to minimum AA £4,000
Annual Allowance
XXX
Remember: it is still possible to use brought forward unused annual allowance in the tax year 202223 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance
for 2022-23 which is used to establish whether any carried forward is available from this year to
future tax years.
Calculation
of Annual
Allowance
Annual Allowance
charge
Payment of t annual
charge tax
- Annual allowance charge =
(Pension payment that qualifies for tax relief during the tax year -Annual allowance available) × top slice/marginal rate of tax taxpayer pay
Additional amount is treated as non-saving.
- The AA charge becomes part of the individual's total tax liability and is
either paid through the self-assessment system or, in some cases, may be
taken from the individual's pension fund.
Receiving benefits from pension arrangements
Access
- Pension Benefit isreceived when an individual is aged 55 years or more. At eligible
pension fund
age Individual can take tax free lump sum payment of lower of:
a) 25% of amount in fund
b) 25% of Life time allowance
- Remainder 75% amount in fund is used to provide pension income and fund are
taxed as non-savings income in the tax year they are withdrawn at the normal rates of
tax (i.e. 20%, 40% or 45%). Pension can be claimed before this age if the individual
is incapacitated due to ill health.
An individual can contribute £1,073,100 during his life time. If contribution exceeds
Life Time
£1,073,100 then There will be a tax charge of:
Allowance
● 55%Tax on excess, if the excess pension funds are taken lump sum. ● 25%Tax on
excess, if the excess pension funds are used to provide pension income.
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Chapter # 10
Self Assessment of Individuals
Self Assessment:-The self assessment system relies upon individual completing and filing tax returnThe
return first part details income and capital gains for the tax year, the second part shows the calculation of
the income tax liability and paying tax due. The system is enforced by a system of penalties for failure to
comply with in set period of time limits and by the interest for late payment of tax.
Amendments: correction of errors in the tax
File Return
Paper return: later of
return
By HMRC: within 9 months of the actual filing
 31st October following the tax year or
date
 3 months after issue of notice
st
By Individual: The taxpayer can give notice to
For example 2022-23 due date is 31 October 2023
an officer to amend his tax return within 12
Online Return: later of
months of the 31 January filing date regardless of
 31st January following tax year or
whether the return is paper based or filed
 3 months after issue of notice
st
electronically.
For example 2022-23 due date is 31 January 2024
Notification of chargeability:
 It is the responsibility of individual who
receives a source of income subject to income
tax or capital gains tax must notify HMRC by
5th October following the end of the tax year
the source arose
 Standard penalty is imposed in case non
compliance. standard penaltybased on a
percentage of tax unpaid on 31 January
following the end of the tax year
 Deadline: 6 months after tax year --- 5th
October of following tax year i.e. tax year
2022-23 5 October 2023
Penalty for late submission
Date return is filed
Penalty
After due date
£100 fixed penalty
£10 per day for 90 days +£100 fixed penalty
>3 months late
5% of tax due (minimum £300), + above penalties
> 6 months late
>12 months late
– not deliberate
•Additional 5% of tax due (minimum £300) + above penalties
– deliberate but no concealment
• 70% of tax due (minimum £300) + above penalties
– deliberate with concealment
• 100% of tax due (minimum £300) + above penalties
Determination of Tax due: where the tax return is not submitted on time, the HMRC can determine the
amount of tax liability on the behalf of the tax payer. They have 3 years from the filing date to do so and
the only way to get this removed is by submitting the actual return
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Records:
(1) business or property letting records: Records must be retained until five years after the filing date,
which is 31 January 2029 for the year 2022/23 if the tax payer has a business or has properties to let
(2)-Non business records: other tax payers keeps the records later of : 12 months after 31 January the
filling date or the date complete or impossible start of compliance check
Important Note: if a person is in business and has non business income then all records must be
maintained for the same 5 year period
Penalty: A failure to retain records can result in a penalty of up to £3,000. The maximum penalty will
only be charged in serious cases
Payment of Tax
Type of income
Due date under
Payment on account due date
normal return
Trading profit
31 January 2024
31/1/2023 1st POA
31/7/2023 2nd POA
31/1/2024 Balancing payment
Property business
31 January 2024
31/1/2023 1st POA
31/7/2023 2nd POA
31/1/2024 Balancing payment
NIC class 4
31 January 2024
31/1/2023 1st POA
31/7/2023 2nd POA
31/1/2024 Balancing payment
NIC class 2
31 January 2024
No payment on account is required
Saving income
31 January 2024
Not applicable POA
Dividend income
31 January 2024
Not applicable POA
Employment income PAYE payments made electronically on the 22nd of the month under the
Real Time Information reporting system. (self assessment is not
applicable)
NIC class 1
PAYE payments made electronically on the 22nd of the month under the
employer
Real Time Information reporting system. (self assessment is not
applicable)
NIC class 1
PAYE payments made electronically on the 22nd of the month under the
employee
Real Time Information reporting system. (self assessment is not
applicable)
NIC Class 1 A
Payable by 22nd July following the end of the tax yea for example tax
year 2022-23 22nd July 2023
(1)Normal return:-Individual pay his income tax , class 2 NIC, class 4 NIC and Capital gain tax 31
January following end of tax year i.e. 31 January 2023 for tax year 2022-23
(2)Payment on account:- Individual pay tax POA with exceptions to this are if:
The relevant amount for the previous tax year is less than £1,000, or more than 80% of the income
tax liability for the previous tax year wasmet by deduction of tax at source.
