Part 2Basic provisions
Chapter 1Charges to income tax
3Overview of charges to income tax
1
Income tax is charged under—
a
Part 2 of ITEPA 2003 (employment income),
b
Part 9 of ITEPA 2003 (pension income),
c
Part 10 of ITEPA 2003 (social security income),
d
Part 2 of ITTOIA 2005 (trading income),
e
Part 3 of ITTOIA 2005 (property income),
f
Part 4 of ITTOIA 2005 (savings and investment income), and
g
Part 5 of ITTOIA 2005 (miscellaneous income).
2
Income tax is also charged under other provisions, including—
a
Chapter 5 of Part 4 of FA 2004 (registered pension schemes: tax charges),
b
section 7 of F(No.2)A 2005 (social security pension lump sums),
c
Part 10 of this Act (special rules about charitable trusts etc),
d
Chapter 2 of Part 12 of this Act (accrued income profits), F129...
e
Part 13 of this Act (tax avoidance)F84, and
f
Chapter 3A of Part 14 of this Act (banks etc in compulsory liquidation).
4Income tax an annual tax
1
Income tax is charged for a year only if an Act so provides.
2
A year for which income tax is charged is called a “tax year”.
3
A tax year begins on 6 April and ends on the following 5 April.
4
“The tax year 2007-08” means the tax year beginning on 6 April 2007 (and any corresponding expression in which two years are similarly mentioned is to be read in the same way).
5
Every assessment to income tax must be made for a tax year.
6
Subsection (5) is subject to Chapter 15 of Part 15 (by virtue of which an assessment may relate to a return period).
F795Income tax and companies
Section 3 of CTA 2009 disapplies the provisions of the Income Tax Acts relating to the charge to income tax in relation to income of a company (not accruing to it in a fiduciary or representative capacity) if—
a
the company is UK resident, or
b
the company is non-UK resident and F33it is chargeable to corporation tax in respect of the income, or would be so chargeable but for an exemption.
Chapter 2Rates at which income tax is charged
The rates
6The F93... basic rate F133, higher rate and additional rate
1
The main rates at which income tax is charged are—
F44a
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b
the basic rate, F91...
c
the higher rate F7, and
d
the additional rate.
2
F712A
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F712B
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F712C
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
For other rates at which income tax is charged see—
F162za
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F68zb
section 6B (Welsh basic, higher and additional rates),
F179zc
section 6C (default basic, higher and additional rates),
F161aa
section 7A (savings basic, higher and additional rates),
b
c
section 9 (trust rate and dividend trust rate).
F1554
See also section 80C of the Scotland Act 1998 which makes provision for the purposes of section 11A (income charged at Scottish rates)
F1476AThe Scottish basic, higher and additional rates
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6BF112The Welsh basic, higher and additional rates
1
The Welsh basic rate, the Welsh higher rate and the Welsh additional rate for a tax year are calculated as follows.
Step 1 Take the basic rate, higher rate or additional rate.
Step 2 Deduct 10 percentage points.
Step 3 Add the Welsh rate (if any) set by the National Assembly for Wales for that year for the purpose of calculating the Welsh basic rate, the Welsh higher rate or the Welsh additional rate (as the case may be).
2
For provision about the setting of the Welsh rates, see Chapter 2 of Part 4A of the Government of Wales Act 2006.
6CF173The default basic, higher and additional rates
The default basic rate, default higher rate and default additional rate for a tax year are the rates determined as such by Parliament for the tax year.
7The starting rate for savings F102and savings nil rate
F1531
The starting rate for savings is 0%.
F982
The savings nil rate is 0%
7AF146The savings basic, higher and additional rates
The savings basic rate, savings higher rate and savings additional rate for a tax year are the rates determined as such by Parliament for the tax year.
8The F120dividend nil rate, dividend ordinary rateF34, dividend upper rate and dividend additional rate
F108A1
The dividend nil rate is 0%.
1
The dividend ordinary rate is F218.75%.
2
The dividend upper rate is F7633.75%.
F113
The dividend additional rate is F5839.35%.
9The trust rate and dividend trust rate
1
The trust rate is F11445%.
2
The dividend trust rate is F6339.35%.
Income charged at particular rates
10F43Income charged at the ... basic F18, higher and additional rates: individuals
F1441
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F812
Income tax on an individual's income up to the basic rate limit is charged at the basic rate F172....
3
Income tax is charged at the higher rate on an individual's income above the basic rate limit F82and up to the higher rate limit.
F1313A
Income tax is charged at the additional rate on an individual's income above the higher rate limit.
F23B
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F23C
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
This section is subject to—
F69. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F115section 11B (income charged at the Welsh basic, higher and additional rates),
F178section 11C (income charged at the default basic, higher and additional rates: non-UK resident individuals),
section 11D (savings income charged at the savings basic, higher and additional rates: individuals),
section 12 (savings income charged at the starting rate for savings),
F134section 12A (savings income charged at the savings nil rate),
section 13 (income charged at the dividend ordinary and dividend upper rates: individuals), and
any other provisions of the Income Tax Acts which provide for income of an individual to be charged at different rates of income tax in some circumstances.
C15
The basic rate limit is F148£37,700.
F135A
The higher rate limit for a tax year is equal to—
a
twice the amount specified in subsection (1) of section 35 (personal allowance) for the tax year, plus
b
the amount specified in subsection (2) of that section (amount at which personal allowance starts to be withdrawn).
5B
Before the start of the tax year the Treasury must make an order specifying the amount which is, as a result of subsection (5A), the higher rate limit for the tax year.
