Finance Act 2018 UK-Tax

Rates of income tax
The rates of income tax for the tax year 2018–19 are:
Normal rates Dividend rates
Basic rate £1 to £34,500 20% 7.5%
Higher rate £34,501 to £150,000 40% 32.5%
£150,001
Additional rate 45% 38.1%
and over
Savings income nil rate band

- Basic rate taxpayers
£1,000
- Higher rate taxpayers
£500
Dividend nil rate band £2,000

A starting rate of 0% applies to savings income where it falls within the first £5,000 of
taxable income.
Personal allowance
The personal allowance for the tax year 2018–19 is £11,850.
This is gradually reduced to nil where a person’s adjusted net income exceeds
£100,000. Adjusted net income is net income (total income less deductions for gross
pension contributions to an employer’s occupational pension scheme, loss relief and
interest payments) less the gross amount of personal pension contributions and gift aid
donations.
The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net
income exceeds £100,000. Therefore, a person with adjusted net income of £123,700
or more is not entitled to any personal allowance ((123,700 – 100,000)/2 = £11,850).
Where a person has an adjusted net income of between £100,000 and £123,700, then
the effective marginal rate of income tax is 60%. This is the higher rate of 40% on
income plus an additional 20% as a result of the withdrawal of the personal allowance.
In this situation, it may be beneficial to make additional personal pension contributions
or gift aid donations.
EXAMPLE 1
For the tax year 2018–19, June has a trading profit of £184,000. Her income tax liability
is:
£
Trading profit 184,000
Personal allowance 0

______
£
Taxable income 184,000

______
Income tax:
34,500 at 20% 6,900
115,500 at 40% 46,200
34,000 at 45% 15,300
______
68,400
Tax liability
______
No personal allowance is available because June’s adjusted net income of £184,000

exceeds £123,700.
EXAMPLE 2
For the tax year 2018–19, May has a trading profit of £159,000. During the year, May
made net personal pension contributions of £32,000 and a net gift aid donation of
£9,600. Her income tax liability is:
£

£
Personal allowance (8,350)

______

______
Income tax:
86,500 at 20% 17,300

64,150 at 40% 25,660
______
42,960
Tax liability
______
 The gross personal pension contributions are £40,000 (32,000 x 100/80) and the
gross gift aid donation is £12,000 (9,600 x 100/80).
 May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000),
so her personal allowance of £11,850 is reduced to £8,350 (11,850 – 3,500 ((107,000 –
100,000)/2)).
 The basic and higher rate tax bands are extended to £86,500 (34,500 + 40,000 +
12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively..
Savings income
Interest received from bank and building societies is paid gross without any tax being
suffered at source. Certain types of savings income are paid net of basic rate tax, but
these are not examinable. Therefore, as far as TX-UK is concerned, all savings
income is treated as paid gross.
Savings income benefits from a 0% rate. For basic rate taxpayers, the savings income
nil rate band for the tax year 2018–19 is £1,000, and for higher rate taxpayers it is £500.
Additional rate taxpayers do not benefit from any savings income nil rate band. 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 £34,500, at the higher rate of 40% if it falls
between the higher rate threshold of £34,500 and the additional rate threshold of
£150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of
£150,000.
EXAMPLE 3
For the tax year 2018–19, Ingrid has a salary of £48,900 and savings income of £1,800.
Her income tax liability is:
£
Employment income 48,900
Savings income 1,800

_______
£
50,700

_______

_______
Income tax:
34,500 at 20% 6,900
2,550 (48,900 – 11,850 – 34,500) at 40% 1,020
500 at 0% 0
1,300 (1,800 – 500) at 40% 520
_______
Tax liability 8,440

_______
Ingrid is a higher rate taxpayer, so her savings income nil rate band is £500.
The savings income nil rate band counts towards the basic rate and higher rate
thresholds.
EXAMPLE 4
For the tax year 2018–19, Henri has a salary of £43,000 and savings income of
£10,000. During the year, he made gross personal pension contributions of £4,000. His
income tax liability is:
£

_______
53,000

_______

_______
Income tax:
31,150 (43,000 – 11,850) at 20% 6,230
500 at 0% 0
£
6,850 (38,500 – 31,150 – 500) at 20% 1,370

2,650 (10,000 – 500 – 6,850) at 40% 1,060
_______
Tax liability 8,660

_______
 Henri is a higher rate taxpayer, so his savings income nil rate band is £500.
 The savings income nil rate band of £500 counts towards the basic rate threshold
of £38,500 (34,500 + 4,000).
Savings income can also benefit from the starting rate of 0%. However, the starting rate
only applies where savings income falls within the first £5,000 of taxable income. If non-
savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.
EXAMPLE 5
For the tax year 2018–19, Ali has pension income of £13,600 and savings income of
£6,000. His income tax liability is:
£
Pension income 13,600

£

_______
19,600

_______

_______
Income tax:
1,750 (13,600 – 11,850) at 20% 350
3,250 at 0% 0
1,000 at 0% 0
1,750 (6,000 – 3,250 – 1,000) at 20% 350
_______
Tax liability 700

_______
 Non-savings income is £1,750 (13,600 – 11,850), so £3,250 (5,000 – 1,750) of
the savings income benefits from the starting rate of 0%.
 Ali is a basic rate taxpayer, so his savings income nil rate band is £1,000.
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 is not
necessarily the most beneficial option.
EXAMPLE 6
Samuel and Samantha are a married couple. For the tax year 2018–19, Samuel will
have a salary of £90,000. Samantha will have a salary of £30,000 and savings income
of £1,500.
Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The
remaining £500 of her savings income will be taxable at the rate of 20%. Samuel is a
higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient
savings to Samuel so that he receives £500 of the savings income will therefore save
income tax of £100 (500 at 20%) for 2018–19.
Dividends
The first £2,000 of dividend income for the tax year 2018–19 benefits from a 0% rate.
This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay
tax at the basic, higher or additional rate. However, the dividend nil rate band counts
towards the basic rate and higher rate thresholds.
Dividend income in excess of the £2,000 nil rate band is taxed at 7.5% if it falls below
the higher rate threshold of £34,500, at 32.5% if it falls between the higher rate
threshold of £34,500 and the additional rate threshold of £150,000, and at 38.1% if it
exceeds the additional rate threshold of £150,000.
EXAMPLE 7
For the tax year 2018–19, Ezra has a salary of £59,000 and dividend income of £3,800.
£
Dividend income 3,800

