TAX LECTURE 2 NOTES:
OUTCOMES
Identify the correct heading under which main sources of income are taxed.
Provide examples of non-taxable income
Set out an income tax computation in the standard format
Demonstrate how tax relief is obtained for charitable donations
Compute taxable income
Apply the correct tax rates, distinguishing between savings income, dividend income, and other
income
Identify personal allowances to which the taxpayer is entitled and explain the conditions which
apply
THE CHARGE TO INCOME:
Income tax is computed for each tax year (year of assessment)
- Based on total income for the year, ignoring exempt income
Individuals who are resident in the UK are generally chargeable to income tax on their world-
wide income
- Non-residents are chargeable on UK-source income e.g. an overseas landlord
Children are chargeable to income tax is they have sufficient income
- If a minor child derives investment income of more than £100 from a parent, the income is
treated as the income of the parent
Companies, clubs and societies are not chargeable to income tax
- Corporation tax instead
Charities are exempt from income tax
NON-TAXABLE INCOME: examples
Premium Bond/Lottery prizes
Some social security benefits (e.g. Child benefit)
Shares to employees under approved profit sharing schemes
Educational grants and scholarships
Statutory redundancy payments up to £30,000
Lump sums from approved pension schemes
Income from Individual Savings Accounts (ISAs)
Trading and property income exempt up to £1,000
COMPUTING THE TAX
1. Add up all sources of income
2. Subtract personal allowance to give:
- Taxable income
3. Compute tax liability
, 4. Subtract tax paid
5. Result is tax due or refund
PERSONAL ALLOWANCE:
£12,570 for 2022/23
If total income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of
income
o example in Part 2
TAX RATES:
Rates apply to taxable income after deducting personal allowance
The following rates apply to ‘non-savings’ income e.g. salary, rental income and business profits.
Basic rate £1 to £37,700 20%
Higher rate £37,701 to £150,000 40%
Additional rate £150,000+ 45%
COMPUTING TAX LIBILITY:
Jan is a full-time student. During 2022/23 she earns £14,960 as a part-time researcher. Her employer
deducted income tax of £390 from her salary.
Calculate her tax position:
Employment income: 14960
(less) personal allowance: (12570)
Taxable income: 2390
Tax liability:
2390 x 20% (basic rate): 478
(less) PAYE deducted: (390)
Tax due: 88
HIGHER RATE TAX PAYER:
Fred has been working for many years. He is on £66,460 a year. PAYE for 2022/23 is £14,010.
Calculate Fred’s tax position
Employment income: 66460
(less) personal allowance: (12570)
Taxable income: 53890
OUTCOMES
Identify the correct heading under which main sources of income are taxed.
Provide examples of non-taxable income
Set out an income tax computation in the standard format
Demonstrate how tax relief is obtained for charitable donations
Compute taxable income
Apply the correct tax rates, distinguishing between savings income, dividend income, and other
income
Identify personal allowances to which the taxpayer is entitled and explain the conditions which
apply
THE CHARGE TO INCOME:
Income tax is computed for each tax year (year of assessment)
- Based on total income for the year, ignoring exempt income
Individuals who are resident in the UK are generally chargeable to income tax on their world-
wide income
- Non-residents are chargeable on UK-source income e.g. an overseas landlord
Children are chargeable to income tax is they have sufficient income
- If a minor child derives investment income of more than £100 from a parent, the income is
treated as the income of the parent
Companies, clubs and societies are not chargeable to income tax
- Corporation tax instead
Charities are exempt from income tax
NON-TAXABLE INCOME: examples
Premium Bond/Lottery prizes
Some social security benefits (e.g. Child benefit)
Shares to employees under approved profit sharing schemes
Educational grants and scholarships
Statutory redundancy payments up to £30,000
Lump sums from approved pension schemes
Income from Individual Savings Accounts (ISAs)
Trading and property income exempt up to £1,000
COMPUTING THE TAX
1. Add up all sources of income
2. Subtract personal allowance to give:
- Taxable income
3. Compute tax liability
, 4. Subtract tax paid
5. Result is tax due or refund
PERSONAL ALLOWANCE:
£12,570 for 2022/23
If total income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of
income
o example in Part 2
TAX RATES:
Rates apply to taxable income after deducting personal allowance
The following rates apply to ‘non-savings’ income e.g. salary, rental income and business profits.
Basic rate £1 to £37,700 20%
Higher rate £37,701 to £150,000 40%
Additional rate £150,000+ 45%
COMPUTING TAX LIBILITY:
Jan is a full-time student. During 2022/23 she earns £14,960 as a part-time researcher. Her employer
deducted income tax of £390 from her salary.
Calculate her tax position:
Employment income: 14960
(less) personal allowance: (12570)
Taxable income: 2390
Tax liability:
2390 x 20% (basic rate): 478
(less) PAYE deducted: (390)
Tax due: 88
HIGHER RATE TAX PAYER:
Fred has been working for many years. He is on £66,460 a year. PAYE for 2022/23 is £14,010.
Calculate Fred’s tax position
Employment income: 66460
(less) personal allowance: (12570)
Taxable income: 53890