F1416
The basic rate limit F56and higher rate limit are increased in some circumstances: see—
a
section 414(2) (gift aid relief), and
b
section 192(4) of FA 2004 (relief for pension contributions).
7
See section 21 for indexation of the basic rate limit.
11Income charged at the F181default basic rate: non-individuals
1
Income tax is charged at the F163default basic rate on the income of persons other than individuals.
2
This section is subject to—
F31...
section 14 (income charged at the dividend ordinary rate: other persons),
Chapters 3 to F1845 of Part 9 (which provide for some income of trustees to be charged at the dividend trust rate or at the trust rate), and
any other provisions of the Income Tax Acts which provide for income of persons other than individuals to be charged at different rates of income tax in some circumstances.
11AF119Income charged at F171Scottish rates
F1511A
Income tax is charged at Scottish rates on the non-savings income of a Scottish taxpayer.
4
For the purposes of this section, “non-savings income” means income which is not savings income.
5
This section is subject to—
section 13 (income charged at the dividend ordinary, upper and additional rates: individuals), and
any provisions of the Income Tax Acts (apart from section 10) which provide for income of an individual to be charged at different rates of income tax in some circumstances.
6
Section 16 has effect for determining F159which part of a Scottish taxpayer’s income consists of savings income.
11BF3Income charged at the Welsh basic, higher and additional rates
1
Income tax is charged at the Welsh basic rate on the income of a Welsh taxpayer which—
a
is non-savings income, and
b
would otherwise be charged at the basic rate.
2
Income tax is charged at the Welsh higher rate on the income of a Welsh taxpayer which—
a
is non-savings income, and
b
would otherwise be charged at the higher rate.
3
Income tax is charged at the Welsh additional rate on the income of a Welsh taxpayer which—
a
is non-savings income, and
b
would otherwise be charged at the additional rate.
4
For the purposes of this section, “non-savings income” means income which is not savings income.
5
This section is subject to—
section 13 (income charged at the dividend ordinary, upper and additional rates: individuals), and
any provisions of the Income Tax Acts (apart from section 10) which provide for income of an individual to be charged at different rates of income tax in some circumstances.
6
Section 16 has effect for determining the extent to which the non-savings income of a Welsh taxpayer would otherwise be charged at the basic, higher or additional rate.
11CF168Income charged at the default basic, higher and additional rates: non-UK resident individuals
1
Income tax on a non-UK resident individual’s income up to the basic rate limit is charged at the default basic rate.
2
Income tax is charged at the default higher rate on a non-UK resident individual’s income above the basic rate limit and up to the higher rate limit.
3
Income tax is charged at the default additional rate on a non-UK resident individual’s income above the higher rate limit.
4
Subsections (1) to (3) are subject to—
section 11D (savings income charged at the savings basic, higher and additional rates),
section 12 (savings income charged at the starting rate for savings),
section 12A (savings income charged at the savings nil rate),
section 13 (income charged at the dividend ordinary, upper and additional rates: individuals), and
any other provisions of the Income Tax Acts (apart from section 10) which provide for income to be charged at different rates of income tax in some circumstances.
11DIncome charged at the savings basic, higher and additional rates
1
Income tax is charged at the savings basic rate on an individual’s income which—
a
is saving income, and
b
would otherwise be charged at the basic rate or the default basic rate.
2
Income tax is charged at the savings higher rate on an individual’s income which—
a
is savings income, and
b
would otherwise be charged at the higher rate or the default higher rate.
3
Income tax is charged at the savings additional rate on an individual’s income which—
a
is savings income, and
b
would otherwise be charged at the additional rate or the default additional rate.
4
Subsections (1) to (3)—
a
have effect after sections 12 and 12A have been applied (so that any reference in subsections (1) to (3) to income which would otherwise be charged at a particular rate does not include income charged at the starting rate for savings or at the savings nil rate), and
b
are subject to any other provisions of the Income Tax Acts (apart from sections 10 and 11C) which provide for income to be charged at different rates of income tax in some circumstances.
5
Section 16 has effect for determining the extent to which an individual’s savings income above the starting rate limit for savings would otherwise be charged at the basic, higher or additional rate or the default basic, default higher or default additional rate.
6
In relation to an individual who is a Scottish taxpayer, references in this section to income which would otherwise be charged at a particular rate are to be read as references to income that would, if the individual were not a Scottish taxpayer (but were UK resident), be charged at that rate (and subsection (5) is to be read accordingly).
12F116Income charged at the starting rate for savings
1
Income tax is charged at the starting rate for savings F149... on so much of an individual's income up to the starting rate limit for savings F154as—
a
is savings income, and
b
would otherwise be charged at the basic rate or the default basic rate.
2
This is subject to any provisions of the Income Tax Acts (apart from section 10) which provide for income of an individual to be charged at different rates of income tax in some circumstances.
3
The starting rate limit for savings is F175£5,000.
4
See section 21 for indexation of the starting rate limit for savings.
5
Section 16 has effect for determining the extent to which a person's income up to the starting rate limit for savings consists of savings income.
12AF32Savings income charged at the savings nil rate
1
This section applies in relation to an individual if—
a
the amount of the individual's Step 3 income is greater than £L, where £L is the amount of the starting rate limit for savings, and
b
when the individual's Step 3 income is split into two parts—
i
one (“the individual's income up to the starting rate for savings”) consisting of the lowest £L of the individual's Step 3 income, and
ii
the other (“the individual's income above the starting rate limit for savings”) consisting of the rest of the individual's Step 3 income,
some or all of the individual's income above the starting rate limit for savings consists of savings income (whether or not some or all of the individual's income up to the starting rate limit for savings consists of savings income).