1st POA: 31st January 2023 (50% of relevant amount =( Income tax+ class4 NIC – tax deduct at
source)
2nd POA: 31st July 2023 (50% of relevant amount =( Income tax+ class4 NIC – tax deduct at
source)
3rd POA: 31 January 2024 (Balance of payment =
( Income tax+ class 2 NIC+class4 NIC+ capital gin – tax deduct at source - POA)
Reduce payments on Accounts:-The taxpayer can claim to reduce payments on account at any time
before 31 January following the tax year. This would be done if actual income tax and class 4 NIC
is expected to be less than the previous year. If the claim is incorrect, penalties and interest will be
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charged. The maximum penalty is the difference between the amounts actually paid on account and
the amounts that should have been paid on account.
Interest (1)Late payment interest: Interest is charged on late payment of tax at a rate of 3.25%. For
2022/23 Payment on account: Interest runs from 31/1/2023 or 31/7/2023 Other payments: Interest runs
from 31/1/2024.Interest charged is not tax deductible for individuals
(2)Repayment interest: If tax is repaid, HMRC pay interest at a rate of 0.5% p.a. from 31 January, or if
later, the date of original payment. Interest received is not taxable for an individual.
Penalty/ surcharge for late Payment: where income tax, class 2 NIC, class 4 NIC or CGT is paid late.
Penalties do not apply to POAs.
1month late:
5% of unpaid amount
6 months late:
5% + Additional 5% of unpaid amount
12 months late:
10% + Additional 5% of unpaid amount
Standard penalty is imposed on failure to notify about chargeability, submission of incorrect tax
return, failure to notify HMRC of understatement and deliberately supplying wrong information
The maximum penalties can be reduced wherethe taxpayer informs or tells to HMRC about the error (this
is known as disclosure), andco-operates with HMRC to establish the amount of tax unpaidwith larger
reductions given for unprompted disclosure. Unprompted disclosure is one made at a time when HMRC
has not discovered, or is not about to discover error otherwise, the disclosure will be a prompted
disclosures.
Maximum penalty(% of
Minimum penalty(% of
Taxpayer behaviour
revenue lost)
revenue lost)
Genuine Mistake (incorrect return)
No penalty
Unprompted Prompted
Careless/Failure to take reasonable care
30%
0% of PRL
15% of PRL
Deliberate but no concealment
70%
20% of PRL
35% of PRL
Deliberate with concealment
100%
30% of PRL
50% of PRL
Claims (a) All claims and elections which can be made in a tax return must be made in this manner if a
return has been issued.
(b) The time limit for making a claim is 4 years from the end of the tax year, unless a different limit is
specifically set..
Error or mistake claim The time limit is 4 years from the end of the tax year to correct errors in a tax
return when the tax would otherwise be overcharged, for 2022/23 this will be 5 April 2027
Compliance check Enquiry: HMRC has power to make compliance check enquiry in returns
 Within 12 months of the actual filling date if return is filed on or before time or
 The quarter day following 12 months of actual filing date, if the return is filed after the due filing
date. The quarter days are 31 January, 30 April,31 July and 31 October to ensure the accuracy and
completeness of return.
 The compliance check may be made as a result of any of the following:
 A suspicion that income is undeclared
 Deductions being incorrectly claimed
 Other information in HMRC‟s possession  Being part of a random review process.
The compliance check ends when HMRC gives written notice that it hasbeen completed. The notice will
state the outcome of the enquiry eitherto confirmation that no amendments are required or amendments to
the self-assessment.
The taxpayer has 30 days to appeal against any amendments by HMRC. The appeal must be written
Discovery Assessment: HMRC can normally carry out an enquiry within 12 months of the actual filing
date but can raise discovery assessment at a later date where fraud or negligence is suspected and full
disclosure has not been made
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Basic time limit: 4 years from the end of the tax year or Accounting period
Careless Error: 6 years from the end of tax year and deliberate Error :20 years from the end of tax year
Taxpayers right of appealagainst an assessment30 days from the assessment appealin writing
Appeal: if the taxpayer is not satisfied with any of the decisions of HMRC. They file appeal against
decision (i) Implosion of a penalty and surcharge (ii) Appeal against a discovery assessment (iii)
Appeal against amendment made to self-assessment as a result of enquiry etc.
Appeal should be made in writing and must be made within the 30 days of relevant event. It must also
state ground of appeal. Initially appeal made to HMRC for internal review
Appeal to HMRC
Appeals are initially made to HMRC. An officer unconnected with case will undertake review ,the review
must normally be carried out within 45 days ,The taxpayer then has 30 days in which to appeal an
tribunal against internal review
Tax Tribunals
Tribunal system consist of First tier Tribunal, and Upper Tribunal.
The first tribunal deals all and less complex cases but upper tier tribunal deals with more complex
cases and appeal against first tier tribunal decision
Cases are allocated one of the four tasks this will depend on the issues and the amount of tax at
stake.
I.
the “paper” track - will hear the simplest appeals, such as an appeal against a fixed
penalty and the case will be normally decided by the tribunal without a hearing
II.
The “basic” track will involve a hearing but the exchange of documents beforehand will
be minimum.
III.
The “standard” track will involve cases that are more detailed in case management and
formality.
IV.
The “complex” track will be for long or complex cases or those that involve a
If decision of first tier tribunal is based on
I.
A matter of fact the decision is binding and final
II.
The point of law then case can be referred to upper tribunal but only with permission of
either first tier tribunal or upper tribunal
Decision of upper tribunal can be referred to court of appeal. However, the grounds of appeal
must always relate to a point of law.
Income Tax Fraud There is a statutory offence of evading income tax. The penalty may be up to seven
years in prison or an unlimited fine or both
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