_______
62,800

_______

_______
Income tax:
34,500 at 20% 6,900
12,650 (59,000 – 11,850 – 34,500) at 40% 5,060
2,000 at 0% 0
1,800 (3,800 – 2,000) at 32.5% 585
_______
£
Tax liability 12,545

_______
EXAMPLE 8
For the tax year 2018–19, Erica has a salary of £40,400 and dividend income of £8,200.
£

_______
48,600

_______
£

_______
Income tax:
28,550 (40,400 – 11,850) at 20% 5,710
2,000 at 0% 0
3,950 (34,500 – 28,550 – 2,000) at 7.5% 296
2,250 (8,200 – 2,000 – 3,950) at 32.5% 731
_______
Tax liability 6,737

_______
The £2,000 dividend nil rate band counts towards the basic rate threshold of £34,500.
The order in which tax rates are applied to taxable income is firstly non-savings income,
then savings income and finally dividend income. Deductible interest, trade losses and
the personal allowance should initially be set against non-savings income and then
savings income.
EXAMPLE 9
For the tax year 2018–19, Joe has a salary of £43,000, savings income of £2,000 and
dividend income of £6,000. During the year, he paid interest of £300 which was for a
qualifying purpose. Joe’s employer deducted £6,230 in PAYE from his earnings. The
income tax payable by Joe is:
Non-
savings
income
£ Savings Dividend
income income Total
£ £ £
Employment income 43,000 43,000
Savings income 2,000 2,000
Dividend income 6,000 6,000

_______
51,000
Interest paid (300) (300)
(11,850)
_______ _________
_________ _______
_ _
30,850 6,000
Taxable income 2,000 38,850
_______ _________
_________ _______
_ _
Income tax:
6,170
30,850 at 20%
0
500 at 0%
300
1,500 (2,000 – 500) at 20%
0
2,000 at 0%
1,300
4,000 (6,000 – 2,000) at 32.5%
_______

Non-
savings
income
£ Savings Dividend
income income Total
£ £ £
Tax liability 7,770
PAYE (6,230)

_______
Income tax payable 1,540

_______
 Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
 The dividend nil rate band uses up the remaining basic rate threshold of £1,650
(34,500 – 30,850 – 500 – 1,500).
The savings income and dividend nil rate bands will mean that many taxpayers do not
have any tax liability in respect of savings and dividend income.
EXAMPLE 10
For the tax year 2018–19, Ming has property income of £23,200, savings income of
£700 and dividend income of £1,200. Her income tax liability is:
£
Property income 23,200

£
Savings income 700

_______
25,100

_______

_______
Income tax:
11,350 (23,200 – 11,850) at 20% 2,270
700 at 0% 0
1,200 at 0% 0
_______
£
2,270
Tax liability
_______
Ming is a basic rate taxpayer, so her savings income nil rate band is £1,000. This is
restricted to the actual savings income of £700.
The availability of the dividend nil rate band (together with the savings income nil rate
band) complicates tax planning for married couples and couples in civil partnerships.
EXAMPLE 11
Nigel and Nook are a married couple. For the tax year 2018–19, Nigel will have a salary
of £160,000 and savings income of £400. Nook will have a salary of £60,000 and
dividend income of £3,800.
Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate
band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of
£500. Transferring the savings to Nook will therefore save income tax of £180 (400 at
45%) for 2018–19.
Nook has fully utilised her dividend nil rate band of £2,000, but Nigel’s nil rate band is
unused. Transferring sufficient investments to Nigel so that he receives £1,800 of the
dividend income will therefore save income tax of £585 (1,800 at 32.5%) for 2018–19.
Given the tax rates which apply to dividend income, incorporating the business of a sole
trader or partnership will not result in a substantial tax saving. The rates also impact on
the decision whether to extract profits from a company either as director’s remuneration
or as dividends.
EXAMPLE 12
Sam is currently self-employed. If he continues to trade on a self-employed basis, his

trading profit for the year ended 5 April 2019 is forecast to be £50,000. Based on this
figure, Sam’s total income tax liability and national insurance contributions (NIC) for the
tax year 2018–19 will be £11,999.
Sam is considering incorporating his business on 6 April 2018. The forecast taxable
total profits of the new limited company for the year ended 5 April 2019 will be £50,000.
After paying corporation tax of £9,500, Sam will withdraw all of the profits by paying
himself dividends of £40,500 during the tax year 2018–19.
Sam’s income tax liability will be:
£

_______

_______
Income tax:
2,000 at 0% 0
26,650 at 7.5% 1,999
_______
Tax liability 1,999

£
_______
The total tax cost if Sam incorporates his business is £11,499 (9,500 + 1,999). This is
an overall saving of just £500 (11,999 – 11,499) compared to continuing on a self-
employed basis.
However, incorporation can provide other tax advantages. For example, the corporation
tax rate on profits remaining undrawn within a company is just 19%. This compares to
the higher and additional rates of 40% and 45% which can be payable by a sole trader
or partners.
Transferable amount of personal allowance
The transferable amount of personal allowance (also known as the marriage allowance
or marriage tax allowance) is £1,190 for the tax year 2018–19.
The benefit is given to the recipient as a reduction from their income tax liability at the
basic rate of tax, so the tax reduction is therefore £238 (1,190 at 20%). If the recipient’s
tax liability is less than £238, then the tax reduction is restricted so that the recipient’s
tax liability is not reduced below zero.
EXAMPLE 13
Paul and Rai are a married couple. For the tax year 2018–19, Rai has a salary of
£35,000 and Paul has a trading profit of £8,000. They have made an election to transfer
the fixed amount of personal allowance from Paul to Rai.
Paul’s personal allowance is reduced to £10,660 (11,850 – 1,190), and because this is
higher than his trading profit of £8,000 he does not have any tax liability.
Rai’s income tax liability is:

£

_______

_______
Income tax:
23,150 at 20% 4,630
Personal allowance tax reduction (1,190 at 20%) (238)
_______
4,392
Tax liability
_______
Employment income
Company car benefit
For the tax year 2018–19, the base level of CO2 emissions used to calculate company
car benefits is unchanged at 95 grams per kilometre. However, the base percentage
has been increased from 18% to 20%. There are lower rates for company motor cars
with low CO2emissions:
 For a motor car with a CO2 emission rate of 50 grams per kilometre or less, the
percentage is 13%.
 For a motor car with a CO2 emission rate of between 51 and 75 grams per
kilometre, the percentage is 16%.
 For a motor car with a CO2 emission rate of between 76 and 94 grams per
kilometre, the percentage is 19%.
The percentage rates (including the lower rates of 13%, 16% and 19%) are increased
by 4% for diesel cars, but not beyond the maximum percentage rate of 37%.
The company car benefit information which will be given in the tax rates and allowances
section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:
Car benefit percentage
The relevant base level of CO2 emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars with CO 2 emissions up to this level are:
50 grams per kilometre or less 13%
51 grams to 75 grams per kilometre 16%
76 grams to 94 grams per kilometre 19%
95 grams per kilometre 20%
EXAMPLE 14
During the tax year 2018–19, Fashionable plc provided the following employees with
company motor cars:
Amanda was provided with a new petrol powered company car throughout the tax year
2018–19. The motor car has a list price of £12,200 and an official CO 2 emission rate of
84 grams per kilometre.
Betty was provided with a new petrol powered company car throughout the tax year
109 grams per kilometre.
Charles was provided with a new diesel powered company car on 6 August 2018. The
motor car has a list price of £13,500 and an official CO 2 emission rate of 127 grams per
kilometre.
Diana was provided with a new petrol powered company car throughout the tax year
198 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2018–
19 for the use of the motor car.
Amanda
The CO2 emissions are between 76 and 94 grams per kilometre, so the relevant
percentage is 19%. The motor car was available throughout 2018–19, so the benefit is
£2,318 (12,200 x 19%).
Betty
The CO2 emissions are above the base level figure of 95 grams per kilometre. The
CO2emissions figure of 109 is rounded down to 105 so that it is divisible by five. The
minimum percentage of 20% is increased in 1% steps for each five grams per kilometre
above the base level, so the relevant percentage is 22% (20% + 2% ((105 – 95)/5)).
The motor car was available throughout 2018–19, so the benefit is £3,608 (16,400 x
22%).
Charles
relevant percentage is 30% (20% + 6% ((125 – 95)/5) + 4% (charge for a diesel car)).
The motor car was only available for eight months of 2018–19, so the benefit is £2,700
(13,500 x 30% x 8/12).
Diana
relevant percentage is 40% (20% + 20% ((195 – 95)/5)), but this is restricted to the
maximum of 37%. The motor car was available throughout 2018–19, so the benefit is
£30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the
motor car reduces the benefit.
Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided
with a company van has been increased from £3,230 to £3,350.
Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure which is announced each
year. For the tax year 2018–19, the base figure has been increased from £22,600 to
£23,400.
The percentage used in the calculation is exactly the same as that used for calculating
the related company car benefit.
EXAMPLE 15
Continuing with example 14.
Amanda was provided with fuel for private use between 6 April 2018 and 5 April 2019.
Betty was provided with fuel for private use between 6 April 2018 and 31 December
2018.
Charles was provided with fuel for private use between 6 August 2018 and 5 April 2019.
Diana was provided with fuel for private use between 6 April 2018 and 5 April 2019. She
paid Fashionable plc £600 during the tax year 2018–19 towards the cost of private fuel,
although the actual cost of this fuel was £1,000.
Amanda
19%).
Betty
Fuel was only available for nine months of 2018–19, so the fuel benefit is £3,861
(23,400 x 22% x 9/12).
Charles
The motor car was only available for eight months of 2018–19, so the fuel benefit is
£4,680 (23,400 x 30% x 8/12).
Diana
37%). There is no reduction for the contribution made by Diana since the cost of private
fuel was not fully reimbursed.
Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased
from £610 to £633.
Approved mileage allowances
Approved mileage allowances were previously known as authorised mileage

allowances. The rates themselves are unchanged, with a rate of 45p per mile for the
first 10,000 business miles, and 25p per mile for business mileage in excess of 10,000
miles.
Tax free childcare
A new tax free childcare scheme for working families has been introduced, with this
scheme replacing childcare vouchers.
Childcare vouchers are therefore no longer examinable. The new tax free childcare
scheme is not examinable.
The rules for employer-supported childcare are not affected and continue to be
examinable.
Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a
beneficial loan or from the provision of living accommodation costing in excess of
£75,000.
For exams in the period 1 June 2019 to 31 March 2020, the actual official rate of
interest of 2.5% for the tax year 2018–19 will be used.
Capital allowances
Annual investment allowance
The annual investment allowance (AIA) limit is unchanged at £200,000.
The AIA provides an allowance of 100% for the first £200,000 of expenditure on plant
and machinery in a 12 month period. Any expenditure in excess of the £200,000 limit
qualifies for writing down allowances as normal. The AIA applies to all expenditure on
plant and machinery with the exception of motor cars. The £200,000 limit is
proportionally reduced or increased where a period of account is shorter or longer than
12 months. For example, for the three-month period ended 31 March 2019, the AIA limit
would be £50,000 (200,000 x 3/12).
Motor cars
The motor car CO2 emission thresholds have been reduced:
 The CO2 emissions limit to qualify for a 100% first-year allowance has been
reduced from 75 grams per kilometre to 50 grams per kilometre.
 The CO2 emissions limit to qualify for writing-down allowances at the rate of 18%
has been reduced from 130 grams per kilometre to 110 grams per kilometre.
This means that writing-down allowances at the rate of 18% are available where a
motor car’s CO2 emissions are between 51 and 110 grams per kilometre, and at the rate
of 8% where CO2emissions are over 110 grams per kilometre.
These changes apply from 1 April 2018, and a question will not be set involving the
CO2emission thresholds that applied prior to this date.
Unless there is private use, motor cars qualifying for writing down allowances at the rate
of 18% are included in the main pool, whilst motor cars qualifying for writing down
allowances at the rate of 8% are included in the special rate pool. Motor cars with
private use (by a sole trader or partner) are not pooled, but are kept separate so that the
private use adjustment can be calculated.
The capital allowances information which will be given in the tax rates and allowances
Rates of allowance
Plant and machinery
Main pool 18%
Special rate pool 8%
Motor cars
New cars with CO₂ emissions up to 50 grams per kilometre 100%
CO₂ emissions between 51 and 110 grams per kilometre 18%