2
In this section—
£A is the amount of the individual's savings allowance (see section 12B),
“the excess” is so much of the individual's income above the starting rate limit for savings as consists of savings income, and
£X is the amount of the excess.
3
If £X is less than or equal to £A, income tax is charged at the savings nil rate (rather than the basic, higher or additional rate F166or the default basic, default higher or default additional rate) on the excess.
4
If £X is more than £A, income tax is charged at the savings nil rate (rather than the basic, higher or additional rate F177or the default basic, default higher or default additional rate) on the lowest £A of the excess.
5
Subsections (3) and (4) are subject to any provisions of the Income Tax Acts (apart from F182sections 10 and 11C) which provide for income to be charged at different rates of income tax in some circumstances.
6
Section 16 has effect for determining the extent to which the individual's income above the starting rate limit for savings consists of savings income.
7
For the purposes of this section, an individual's “Step 3 income” is the individual's net income less allowances deducted at Step 3 of the calculation in section 23.
12BIndividual's entitlement to a savings allowance
1
Subsections (2) to (4) determine the amount of an individual's savings allowance for a tax year.
2
If any of the individual's income for the year is additional-rate income, the individual's savings allowance for the year is nil.
3
If—
a
any of the individual's income for the year is higher-rate income, and
b
none of the individual's income for the year is additional-rate income,
the individual's savings allowance for the year is £500.
4
If none of the individual's income for the year is higher-rate income, the individual's savings allowance for the year is £1,000.
5
The Treasury may by regulations substitute a different amount for the amount for the time being specified in subsection (2), (3) or (4); and regulations under this subsection that have effect for a tax year may be made at any time before the end of that tax year.
6
If regulations under subsection (5) reduce any amount, the regulations may not be made unless a draft of the instrument containing them (whether alone or together with regulations under subsection (5) which increase any amount) has been laid before, and approved by a resolution of, the House of Commons.
7
Section 1014(4) (negative procedure) does not apply to regulations under subsection (5) which increase any amount if—
a
the instrument containing them also contains regulations under subsection (5) which reduce any amount, and
b
a draft of the instrument has been laid before, and approved by a resolution of, the House of Commons.
8
For the purposes of this section—
a
each of the following is “additional-rate income”—
i
income on which income tax is charged at the additional rate F167, default additional rate or dividend additional rate,
ii
income on which income tax would be charged at the additional rate F176, or default additional rate, but for section 12A (income charged at savings nil rate),
iii
income on which income tax would be charged at the dividend additional rate but for section 13A (income charged at dividend nil rate), and
iv
income of an individual who is a Scottish taxpayer or Welsh taxpayer which would, if the individual were not a Scottish taxpayer or Welsh taxpayer (as the case may be), be income on which income tax is charged at the additional rate F145or default additional rate, and
b
each of the following is “higher-rate income”—
i
income on which income tax is charged at the higher rate F156, default higher rate or dividend upper rate,
ii
income on which income tax would be charged at the higher rate F165, or default higher rate, but for section 12A (income charged at savings nil rate),
iii
income on which income tax would be charged at the dividend upper rate but for section 13A (income charged at dividend nil rate), and
iv
income of an individual who is a Scottish taxpayer or Welsh taxpayer which would, if the individual were not a Scottish taxpayer or Welsh taxpayer (as the case may be), be income on which income tax is charged at the higher rate F152or default higher rate.
13Income charged at the dividend ordinary F53, dividend upper and dividend additional rates: individuals
1
Income tax is charged at the dividend ordinary rate on an individual's income which—
a
is dividend income,
c
is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).
2
Income tax is charged at the dividend upper rate on an individual's income which—
a
is dividend income, F124...
c
is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005.
F202A
Income tax is charged at the dividend additional rate on an individual's income which—
a
is dividend income,
c
is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005.
3
4
F1585
In relation to an individual who is a Scottish taxpayer, references in this section to income that would otherwise be charged at a particular rate are to be read as references to income that would, if the individual were not a Scottish taxpayer, be charged at that rate (and subsection (4) is to be read accordingly).
13AF38Income charged at the dividend nil rate
1
Subsection (2) applies if, ignoring this section, at least some of an individual's income would be charged to income tax at the dividend ordinary rate, the dividend upper rate or the dividend additional rate.
2
Income tax is charged at the dividend nil rate (rather than the dividend ordinary rate, dividend upper rate or dividend additional rate) on one or more amounts of the individual's income as follows—
Step 1 Identify the amount (“D”) of the individual's income which would, ignoring this section, be charged at the dividend ordinary rate.Rule 1A: If D is more than F185£500, the first F185£500 of D is charged at the dividend nil rate (rather than the dividend ordinary rate), and is the only amount charged at the dividend nil rate.Rule 1B: If D is equal to F185£500, D is charged at the dividend nil rate (rather than the dividend ordinary rate), and is the only amount charged at the dividend nil rate.Rule 1C: If D is less than F185£500 but more than nil, D is charged at the dividend nil rate (rather than the dividend ordinary rate).
Step 2 If D is less than F185£500, identify the amount (“U”) of the individual's income which would, ignoring this section, be charged at the dividend upper rate.Rule 2A: If the total of D and U is more than F185£500—
- a
the first £M of U is charged at the dividend nil rate (rather than the dividend upper rate), where £M is the difference between F185£500 and D, and
- b
the amounts charged under this Rule and Rule 1C are the only amounts charged at the dividend nil rate.
