Part 2Basic provisions
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).
23The 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 F1sections 24A and 25 for further provision about the deduction of those reliefs.
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 F2... (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 6 and 10 of Part 9 (special rules about settlements and trustees) for further provision about the income charged at particular rates.
F3See 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),
F4Chapter 1A of Part 8 (irrecoverable peer-to-peer loans),
Chapter 4 of Part 8 (annual payments F5...),
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),
F6...
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)
F7regulation 18 of the Unauthorised Unit Trusts (Tax) Regulations 2013.
F824ALimit 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;
(c)
deductions for amounts of relief under the provision mentioned in subsection (6)(a) or (b) so far as attributable to a deduction allowed under section 205 or 220 of ITTOIA 2005 (deduction for overlap profit in final tax year or on change of accounting date);
(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)F9, 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.
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.
(2)
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),
F10sections 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),
F11...
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 F12... (tax reductions for married couples and civil partners),
F13Chapter 3A of Part 3 of this Act (transferable tax allowance for married couples and civil partners),
Chapter 1 of Part 5 (EIS relief),
F14Chapter 1 of Part 5A (SEIS relief),
F15Chapter 1 of Part 5B (relief for social investments),
Chapter 2 of Part 6 (VCT relief),
Chapter 1 of Part 7 (community investment tax relief),
F16section 399B (relief for non-deductible interest on loan to invest in partnership with residential property business),
F17section 414A(3) (gift aid where devolved basic rate is above basic rate),
section 453 (qualifying maintenance payments),
F18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
section 461 (spreading of patent royalty receipts),
section 353(1A) of ICTA (relief for interest on loan to buy life annuity),
F19section 192A of FA 2004 (relief at source: additional relief),
F20section 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—
F21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
section 401 of ITTOIA 2005 (relief: F22distribution repaying shares or security issued in earlier distribution), F23...
sections 677 and 678 of ITTOIA 2005 (relief where foreign estates have borne UK income tax).
F24sections 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),
F25(aa)
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),
F26Chapter 1 of Part 5A (SEIS relief),
F27Chapter 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),
F28. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter 3 of Part 3 of this Act F29... (tax reductions for married couples and civil partners).
(6)
If the taxpayer is entitled to a tax reduction under—
(a)
F30sections 2 and 6 of TIOPA 2010 (double taxation arrangements: relief by agreement), or
(b)
F31section 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)
F32sections 2 and 6 of TIOPA 2010 (double taxation arrangements: relief by agreement), or
(b)
F33section 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)
F34sections 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.
F35(4A)
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 F38sections 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—
F39section 414A(4) read with section 414A(5) (gift aid where devolved basic rate is below basic rate),
section 424 (gift aid: charge to tax),
F40section 809ZN (tainted gift aid donations: charge to tax),
F40section 809ZO (tainted charity donations by trustees: charge to tax),
F41Chapter 8 of Part 10 of ITEPA 2003 (high income child benefit charge),
F42section 192B of FA 2004 (relief at source: excessive relief given),
section 205 of FA 2004 (pension schemes: the short service refund lump sum charge),
F43...
section 206 of FA 2004 (pension schemes: the special lump sum death benefits charge),
section 208(2)(a) of FA 2004 (pension schemes: the unauthorised payments charge),
section 209(3)(a) 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
section 7 of F(No.2)A 2005 (social security pension lump sum).
F44(2)
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)
F49(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)
F50Subsection (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—
F51under 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 F52section 103B(5) (non-active partners: withdrawal of relief),
under section 235 (withdrawal or reduction of EIS relief),
F53under section 257G (withdrawal or reduction of SEIS relief),
F54 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), F56...
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 23F57, and
under section 24(4) of TIOPA 2010 (recovery of excess credit for overseas tax).