Plant and machinery
CO₂ emissions over 110 grams per kilometre 8%
Annual investment allowance
Rate of allowance 100%
Expenditure limit £200,000
EXAMPLE 16
Ling prepares accounts to 31 December. On 1 January 2018, the tax written down value
of plant and machinery in her main pool was £16,700.
The following transactions took place during the year ended 31 December 2018:
Cost/
(proceeds)
£
8 April 2018 Purchased motor car (1) 15,600
14 April 2018 Purchased motor car (2) 10,100
12 August 2018 Purchased equipment 218,750
2 September 2018 Purchased motor car (3) 28,300
19 November 2018 Purchased motor car (4) 16,800
12 December 2018 Sold motor car (2) (8,300)
Motor car (1) purchased on 8 April 2018 has CO2 emissions of 100 grams per kilometre.
This motor car is used by Ling and 20% of the mileage is for private journeys. Motor car
(2) purchased on 14 April 2018 and sold on 12 December 2018 has CO 2 emissions of
135 grams per kilometre. Motor car (3) purchased on 2 September 2018 has
CO2 emissions of 105 grams per kilometre. Motor car (4) purchased on 19 November
2018 has CO2 emissions of 45 grams per kilometre.
Ling’s capital allowance claim for the year ended 31 December 2018 is:
Special
Main Motor
rate Allowances
£ pool car (1)
pool £
£ £
£
WDA brought forward 16,700
Addition qualifying
for AIA

Equipment 218,750
AIA – 100% (200,000)
200,000
_______
18,750
Other
additions
Motor
car (1) 15,600

Motor
car (2) 10,100
Motor
car (3) 28,300
Special
Main Motor
rate Allowances
£ pool car (1)
pool £
£ £
£
(8,300)
Proceeds motor car (2)
______ _______ _______
63,750 15,600 1,800
WDA – 18% (11,475) 11,475

WDA – 18% (2,808) x 80% 2,246
WDA – 8% (144) 144
Addition qualifying
for FYA
Motor
car (4)
16,800
FYA –
(16,800)
100%
_______
0 16,800
______ _______ ________
52,275 12,792 1,656

WDV carried forward
______ _______ ________
Special
Main Motor
rate Allowances
£ pool car (1)
pool £
£ £
£
_________
230,665
Total allowances
_________
 Motor car (1) is kept separately because there is private use by Ling. This motor
car has CO2 emissions between 51 and 110 grams per kilometre and therefore qualifies for
writing down allowances at the rate of 18%.
 Motor car (2) had CO2 emissions over 110 grams per kilometre and therefore
qualifies for writing down allowances at the rate of 8%. Even though it is the only asset in
the special rate pool, there is no balancing allowance on the disposal of this motor car
because the expenditure is included in a pool.
 Motor car (3) has CO2 emissions between 51 and 110 grams per kilometre and
therefore qualifies for writing down allowances at the rate of 18% in the main pool.
 Motor car (4) has CO2 emissions of up to 50 grams per kilometre and therefore
qualifies for the 100% first year allowance.
Leased motor cars
The CO2 emission threshold for leased motor cars has been reduced from 130 grams
per kilometre to 110 grams per kilometre. This means that there is no adjustment where
the CO2emissions of a leased motor car do not exceed 110 grams per kilometre. Where
CO2 emissions are more than 110 grams per kilometre then 15% of the leasing costs
are disallowed in calculating taxable profits.
EXAMPLE 17
Fabio Ltd makes up its accounts to 31 March. On 1 April 2018, the company
commenced the lease of two motor cars. The first motor car has CO 2 emissions of 95
grams per kilometre and was leased at a cost of £4,800 during the year ended 31
March 2019. The second motor car has CO2 emissions of 130 grams per kilometre and
was leased at a cost of £6,000 during the year ended 31 March 2019.
When calculating its taxable profits for the year ended 31 March 2019, Fabio Ltd will
have to disallow leasing costs of £900 (6,000 x 15%).
Allowances for miscellaneous income
Two £1,000 allowances have been introduced which can be used against
miscellaneous trading income and miscellaneous property income. These £1,000
allowances are not examinable.
Cash basis for small businesses
When the cash basis is used, most purchases of equipment are deducted as an
expense. However, the cost of motor cars, land and buildings is not deductible.
Certain other items have been added to the list of non-deductible capital expenditure,
but these items are not examinable.
Property income
Cash basis
The cash basis is now the default basis for calculating property income for individuals
and partnerships. However, it is still possible to opt to use the accruals basis, and the
accruals basis must be used if property income receipts exceed £150,000.
Limited companies continue to use the accruals basis.
In many cases, there will be no difference between the cash basis and the accruals
basis. The following are treated the same under both the cash basis and the accruals
basis:
 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).
 Replacement furniture relief.
 Relief for property income losses.
 Premiums received.
 The restriction to finance costs (see below).
However, rent will be included on a received basis (rather than a receivable basis), with
expenses (such as insurance) deducted on a paid basis (rather than a payable basis).
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.
As for the cash basis for small businesses, most purchases of equipment are deductible
as an expense, with the exception of motor cars, land and buildings. The other items
which have been added to the list of non-deductible expenditure are not examinable.
Use of mileage allowances
Individuals and partnerships can now use HM Revenue and Customs’ (HMRC)
approved mileage allowances when calculating property income. This is as an
alternative to using the actual motor expenses incurred.
EXAMPLE 18
On 6 July 2018, Nim purchased a freehold house. The property was then let throughout
the period 6 July 2018 to 5 April 2019 at a monthly rent of £800, although the rent for
March 2019 was not received until 8 April 2019.
On 6 July 2018, Nim paid property insurance of £600 for the year ended 5 July 2019.
During July 2018, Nim furnished the property with a cooker costing £440. The cooker
was sold during March 2019 for £110, and replaced with a similar model costing £460.
During the period 6 July 2018 to 5 April 2019, Nim drove 80 miles in her motor car in
respect of her property business. She uses HMRC’s approved mileage allowances to
calculate the expense deduction.
Nim’s property income is:
£
Rent received (800 x 8) 6,400

£
Insurance (600)
Replacement furniture relief (460 – 110) (350)
(36)
Mileage allowance (80 miles at 45p)
______