Rule 2B: If the total of D and U is equal to F185£500, U is charged at the dividend nil rate (rather than the dividend upper rate), and the amounts charged under this Rule and Rule 1C are the only amounts charged at the dividend nil rate.Rule 2C: If the total of D and U is less than F185£500 but more than nil, U is charged at the dividend nil rate (rather than the dividend upper rate).
- a
Step 3 If the total of D and U is less than F185£500, identify the amount (“A”) of the individual's income which would, ignoring this section, be charged at the dividend additional rate.Rule 3A: If the total of D, U and A is more than F185£500, the first £X of A is charged at the dividend nil rate (rather than the dividend additional rate), where £X is the difference between—
F185£500, and
the total of D and U,
and the amounts charged under this Rule, and Rules 1C and 2C, are the amounts charged at the dividend nil rate.Rule 3B: If the total of D, U and A is less than or equal to F185£500, A is charged at the dividend nil rate (rather than the dividend additional rate), and the amounts charged under this Rule, and Rules 1C and 2C, are the amounts charged at the dividend nil rate.
14Income charged at the dividend ordinary rate: other persons
1
Income tax is charged at the dividend ordinary rate on the income of persons other than individuals which—
a
is dividend income,
b
would otherwise be charged at the basic rate, and
c
is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).
2
This is subject to—
Chapters 3 to F1865 of Part 9 (which provide for some income of trustees to be charged at the dividend trust rate or at the trust rate),
F126... and
any other provisions of the Income Tax Acts (apart from section 11) which provide for income of persons other than individuals to be charged at different rates of income tax in some circumstances.
15Income charged at the trust rate and the dividend trust rate
For the circumstances in which income tax is charged at the trust rate and the dividend trust rate, see Chapters 3 to F1875 of Part 9.
16Savings and dividend income to be treated as highest part of total income
1
This section has effect for determiningF51 —
F164za
which part of a Scottish taxpayer's income consists of savings income,
F109zb
the rate at which income tax would be charged on the non-savings income of a Welsh taxpayer apart from section 11B,
a
the extent to which a person's income up to the starting rate limit for savings consists of savings income,
F75aa
the extent to which a person's income above the starting rate limit for savings consists of savings income, and
F170ab
the rate at which income tax would be charged on a person’s savings income above the starting rate limit for savings apart from sections 11D and 12A,
b
the rate at which income tax would be charged on a person's dividend income apart from section 13.
2
It also has effect for all other income tax purposes except for the purposes of—
F188a
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b
sections 535 to 537 of ITTOIA 2005 (gains from contracts for life insurance etc: top slicing relief).
3
If a person has savings income but no dividend income, the savings income is treated as the highest part of the person's total income.
4
If a person has dividend income but no savings income, the dividend income is treated as the highest part of the person's total income.
5
If a person has both savings income and dividend income—
a
the savings income and dividend income are together treated as the highest part of the person's total income, and
b
the dividend income is treated as the higher part of that part of the person's total income.
6
See section 1012 for the relationship between—
a
the rules in this section, and
b
other rules requiring particular income to be treated as the highest part of a person's total income.
7
References in this section to dividend income do not include dividend income which is relevant foreign income charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).
17Repayment: tax paid at F14greater rate instead of F52starting rate for savingsF40or savings nil rate
1
F771A
This section also applies if income tax at a rate greater than the savings nil rate has been paid on income on which income tax is chargeable at the savings nil rate.
2
If a claim is made, any necessary repayment of tax must be made.
C2518Meaning of “savings income”
1
This section applies for the purposes of the Income Tax Acts.
2
“Savings income” is income—
a
which is within subsection (3) or (4), and
b
which is not relevant foreign income charged in accordance with section 832 of ITTOIA 2005 (relevant foreign income charged on the remittance basis).
3
Income is within this subsection if it is—
a
income chargeable under Chapter 2 of Part 4 of ITTOIA 2005 (interest),
b
income chargeable under Chapter 7 of Part 4 of ITTOIA 2005 (purchased life annuity payments), other than income from annuities specified in section 718(2) of that Act (annuities purchased from certain life assurance premium payments or under wills etc),
c
income chargeable under Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities), or
d
income chargeable under Chapter 2 of Part 12 of this Act (accrued income profits).
4
Income is within this subsection if—
a
it is chargeable under Chapter 9 of Part 4 of ITTOIA 2005 (gains from contracts for life insurance etc), and
b
an individual is, or personal representatives are, liable for income tax on it (under section 465 or 466 of that Act).
19Meaning of “dividend income”
1
This section applies for the purposes of the Income Tax Acts.
2
“Dividend income” is income which is—
a
chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc from UK resident companies),
b
chargeable under Chapter 4 of that Part (dividends from non-UK resident companies),
c
chargeable under Chapter 5 of that Part (stock dividends from UK resident companies),
d
chargeable under Chapter 6 of that Part (release of loan to participator in close company), or
e
a relevant foreign distribution chargeable under Chapter 8 of Part 5 of ITTOIA 2005 (income not otherwise charged).
3
In subsection (2) “relevant foreign distribution” means a distribution of a non-UK resident company which—
a
is not chargeable under Chapter 4 of Part 4 of ITTOIA 2005, but
b
would be chargeable under Chapter 3 of that Part if the company were UK resident.
Starting rate limit and basic rate limit
F5720The starting rate limit and the basic rate limit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C4C13C3C5C6C9C26C17C22C24C19C10C30C21C28C15C2921Indexation of the F80basic rate limit and starting rate limit for savings
1
This section applies if the F139consumer prices index for the September before the start of a tax year is higher than it was for the previous September.
