ACCA ATX ^UK Syllabus A1. Income tax - Tax payable on savings and dividend income/Income tax computation/Income tax payable - Notes ^{7 / 9}

Computation of Taxable Income

An Income Tax Computation is prepared for each taxpayer and records the income to be taxed for that individual for a tax year. 

The tax year runs from April 6 to following April 5. 

The tax year 2024/25 runs from April 6, 2024 to April 5, 2025.

Therefore each source of income requires its own basis of assessment to determine how much income is to be assessed to tax in each such tax year.

Proforma income tax computation

Non savings income

This includes income from employment, income from self employment and property income.

Savings income

Savings income is all types of interest income, and for the exam, it is received gross - therefore you just need to include the received amount in the income tax computation.

Savings income now benefits from a 0% rate, because there is a savings income nil rate band.

For basic rate taxpayers, the savings income nil rate band for the tax year 2024/25 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band

Do not confuse this with the personal allowance, this savings nil rate band is only for savings income, if there is no savings income then it cannot be used against any other types of income.

Also do not confuse this with the savings income starting rate of £5,000 which applies if there is taxable non savings income of less than £5,000

Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the higher rate threshold of £37,700, at the higher rate of 40% if it falls between the higher rate threshold of £37,700 and the additional rate threshold of £125,140, and at the additional rate of 45% if it exceeds the additional rate threshold of £125,140.

• Example of a higher rate payer

  For the tax year 2024/25, Jina has a salary of £48,500 and savings income of £1,800. 

  Income tax on:  

  Non savings income
  Employment income £48,500
  Personal allowance (£12,570)

  Taxable income £35,930

  £35,930 at 20% = £7,186


  Savings income
  Savings income £1,800

  £500 at 0% = £0
  £1,270 at 20% (£37,700 - £35,930 - £500) = £254
  £30 at 40% (£1,800 – £500 - £1,270)  = £12
 


  Tax liability  (7,186 + 0 + 254 + 12) = £7,452

  Note if she was a basic rate taxpayer, then the savings nil rate band would have been
  £1,000 and if she was an additional rate taxpayer, then there would be no nil rate band
  available.

  Also notice that the nil rate band uses up the basic rate band.

Dividend income

This includes dividends received from UK companies. 

The first £500 of dividend income for the tax year 2024/25 benefits from a 0% rate.

This £500 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate.

• Example of dividend nil rate band

  For the tax year 2024/25   Eesha has a salary of £56,000 and dividend income of £6,800.
  Income tax on:  

  Non savings income
  Employment income £56,000
  Personal allowance (£12,570)

  Taxable income £43,430

  37,700 at 20% = £7,540

  5,730 (43,430 – 37,700) at 40% = £2,292

  Dividend income
  Dividend income £6,800
  £500 at 0% =£Nil
  £6,300 (£6,800 – £500) at 33.75% = £2,126
   
  Tax liability (7,540 + 2,292 + 2,126) = £11,958

Carefully note

These nil rate bands are not deductions, they just allow some savings and dividend income to be taxed at 0%. 

They also use up the bands so, if there is taxable non savings income of £23,000 and taxable savings income of £15,000, even though £500 of the savings income is at 0% it still uses the band and so £38,000 is taxable in total meaning that this taxpayer is higher rate.

Only the personal allowance is a deduction which must be first given to non savings income, then savings income and then dividend income.

This also applies for other reliefs.

Income that is exempt from income tax

1. Interest or bonuses on National Savings & Investment Certificates

2. Interest and dividends within an Individual Savings Account [ISA]

3. Gaming, lottery and premium bond winnings

The difference between an income tax liability and income tax payable

Income tax liability is a taxpayers total tax liability for the year.

Tax payable is the amount of tax that is still owing at the end of the year.

For example, if you are an employee with no other income, you are unlikely to have any tax to pay at the end of the year as it has all been deducted at source by your employer via PAYE.

You would still calculate your tax liability, then deduct any tax paid at source via PAYE to leave you with a tax payable figure.

Therefore,

Income tax liability – tax deducted at source = Income tax payable

Non-savings income is taxed at the following rates:

£1-£37,700 at 20% (basic rate band)

£37,701-£125,140 at 40% (higher rate band)

£125,141 -  onwards at 45% (additional rate band)

Savings income is taxed at the following rates:

£1-£37,700 at 20% (basic rate band) (unless the starting rate is available and then it is £0 - £5,000 at 0% and £5,001 to £37,700 at 20%)

£37,701-£125,140 at 40% (higher rate band)

£125,141 -  onwards at 45% (additional rate band)

Remember to use your savings nil rate band!

Dividend income is taxed at the following rates:

£1-£37,700 at 8.75% (basic rate band)

£37,701-£125,140 at 33.75% (higher rate band)

£125.141 -  onwards at 39.35% (additional rate band)

Remember to use your dividend nil rate band!

Illustration

For the tax year 2024/25, Joe has a salary of £40,000, savings income of £2,000 and dividend income of £9,000.

During the year, he paid interest of £300 which was for a qualifying purpose.

Joe’s employer deducted £5,800 in PAYE from his earnings.

What is the income tax payable by Joe for 2024/25?

Solution:

Note

Joe is a higher rate taxpayer, so his savings income nil rate band is £500.

The dividend 0% nil rate band used up some of the basic rate band leaving £8,070 of the basic rate band for some of the dividends with the remainder of the dividends being taxed at the higher rate.