______
 No relief is available for the initial cost of the cooker. Relief for the replacement
cooker is reduced by the proceeds of £110 from the sale of the original cooker.
 Under the cash basis, rent and insurance are calculated on a received and paid
basis. If Nim had instead used the accruals basis, then rent receivable would have been
£7,200 (800 x 9) and insurance payable would have been £450 (600 x 9/12).
Finance costs
Tax relief for finance costs in respect of residential property, such as mortgage interest,
is to be restricted to the basic rate. However, this restriction is being phased in over four
years, and for the tax year 2018–19 only 50% of finance costs are subject to the basic
rate restriction.
It makes no difference whether the finance was used to purchase the property or was
used to pay for repairs.
The restriction does not apply where finance costs relate to a furnished holiday letting or
to non-residential property such as an office or warehouse. The restriction only applies
to individuals and not to limited companies.
The restriction has no impact on basic rate taxpayers.
The 50% finance costs restriction will be given in the tax rates and allowances section
of the examination.
EXAMPLE 19
On 6 April 2018, Fang purchased a freehold house. The property was then let
throughout the tax year 2018–19 at a monthly rent of £1,000.
Fang partly financed the purchase of the property with a repayment mortgage, paying
mortgage interest of £4,000 during the tax year 2018–19.
The other expenditure on the property for the tax year 2018–19 amounted to £1,300,
and this is all allowable.
For the tax year 2018–19, Fang has a salary of £80,000.
Fang’s property income is:
£
Rent received (1,000 x 12) 12,000

Mortgage interest (4,000 x 50%) (2,000)
Other expenses (1,300)

______

______
His income tax liability is:
£

______
88,700
£

______

______
Income tax:
34,500 at 20% 6,900

42,350 at 40% 16,940
______
23,840
Interest relief
(2,000 (4,000 x 50%) at 20%) (400)
______

______
Individual savings accounts

The individual savings account (ISA) investment limit for the tax year 2018–19 is
unchanged at £20,000. The £20,000 limit is completely flexible, so a person can invest
£20,000 in a cash ISA, or they can invest £20,000 in a stocks and shares ISA, or in any
combination of the two – such as £10,000 in a cash ISA and £10,000 in a stocks and
shares ISA.
The availability of the savings 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 rate band means that there is no tax advantage to
receiving dividend income within a stocks and shares ISA for many individuals.
However, chargeable gains made within a stocks and shares ISA are exempt from
capital gains tax. Stocks and shares ISAs are therefore advantageous where
chargeable gains are made in excess of the annual exempt amount.
National insurance contributions (NIC)
Class 1 and class 1A NIC
For the tax year 2018–19, the rates of employee class 1 NIC are unchanged at 12%
and 2%. The rate of 12% is paid on earnings between £8,424 per year and £46,350 per
year, and the rate of 2% is paid on all earnings over £46,350 per year.
The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings
over £8,424 per year. Note that this limit is now aligned with the employee limit.
The rate of class 1A NIC which employers pay on taxable benefits provided to
employees is also unchanged at 13.8%.
Employment allowance
The annual employment allowance for the tax year 2018–19 is unchanged at £3,000.
This can be used by businesses to reduce the amount of employer’s class 1 NIC which
is paid to HMRC. For example, if a business’s total employer’s class 1 NIC for the tax
year 2018–19 is £4,600, then only £1,600 (4,600 – 3,000) will be paid to HMRC. If total
employer’s class 1 NIC is £3,000 or less, then the liability will be nil. The employment
allowance is not available to companies where a director is the sole employee.
The class 1 and class 1A NIC information which will be given in the tax rates and
allowances section of the examination for exams in the period 1 June 2019 to 31 March
2020 is:

Class 1
£1 – £8,424 per year Nil
employee
£8,425 – £46,350 per year 12%
£46,351 and above per year 2%

Class 1
£1 – £8,424 per year Nil
employer
£8,425 and above per year 13.8%
Employment allowance £3,000

Class 1A 13.8%
EXAMPLE 20
Simone Ltd has three employees who are each paid £55,000 per year. One of the
employees was provided with the following taxable benefits during the tax year 2018–
19:
£
Company motor car 6,300
Car fuel 5,850
Living accommodation 1,800

£
The class 1 and class 1A NIC liabilities are:
£
Employee class 1 NIC
37,926 (46,350 – 8,424) at 12% 4,551
8,650 (55,000 – 46,350) at 2% 173

_____
4,724

_____
£
Total employee class 1 NIC (4,724 x 3) 14,172

______
Employer’s class 1 NIC
46,576 (55,000 – 8,424)

6,427
at 13.8%
_____

Total employer’s class 1 NIC (6,427 x 3) 19,281
Employment allowance (3,000)

______
Payable amount 16,281

______
Employer’s class 1A NIC

£
13,950 (6,300 + 5,850 + 1,800)

1,925
at 13.8%
_____
Class 2 NIC
For the tax year 2018–19, the rate of class 2 NIC has been increased to £2.95 per
week.
Class 2 NIC is payable where profits exceed a small profits threshold of £6,205.
Class 4 NIC
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits
between £8,424 and £46,350, and the rate of 2% is paid on all profits over £46,350.
The class 4 NIC information which will be given in the tax rates and allowances section
of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Class 4 £1 – £8,424 per year Nil

£8,425 – £46,350 per year 9%
£46,351 and above per year 2%
EXAMPLE 21
Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2018–19
are respectively £25,000 and £55,000. The class 4 NIC liabilities are:
£
Jimmy 16,576 (25,000 – 8,424) at 9% 1,492

_____
37,926 (46,350 – 8,424) at 9% 3,413

Jenny
8,650 (55,000 – 46,350) at 2% 173
_____
3,586

_____
Pension schemes
Annual allowance
The annual allowance for the tax year 2018–19 is unchanged at £40,000.
The annual allowance is reduced by £1 for every £2 by which a person’s adjusted

income exceeds £150,000, down to a minimum tapered annual allowance of £10,000.
Therefore, a person with adjusted income of £210,000 or more, will only be entitled to
an annual allowance of £10,000 (40,000 – ((210,000 – 150,000)/2) = £10,000).
The definition of adjusted income is net income plus any employee contributions to
occupational pension schemes (these will have been deducted in calculating net
income) plus any employer contributions to either occupational or personal pension
schemes. For the self-employed, adjusted income will simply be net income.
EXAMPLE 22
For the tax year 2018–19, Juliet has a trading profit of £196,000. She has never
previously been a member of a pension scheme.
Juliet’s tapered annual allowance for 2018–19 is £17,000 (40,000 – ((196,000 –

150,000)/2)).
Carry forward
If the annual allowance is not fully used in any tax year, then it is possible to carry
forward any unused allowance for up to three years.
It is still possible to use brought forward unused annual allowances in the tax year
2018–19 if a tapered annual allowance applies for this year. However, it is the tapered
annual allowance for 2018–19 which is used to establish whether any carried forward is
available from this year to future tax years.
Carry forward is only possible if a person is a member of a pension scheme for a

particular tax year. Therefore, for any year in which a person is not a member of a
pension scheme the annual allowance is lost.
EXAMPLE 23
Monica and Nicola have made the following gross personal pension contributions during
the tax years 2015–16, 2016–17 and 2017–18:
Monica Nicola