F1232
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
The basic rate limit for the tax year is the amount found as follows.
Step 1
Increase the basic rate limit for the previous tax year by the same percentage as the percentage increase in the F128consumer prices index.
Step 2
If the result of Step 1 is a multiple of £100, it is the basic rate limit for the tax year.
If the result of Step 1 is not a multiple of £100, round it up to the nearest amount which is a multiple of £100.
That amount is the basic rate limit for the tax year.
F923A
The starting rate limit for savings for the tax year is the amount found as follows.
Step 1
Increase the starting rate limit for savings for the previous tax year by the same percentage as the percentage increase in the F140consumer prices index.
Step 2
If the result of Step 1 is a multiple of £10, it is the starting rate limit for savings for the tax year.
If the result of Step 1 is not a multiple of £10, round it up to the nearest amount which is a multiple of £10.
That amount is the starting rate limit for savings for the tax year.
4
Subsections F78(3) and (3A) do not require a change to be made in the amounts deductible or repayable under PAYE regulations during the period beginning on 6 April and ending on 17 May in the tax year.
5
F616
In this section “consumer prices index” means the all items consumer prices index published by the Statistics Board.
Chapter 3Calculation of income tax liability
22Overview of Chapter
1
This Chapter deals with the calculation of a person's income tax liability for a tax year.
2
But it does not deal with any income tax liability mentioned in section 32.
3
This Chapter needs to be read with Chapter 1 of Part 14 (limits on liability to income tax of non-UK residents).
C2C16C23C7C11C20C1423The calculation of income tax liability
To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. Step 1
Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.
The sum of those amounts is “total income”.
Each of those amounts is a “component” of total income.
Step 2
Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.
See F6sections 24A and 25 for further provision about the deduction of those reliefs.
F189See also section 24B which provides that a taxpayer’s net income is taken to be £0 in certain cases.
The sum of the amounts of the components left after this step is “net income”.
Step 3
Deduct from the amounts of the components left after Step 2 any allowances to which the taxpayer is entitled for the tax year under Chapter 2 of Part 3 of this Act or F122... (individuals: personal allowance and blind person's allowance).
See section 25 for further provision about the deduction of those allowances.
Step 4
Calculate tax at each applicable rate on the amounts of the components left after Step 3.
See Chapter 2 of this Part for the rates at which income tax is charged and the income charged at particular rates.
If the taxpayer is a trustee, see also Chapters 3 to F1905 and 10 of Part 9 (special rules about settlements and trustees) for further provision about the income charged at particular rates.
F4See also section 863I of ITTOIA 2005 which provides for certain partnership profits to be charged at the additional rate.
Step 5
Add together the amounts of tax calculated at Step 4.
Step 6
Deduct from the amount of tax calculated at Step 5 any tax reductions to which the taxpayer is entitled for the tax year under a provision listed in relation to the taxpayer in section 26.
See sections 27 to 29 for further provision about the deduction of those tax reductions.
Step 7
Add to the amount of tax left after Step 6 any amounts of tax for which the taxpayer is liable for the tax year under any provision listed in relation to the taxpayer in section 30.
The result is the taxpayer's liability to income tax for the tax year.
24Reliefs deductible at Step 2
1
If the taxpayer is an individual, the provisions referred to at Step 2 of the calculation in section 23 are—
a
the following—
section 72 (early trade losses relief),
Chapter 6 of Part 4 (share loss relief),
Chapter 3 of Part 8 (gifts of shares, securities and real property to charities etc),
sections 457 and 458 of this Act or section 266(7) of ICTA (payments to trade unions or police organisations),
section 193(4) of FA 2004 (pension schemes: relief under net pay arrangement: excess relief), and
section 194(1) of FA 2004 (pension schemes: relief on making of claim), and
b
the following—
section 64 (trade loss relief against general income),
section 83 (carry-forward trade loss relief),
section 89 (terminal trade loss relief),
section 96 (post-cessation trade relief),
section 118 (carry-forward property loss relief),
section 120 (property loss relief against general income),
section 125 (post-cessation property relief),
section 128 (employment loss relief against general income),
section 152 (loss relief against miscellaneous income),
Chapter 1 of Part 8 (interest payments),
F137Chapter 1A of Part 8 (irrecoverable peer-to-peer loans),
Chapter 4 of Part 8 (annual payments F89...),
section 574 (manufactured dividends on UK shares: payments by non-companies),
section 579 (manufactured interest on UK securities: payments not otherwise deductible),
Part 2 of CAA 2001 (plant and machinery allowances), in a case where the allowance is to be given effect under section 258 of that Act (special leasing of plant and machinery),
F135...
Part 8 of CAA 2001 (patent allowances), in a case where the allowance is to be given effect under section 479 of that Act (persons having qualifying non-trade expenditure),
section 555 of ITEPA 2003 (deduction for liabilities related to former employment),
section 446 of ITTOIA 2005 (strips of government securities: relief for losses),
section 454(4) of ITTOIA 2005 (listed securities held since 26 March 2003: relief for losses: persons other than trustees), and
section 600 of ITTOIA 2005 (relief for patent expenses).
2
In any other case, the provisions referred to at Step 2 of the calculation in section 23 are—
a
the provisions listed in subsection (1)(b), and
b
F27regulation 18 of the Unauthorised Unit Trusts (Tax) Regulations 2013.
24AF72Limit on Step 2 deductions
1
If the taxpayer is an individual, there is a limit on certain deductions which may be made for the tax year at Step 2.
2
The limit is determined as follows.
3
Amount A must not exceed amount B.
4
Amount A is—
a
the deductions for the tax year at Step 2 for the reliefs listed in subsection (6) taken together, less
b
so much of those deductions as fall within subsection (7).
5
Amount B is—
a
£50,000, or
b
if more, 25% of the taxpayer's adjusted total income for the tax year (see subsection (8)).
6
The reliefs are—
a
relief under section 64 (trade loss relief against general income);
b
relief under section 72 (early trade losses relief);
c
relief under section 96 (post-cessation trade relief);
d
relief under section 120 (property loss relief against general income);
e
relief under section 125 (post-cessation property relief);
f
relief under section 128 (employment loss relief against general income);
g
relief under Chapter 6 of Part 4 (share loss relief);
h
relief under Chapter 1 of Part 8 (interest payments);
i
relief under section 555 of ITEPA 2003 (deduction for liabilities relating to former employment);
j
relief under section 446 of ITTOIA 2005 (strips of government securities: relief for losses);
k
relief under section 454(4) of ITTOIA 2005 (listed securities held since 26 March 2003: relief for losses: persons other than trustees).
7
The deductions falling within this subsection are—
a
deductions for amounts of relief so far as attributable to allowances under Part 3A of CAA 2001 (business premises renovation allowances);
b
deductions for amounts of relief under a provision mentioned in subsection (6)(a) to (e) so far as made from profits of the trade or business to which the relief in question relates;
F191c
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d
deductions for amounts of relief under the provision mentioned in subsection (6)(g)—
i
where the shares in question fall within section 131(2)(a) (qualifying shares to which EIS relief is attributable), or
ii
where SEIS relief is attributable to the shares in question as determined in accordance with Part 5A (seed enterprise investment scheme)F37, or
iii
where SI relief is attributable to the shares in question as determined in accordance with Part 5B (income tax relief for social investments).
8
The taxpayer's “adjusted total income” for the tax year is calculated as follows.
Step 1 Take the amount of the taxpayer's total income for the tax year.
Step 2 Add back the amounts of any deductions allowed under Part 12 of ITEPA 2003 (payroll giving) in calculating the taxpayer's income which is charged to tax for the tax year.
Step 3 If the taxpayer is given relief in accordance with section 192 of FA 2004 (pension schemes: relief at source) in respect of any contribution paid in the tax year under a pension scheme, deduct the gross amount of the contribution. The “gross” amount of a contribution is the amount of the contribution before deduction of tax under section 192(1) of FA 2004.
Step 4 If the taxpayer is entitled to a deduction for relief under section 193(4) or 194(1) of FA 2004 (pension schemes: excess relief under net payment arrangements or relief on making a claim) for the tax year, deduct the amount of the excess or contribution (as the case may be). The result is the taxpayer's adjusted total income for the tax year.
24BF183Calculation of net income at Step 2 for low income estates and trusts
1
Subsection (2) applies in relation to a taxpayer if—
a
they are the personal representative of a deceased person and, ignoring this section, their net income in that capacity at the end of Step 2 of the calculation in section 23 would be equal to or less than the de minimis estates amount, or
b
they are the trustee of a settlement (“the relevant settlement”) and, ignoring this section, their net income in that capacity at the end of that Step would be equal to or less than the de minimis trusts amount.
2
The taxpayer’s net income in their capacity as a personal representative of a deceased person or trustee of a settlement (as the case may be) at the end of Step 2 of the calculation in section 23 is taken to be £0.
3
The de minimis estates amount is £500.
4
The de minimis trusts amount is—
a
£500, or
5
This subsection applies where—
a
the settlor in relation to the relevant settlement is also the settlor in relation to one or more qualifying settlements,
b
ignoring this section, the trust rate income (within the meaning of Part 9) for the tax year of the trustees of the relevant settlement would be greater than £0, and
c
the relevant settlement is a settlement in respect of which each of the conditions mentioned in subsection (9) is met throughout the tax year.
6
The settlor’s threshold amount is the amount given by—
where QS is the total number of qualifying settlements.
7
If there is more than one settlor in relation to the relevant settlement—
a
calculate the threshold amount of each of them, and
b
use the lowest of those threshold amounts for the purposes of subsection (4)(b)(ii).
8
A settlement is a “qualifying settlement” if—
a
it is not the relevant settlement,
b
it is in existence at a time during the tax year,
c
ignoring this section, the trust rate income (within the meaning of Part 9) for the tax year of the trustees of the settlement would be greater than £0, and
d
it is a settlement in respect of which each of the conditions mentioned in subsection (9) is met throughout the tax year.
9
The conditions are—
a
the property comprised in the settlement is not held for a pensions purpose within the meaning of paragraph 7(3) of Schedule 1C to TCGA 1992 (property comprised in settlements held for a pensions purpose);
b
no income arising under the settlement is treated as the income of the settlor as a result of section 624 of ITTOIA 2005 (income where settlor retains an interest);
c
the settlement is not a qualifying trust within the meaning of section 34 or 35 of FA 2005 (trusts for the benefit of disabled persons or relevant minors);
d
the settlement is not a heritage maintenance settlement within the meaning of Chapter 10 of Part 9 (heritage maintenance settlements) (see section 507(2) and (3)).
25Reliefs and allowances deductible at Steps 2 and 3: supplementary
1
This section supplements the provisions about reliefs and allowances in Steps 2 and 3 of the calculation in section 23.
C8C12C27C182
At Steps 2 and 3, deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax.