£ £
2015–16 Nil 46,000
2016–17 32,000 19,000
2017–18 28,000 Nil
Monica was not a member of a pension scheme for the tax year 2015–16. Nicola was a
member of a pension scheme for all three tax years. Neither Monica nor Nicola’s
adjusted income exceeds £150,000 for any tax year.
Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2016–17 and £12,000
(40,000 – 28,000) from 2017–18, so, with the annual allowance of £40,000 for 2018–19,
a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2018–19. She was not a
member of a pension scheme for 2015–16, so the annual allowance for that year is lost.
Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2016–17 and £40,000
from 2017–18, so, with the annual allowance of £40,000 for 2018–19, a total of
£101,000 (40,000 + 21,000 + 40,000) is available for 2018–19. The annual allowance
for 2015–16 is fully utilised, but Nicola was a member of a pension scheme for 2017–18
so the annual allowance for that year is available in full.
The annual allowance for the tax year 2018–19 is utilised first, then any unused
allowances from earlier years with those from the earliest year used first.
EXAMPLE 24
Perry has made the following gross personal pension contributions:
£
2015–16 22,000
2016–17 31,000
2017–18 19,000
2018–19 48,000
Perry’s adjusted income does not exceed £150,000 for any tax year.
The pension contribution of £48,000 for 2018–19 has used all of Perry’s annual
allowance of £40,000 for 2018–19 and £8,000 (48,000 – 40,000) of the unused
allowance of £18,000 (40,000 – 22,000) from 2015–16. Perry therefore has unused
allowances of £9,000 (40,000 – 31,000) from 2016–17 and £21,000 (40,000 – 19,000)
from 2017–18 to carry forward to 2019-20. The remaining unused allowance from
2015–16 cannot be carried forward to 2019–20 because this is more than three years
ago.
EXAMPLE 25
Chong has made the following gross personal pension contributions:
£
2015–16 32,000
2016–17 31,000
2017–18 19,000
2018–19 8,000
Chong’s adjusted income for the tax year 2018–19 is £250,000, but for previous tax
years it did not exceed £150,000.
Chong’s tapered annual allowance for 2018–19 is the minimum of £10,000 because his
adjusted income exceeds £210,000. Chong therefore has unused allowances of £9,000
(40,000 – 31,000) from 2016–17, £21,000 (40,000 – 19,000) from 2017–18 and £2,000
(£10,000 – £8,000) from 2018–19 to carry forward to 2019–20.
Although tax relief is available on pension contributions up to the amount of earnings for
a particular tax year, the annual allowance acts as an effective annual limit. Where tax
relieved contributions are paid in excess of the annual allowance (including any brought
forward unused allowances), then there will be an annual allowance charge. This
charge is subject to income tax at a person’s marginal rates.
EXAMPLE 26
For the tax year 2018–19, Frank has a trading profit of £97,000 and made gross
personal pension contributions of £45,000. He does not have any brought forward
unused annual allowances. Frank’s income tax liability is:
£

_______

_______
Income tax:
79,500 at 20% 15,900
5,650 at 40% 2,260
Annual allowance charge

5,000 (45,000 – 40,000) at 40% 2,000
______
£

_______
 Frank has earnings of £97,000 for 2018–19. All of the pension contributions of
£45,000 therefore qualify for tax relief.
 Frank’s adjusted income is clearly less than £150,000, so the full annual
allowance of £40,000 is available for 2018–19.
 The annual allowance charge of £5,000 is the excess of the pension
contributions over the annual allowance.
 Frank will have paid £36,000 (45,000 less 20%) to the personal pension
company.
 Higher rate tax relief is given by extending the basic rate tax band to £79,500
(34,500 + 45,000).
The amount of annual allowance for the tax year 2015–16 was subject to some complex
transitional rules which meant that it could have actually been more than £40,000. The
transitional rules were not examinable, and you should assume that in any exam
question involving the carry forward of unused annual allowances only an annual
allowance of £40,000 was available for the tax year 2015–16.
The pension scheme information which will be given in the tax rates and allowances
Pension scheme limit
Annual allowance £40,000

Minimum allowance £10,000
Income limit £150,000
The maximum contribution that can qualify for tax relief without any earnings is £3,600.
Lifetime allowance
The lifetime allowance for the tax year 2018–19 has been increased from £1,000,000 to
£1,030,000.
The lifetime allowance applies to the total funds which can be built up within a person’s
pension schemes. Where the limit is exceeded, there will be an additional tax charge
when that person subsequently withdraws the funds in the form of a pension.
Capital gains tax
Annual exempt amount
The annual exempt amount for the tax year 2018–19 has been increased from £11,300
to £11,700.
Rates of capital gains tax
The lower rate and the higher rate of capital gains tax for the tax year 2018–19 are
unchanged at 10% and 20%. The residential property rates are also unchanged at 18%
and 28%. These apply where a gain arising from the disposal of residential property is
not fully covered by the principal private residence exemption.
Chargeable gains are taxed at the lower rate of 10% (or 18%) where they fall within the
basic rate tax band of £34,500, and at the higher rate of 20% (or 28%) where they
exceed this threshold. The basic rate band is extended if a person pays personal
pension contributions or makes a gift aid donation.
EXAMPLE 27
For the tax year 2018–19, Adam has a salary of £41,000. During the year, he made net
personal pension contributions of £4,400. On 15 June 2018, Adam sold an antique table
and this resulted in a chargeable gain of £20,000.
For the tax year 2018–19, Bee has a trading profit of £60,000. On 20 August 2018, she
sold an antique vase and this resulted in a chargeable gain of £19,500.
For the tax year 2018–19, Chester has a salary of £40,000. On 25 October 2018, he
sold a residential property and this resulted in a chargeable gain of £46,500.
Adam
Adam’s taxable income is £29,150 (41,000 less the personal allowance of 11,850). His
basic rate tax band is extended to £40,000 (34,500 + 5,500 (4,400 x 100/80)), of which
£10,850 (40,000 – 29,150) is unused.
Adam’s taxable gain of £8,300 (20,000 less the annual exempt amount of 11,700) is
fully within the unused basic rate tax band, so his capital gains tax liability is therefore
£830 (8,300 at 10%).
Bee
Bee’s taxable income is £48,150 (60,000 – 11,850), so all of her basic rate tax band has
been used. The capital gains tax liability on her taxable gain of £7,800 (19,500 - 11,700)
is therefore £1,560 (7,800 at 20%).
Chester
Chester’s taxable income is £28,150 (40,000 – 11,850), so £6,350 (34,500 – 28,150) of

his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable
gain of £34,800 (46,500 – 11,700) is therefore:
£
6,350 at 18% 1,143