3
Subsection (2) is subject to—
section 65(2) to (4) (priority rule in relation to trade loss relief against general income),
section 80(2) (ring fence income),
section 83(3) and (4) (carry-forward trade loss relief against trade profits),
section 89(3) (terminal trade loss relief against trade profits),
section 93(2) (terminal trade loss relief and mineral extraction trade),
section 95(2) (foreign trades etc reliefs only against qualifying foreign income),
section 115(2) (restrictions on reliefs for firms exploiting films),
section 118(3) and (4) (carry-forward property loss relief against property business profits),
section 121(2) and (3) (priority rule in relation to property loss relief against general income),
section 129(2) to (4) (priority rule in relation to employment loss relief against general income),
section 133(4) (share loss relief against general income),
section 152(4) and (7) (loss relief against miscellaneous income),
F66sections 412A(4), 412B(3) and 412C(3) (relief for irrecoverable peer-to-peer loans only against interest on certain loans),
sections 574(3) to (8) and 575 (manufactured dividends on UK shares: restrictions on deductions),
section 579(2) to (5) and 580 (manufactured interest on UK securities: restrictions on deductions),
section 258 of CAA 2001 (special leasing of plant or machinery),
F25...
section 479 of that Act (persons having qualifying non-trade expenditure),
section 601 of ITTOIA 2005 (how relief for patent expenses is given), and
any other provision of the Income Tax Acts under which reliefs or allowances deductible at Step 2 or 3 are not permitted to be deducted from particular components of income or are required to be deducted from particular components of income or in a different order.
4
A relief or allowance may be deducted at Step 2 or 3 only so far as there is sufficient income from which to deduct it.
5
In deciding whether there is sufficient income from which to deduct a relief or allowance, reliefs and allowances already deducted at Step 2 or 3 must be taken into account.
6
Nothing in Step 2 or 3 is to be read as permitting a relief or allowance to be deducted more than once.
26Tax reductions
1
If the taxpayer is an individual, the provisions referred to at Step 6 of the calculation in section 23 are—
a
the following—
Chapter 3 of Part 3 of this Act F10... (tax reductions for married couples and civil partners),
F35Chapter 3A of Part 3 of this Act (transferable tax allowance for married couples and civil partners),
Chapter 1 of Part 5 (EIS relief),
F19Chapter 1 of Part 5A (SEIS relief),
F113Chapter 1 of Part 5B (relief for social investments),
Chapter 2 of Part 6 (VCT relief),
Chapter 1 of Part 7 (community investment tax relief),
F97section 399B (relief for non-deductible interest on loan to invest in partnership with residential property business),
F88section 414A(3) (gift aid where devolved basic rate is above basic rate),
section 453 (qualifying maintenance payments),
F49. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
section 461 (spreading of patent royalty receipts),
section 353(1A) of ICTA (relief for interest on loan to buy life annuity),
F42section 192A of FA 2004 (relief at source: additional relief),
F17section 274A of ITTOIA 2005 (property business: relief for non-deductible costs of a dwelling-related loan),
section 535 of ITTOIA 2005 (top slicing relief), and
section 539 of ITTOIA 2005 (relief for deficiencies), and
b
the following—
F8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
section 401 of ITTOIA 2005 (relief: F54distribution repaying shares or security issued in earlier distribution), F104...
sections 677 and 678 of ITTOIA 2005 (relief where foreign estates have borne UK income tax).
F105sections 2 and 6 of TIOPA 2010 (double taxation relief: relief by agreement), and
section 18(1)(b) and (2) of TIOPA 2010 (relief for foreign tax where no double taxation arrangements).
2
In any other case, the provisions referred to at Step 6 of the calculation in section 23 are—
a
the provisions listed in subsection (1)(b),
F30aa
section 274B of ITTOIA 2005 (trusts with accumulated or discretionary income derived from property business: relief for non-deductible costs of dwelling-related loans), and
b
section 26 of FA 2005 (trusts with vulnerable beneficiary: income tax relief).
27Order of deducting tax reductions: individuals
1
This section makes provision about the order in which tax reductions are to be deducted at Step 6 of the calculation in section 23, if the taxpayer is an individual.
2
Deduct the tax reductions in the order which will result in the greatest reduction in the taxpayer's liability to income tax for the tax year.
3
Subsection (2) is subject to subsections (4) to (6).
4
If the taxpayer is entitled to tax reductions for the tax year under more than one of the provisions listed in subsection (5), a tax reduction under a provision mentioned earlier in the list must be deducted before a tax reduction under a provision mentioned later in the list.
5
The provisions are—
Chapter 2 of Part 6 (VCT relief),
Chapter 1 of Part 5 (EIS relief),
F99Chapter 1 of Part 5A (SEIS relief),
F96Chapter 1 of Part 5B (relief for social investments),
Chapter 1 of Part 7 (community investment tax relief),
section 353(1A) of ICTA (relief for interest on loan to buy life annuity),
section 453 (qualifying maintenance payments),
F95. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter 3 of Part 3 of this Act F117... (tax reductions for married couples and civil partners).
6
If the taxpayer is entitled to a tax reduction under—
a
F5sections 2 and 6 of TIOPA 2010 (double taxation arrangements: relief by agreement), or
b
F101section 18(1)(b) and (2) of TIOPA 2010 (relief for foreign tax where no double taxation arrangements),
that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year.
28Order of deducting tax reductions: other persons
1
This section makes provision about the order in which tax reductions are to be deducted at Step 6 of the calculation in section 23, if the taxpayer is a person other than an individual.
2
Deduct the tax reductions in the order which will result in the greatest reduction in the taxpayer's liability to income tax for the tax year.
3
Subsection (2) is subject to subsections (4) and (5).
4
If the taxpayer is entitled to a tax reduction under—
a
F83sections 2 and 6 of TIOPA 2010 (double taxation arrangements: relief by agreement), or
b
F41section 18(1)(b) and (2) of TIOPA 2010 (relief for foreign tax where no double taxation arrangements),
that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year, subject to subsection (5).
5
If the taxpayer is a trustee and is entitled to a tax reduction under section 26 of FA 2005 (trusts with vulnerable beneficiary: income tax relief) that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year.
29Tax reductions: supplementary
1
This section supplements the provisions about tax reductions in Step 6 of the calculation in section 23.
2
A tax reduction may be deducted at Step 6 only so far as there is sufficient tax calculated at Step 5 of the calculation from which to deduct it.
3
In deciding whether there is sufficient tax calculated at Step 5 from which to deduct a tax reduction, tax reductions already deducted at Step 6 must be taken into account.
4
Subsections (2) and (3) apply in addition to—
a
F9sections 36(1) to (5) and (7) and 41 of TIOPA 2010 (limits on credit for foreign tax), and
b
any other provision of the Income Tax Acts that limits the amount of a tax reduction.
F1304A
If the taxpayer is an individual, the total of the tax reductions within subsection (4B) that are deducted at Step 6 must not be greater than—
A − B
where—
A is the amount of tax calculated at Step 5, and
B is the total amount of the tax treated under section 414 (gift aid) as deducted from gifts made by the taxpayer in the tax year.
4B
4C
Subsection (4A) applies in addition to subsections (2) and (3).
5
For the purposes of this Chapter, a person is treated as being entitled to a tax reduction under F48sections 2 and 6 of TIOPA 2010 if the person is entitled to credit against income tax under double taxation arrangements.
30Additional tax
1
If the taxpayer is an individual, the provisions referred to at Step 7 of the calculation in section 23 are—
F29section 414A(4) read with section 414A(5) (gift aid where devolved basic rate is below basic rate),
section 424 (gift aid: charge to tax),
F73section 809ZN (tainted gift aid donations: charge to tax),
F73section 809ZO (tainted charity donations by trustees: charge to tax),
F28Chapter 8 of Part 10 of ITEPA 2003 (high income child benefit charge),
F67section 192B of FA 2004 (relief at source: excessive relief given),
section 205 of FA 2004 (pension schemes: the short service refund lump sum charge),
F111...
section 206 of FA 2004 (pension schemes: the special lump sum death benefits charge),
F106section 208 of FA 2004 (pension schemes: the unauthorised payments charge),
F70section 209 of FA 2004 (pension schemes: the unauthorised payments surcharge),
section 214 of FA 2004 (pension schemes: the lifetime allowance charge),
section 227 of FA 2004 (pension schemes: the annual allowance charge), and
F16section 244A of FA 2004 (pension schemes: the overseas transfer charge),
section 7 of F(No.2)A 2005 (social security pension lump sum).
F122
If the taxpayer is a trustee, the provisions referred to at Step 7 of the calculation in section 23 are—
section 496 (discretionary payments by trustees: tax pool adjustment),
section 809ZN (tainted gift aid donations: charge to tax), and
section 809ZO (tainted charity donations by trustees: charge to tax).
31Total income: supplementary
1
This section applies for the purposes of calculating total income.
2
F503
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
F86Subsection (2) applies even if all or part of the income, or the dividend or other distribution, accrued or will accrue in a different tax year.
5
An assessment that has become final and conclusive for income tax purposes for a tax year is also final and conclusive for the purposes of calculating total income.
32Liability not dealt with in the calculation
The liabilities referred to in section 22(2) are income tax liability—
F85under section 74C(5) (non-active traders: withdrawal of relief),
under section 79(1) (capital allowances restrictions: withdrawal of relief),
under section 81(6) (dealings in commodity futures: withdrawal of relief),
under F24section 103B(5) (non-active partners: withdrawal of relief),
under section 235 (withdrawal or reduction of EIS relief),
F118under section 257G (withdrawal or reduction of SEIS relief),
F142 under section 257S (withdrawal or reduction of relief for social investments),
under sections 266 to 270 (withdrawal or reduction of VCT relief),
under section 372 (withdrawal or reduction of CITR),
under section 512 (heritage maintenance settlements: application of property for non-heritage purposes),
under Chapter 1 of Part 13 (transactions in securities),
under regulations made under section 918(4) (foreign payers of manufactured dividends: Real Estate Investment Trusts: the reverse charge),
under section 920 or 923 (foreign payers of manufactured interest or manufactured overseas dividends: the reverse charge),
under Chapter 15, 16 or 17 of Part 15 (deduction of tax at source: collection mechanisms),
F55. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
under paragraph 11(3) of Schedule 20 to FA 1994 (recovery of excess credit for overseas tax: changes for facilitating self-assessment),
of the person who is (or persons who are) the responsible person in relation to an employer-financed retirement benefits scheme under section 394(2) of ITEPA 2003,
under Chapter 5 of Part 4 of FA 2004 (registered pension schemes: tax charges), except any liability under a provision mentioned in section 30(1), F64...
under section 682(4) of ITTOIA 2005 (assessments, adjustments and claims after the administration period), so far as the liability represents a tax reduction given effect at Step 6 of the calculation in section 23F15, and
under section 24(4) of TIOPA 2010 (recovery of excess credit for overseas tax).