£
28,450 at 28% 7,966

_____
Tax liability 9,109

_____
In each case, the capital gains tax liability will be due on 31 January 2020.
Where a person has both residential property gains and other gains, then the annual
exempt amount and any capital losses should initially be deducted from the residential
property gains. This approach will save capital gains tax at either 18% or 28%,
compared to either 10% or 20% if used against the other gains.
However, how any unused basic rate tax band is allocated between chargeable gains
does not make any difference to the overall capital gains tax liability.
EXAMPLE 28
For the tax year 2018–19, Douglas does not have any income. On 15 June 2018, he
sold an antique vase and this resulted in a chargeable gain of £15,800. On 28 August
2018, he sold a residential property and this resulted in a chargeable gain of £39,200.
Douglas’ capital gains tax liability is:
£
Residential property gain 39,200

£
Annual exempt amount (11,700)

_______
27,500
_______
Other gains 15,800

_______
Capital gains tax:

27,500 at 18% 4,950
7,000 (34,500 – 27,500) at 10% 700
8,800 (15,800 – 7,000) at 20% 1,760
______
Tax liability 7,410

_______
 The annual exempt amount is set against the residential property gain.
 The capital gains tax liability could alternatively be calculated as:
£
15,800 at 10% 1,580
18,700 (34,500 – 15,800) at 18% 3,366
8,800 (27,500 – 18,700) at 28% 2,464

______
7,410

______
Entrepreneurs’ relief
Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part

of a business. For the tax year 2018–19, the lifetime qualifying limit is unchanged at £10
million.
Gains qualifying for entrepreneurs’ relief are taxed at a rate of 10% regardless of the
level of a person’s taxable income.
EXAMPLE 29
On 25 January 2019, Michael sold a 30% shareholding in Green Ltd, an unquoted
trading company. The disposal resulted in a chargeable gain of £800,000. Michael had
owned the shares since 1 March 2012 and was an employee of the company from that
date until the date of disposal.
He has taxable income of £8,000 for the tax year 2018–19.
Michael’s capital gains tax liability is:
£
Shareholding in Green Ltd 800,000

_______
788,300

_______
Capital gains tax: 788,300 at 10% 78,830

_______
Although chargeable gains which qualify for entrepreneurs’ relief are always taxed at a
rate of 10%, they must be taken into account when establishing the rate which applies
to other chargeable gains. Chargeable gains qualifying for entrepreneurs’ relief
therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should initially be deducted from
those chargeable gains which do not qualify for entrepreneurs’ relief (giving preference
to any residential property gains). This approach could save capital gains tax at 20%
(18% or 28% if residential property gains are involved), compared to just 10% if used
against chargeable gains which do qualify for relief.
There are several ways of presenting computations involving such a mix of chargeable
gains, but the simplest approach is to keep chargeable gains qualifying for
entrepreneurs’ relief and other chargeable gains separate.
EXAMPLE 30
On 30 September 2018, Mika sold a business which she had run as a sole trader since
1 January 2012. The sale resulted in the following chargeable gains:
£
Goodwill 260,000
Freehold office building 370,000
170,000
Freehold warehouse
_______
800,000

_______
The warehouse had never been used by Mika for business purposes.
Mika has taxable income of £5,000 for the tax year 2018–19. She has unused capital
losses of £28,000 brought forward from the tax year 2017–18.
Mika’s capital gains tax liability is:
£
Gains qualifying for entrepreneurs’ relief
Goodwill 260,000
Freehold office building 370,000

_______
630,000

_______
Other gains
Freehold warehouse 170,000

£
Capital losses brought forward (28,000)

_______
142,000

_______
130,300

_______
Capital gains tax:

630,000 at 10% 63,000

130,300 at 20% 26,060
_______
89,060
Tax liability
_______
 The capital losses and the annual exempt amount are set against the chargeable
gain on the sale of the freehold warehouse because this does not qualify for entrepreneurs’
relief.
 £29,500 (34,500 – 5,000) of Mika’s basic rate tax band is unused, but this is set
against the gains qualifying for entrepreneurs’ relief.
The capital gains tax information which will be given in the tax rates and allowances
Capital gains tax
Normal rates Residential

property

Lower rate 10% 18%
Higher rate 20% 28%
Annual exempt amount £11,700
Entrepreneurs' relief
– Lifetime limit £10,000,000
– Rate of tax 10%
Inheritance tax
Rates of inheritance tax
The nil rate band for the tax year 2018–19 is unchanged at £325,000.
A residence nil rate band applies where a main residence is inherited on death by direct
descendants (children and grandchildren). For the tax year 2018–19, the residence nil
rate band is £125,000.
The residence nil rate band is only relevant where an individual dies on or after 6 April
2017, their estate exceeds the normal nil rate band of £325,000 and their estate
includes a main residence. Any other type of property, such as a property which has
been let out, does not qualify for the residence nil rate band.
EXAMPLE 31
Sophie died on 26 May 2018 leaving an estate valued at £800,000. Under the terms of
her will, Sophie’s estate was left to her children. The estate included a main residence
valued at £275,000.
The inheritance tax (IHT) liability is:
£
800,000
Chargeable estate
_______
IHT liability
- 450,000 (325,000 + 125,000) at nil% 0
- 350,000 at 40% 140,000
_______
140,000

_______
The residence nil rate band of £125,000 is available because Sophie’s estate included a
main residence and this was left to her direct descendants.
In the same way in which any unused normal nil rate band can be transferred to a
surviving spouse (or registered civil partner), the residence nil rate band is also
transferable. It does not matter when the first spouse died.
EXAMPLE 32
Timothy died on 19 June 2018 leaving an estate valued at £750,000. Under the terms of
his will, Timothy’s estate was left to his children. The estate included a main residence
valued at £350,000.
Timothy’s wife died on 5 May 2007. She used all of her nil rate band.
Timothy’s IHT liability is:
£
750,000
Chargeable estate
_______
IHT liability
- 575,000 (325,000 + 250,000) at nil% 0
- 175,000 at 40% 70,000
_______
70,000

_______
 Timothy’s personal representatives can claim the wife’s unused residence nil rate
band of £125,000.
 The amount of residence nil rate band is therefore £250,000 (125,000 +
125,000).
The value of the main residence is after deducting any repayment mortgage or interest-
only mortgage secured on that property.
If a main residence is valued at less than the available residence nil rate band, then the
residence nil rate band is reduced to the value of the residence.
EXAMPLE 33
Una died on 10 July 2018 leaving an estate valued at £625,000. Under the terms of her
will, Una’s estate was left to her children. The estate included a main residence valued
at £225,000 on which there was an outstanding interest-only mortgage of £130,000.
Una’s IHT liability is:
£
625,000
Chargeable estate
_______
IHT liability
- 420,000 (325,000 + 95,000) at nil% 0
- 205,000 at 40% 82,000
_______
82,000

_______
The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil
rate band is restricted to this amount.
The residence nil rate band does not apply to lifetime transfers becoming chargeable as
a result of the donor’s death within seven years.
EXAMPLE 34
Maud died on 22 April 2018 leaving an estate valued at £725,000. Under the terms of
her will, Maud’s estate was left to her grandchildren. The estate included a main
residence valued at £385,000.
On 30 April 2016, Maud had made a potentially exempt transfer of £400,000 (after the
deduction of annual exemptions) to her son.
IHT liabilities are:
Potentially exempt transfer £
400,000
Potentially exempt transfer
_______
IHT liability
- 325,000 at nil% 0
- 75,000 at 40% 30,000
_______
30,000

_______
Potentially exempt transfer £
Death estate £
725,000
Chargeable estate
_______
IHT liability
- 125,000 at nil% 0
- 600,000 at 40% 240,000
_______
240,000

_______
Given that the residence nil rate band is only available where inheritance is by direct
descendants, rearranging the terms of a will can save IHT.
EXAMPLE 35
Victor has an estate valued at £1,250,000, including a main residence valued at

£450,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2008 and all
of her estate was left to Victor. Under the terms of his will, Victor has left his main
residence to his brother, with the residue of the estate left to his children.
Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 +
325,000). The residence nil rate band is not available because the main residence will
not be inherited by a direct descendant.
Victor could amend the terms of his will so that his brother inherited £450,000 of other
assets, with the main residence being included within the residue. A residence nil rate
band of £250,000 (125,000 + 125,000) would then be available, saving IHT of £100,000
(250,000 at 40%).
There is no reason why Victor’s brother could not purchase the main residence from the
children following Victor’s death.
A question will make it clear if the residence nil rate band is available. Therefore, you
should assume that the residence nil rate band is not available if there is no mention of
a main residence.
A question will not be set where the residence nil rate band is available in respect of a
death occurring during the tax year 2017–18.
The inheritance tax information which will be given in the tax rates and allowances
Inheritance tax: tax rates
Nil rate band £325,000
Residence nil rate band £125,000
Rates of tax on excess

- Lifetime rate 20%
- Death rate 40%
Inheritance tax: taper relief

Inheritance tax: tax rates
Percentage
Years before death
reduction
Over 3 but less than 4 years 20%
Where earlier nil rate bands may be relevant, they will be given to you within the
question.
Corporation tax
Rate of corporation tax

For the financial year 2018, the rate of corporation tax is unchanged at 19%. This single
rate applies regardless of the level of a company’s profits.
EXAMPLE 36
For the year ended 31 March 2019, Simplified Ltd has taxable total profits of £600,000.
Simplified Ltd’s corporation tax liability is £114,000 (600,000 at 19%).
The corporation tax information which will be given in the tax rates and allowances
Rate of tax
- Financial year 2018 19%

Profit threshold £1,500,000
Losses
Previously, a carried forward trading loss had to be relieved against the first available
trading profits. A carried forward property business loss had to be relieved against the
first available total profits.
Losses arising from 1 April 2017 can be relieved on a more flexible basis. Both carried
forward trading losses and carried forward property business losses can now be
relieved against total profits, and it is possible to restrict the amount of loss that is
relieved.
A claim must be made within two years of the end of the accounting period in which the
loss is relieved.
Additionally, a carried forward trading loss or property business loss can now be group
relieved. A carried forward trading loss or property business loss can only be
surrendered as group relief to the extent it cannot be set off against the surrendering
company’s own total profits.
EXAMPLE 37
Flexible Ltd commenced trading on 1 April 2017. The company’s results are:
Year ended Year ended

31 March 2018 31 March 2019

£ £
Trading profit/(loss) (78,200) 43,800
Property business income/(loss) (13,600) 15,700
Chargeable gain 0 18,900
Qualifying charitable donation 0 (800)
Flexible Ltd’s taxable total profits for the year ended 31 March 2019 are:

£
Trading profit/(loss) 43,800
Property business income 15,700
Chargeable gain 18,900

______
78,400
Loss relief (77,600)

Qualifying charitable donation (800)

______
Taxable total profits 0

______
 The claim for loss relief must be made by 31 March 2021.

 The unrelieved losses of £14,200 (78,200 + 13,600 – 77,600) will be carried
forward against total profits.
 If there had been any 75% group companies, then the unrelieved losses could
have been surrendered as group relief.
The basis of relieving capital losses is unchanged, so carried forward capital losses can
only be relieved against the first available chargeable gains
There is also no change to any other loss reliefs. A trading loss or a property business
loss can therefore be relieved against total profits of the same accounting period. A
trading loss can then be set against total profits of the previous 12 months. It is normally
beneficial to claim loss relief as early as possible, but it may be worthwhile claiming
against future total profits if this means that qualifying charitable donations can be
relieved.
EXAMPLE 38
Giver Ltd commenced trading on 1 April 2017. The company’s results are:

31 March 2018 31 March 2019

£ £
Trading profit/(loss) (18,200) 47,300
Property business income 13,400 12,200

Chargeable gain 5,100 0
Qualifying charitable donation (3,000) 0
Current year loss relief claim against total profits

31 March 2018 31 March 2019

£ £
Trading profit 0 47,300

_______ _______
18,500 59,500
Loss relief (18,200) 0
Qualifying charitable donation (300) 0

_______ _______
Taxable total profits 0 59,500

_______ _______
Carry forward loss relief claim against total profits

31 March 2018 31 March 2019
£ £
Trading profit 0 47,300

_______ _______
18,500 59,500
Loss relief 0 (18,200)
Qualifying charitable donation (3,000) 0

_______ _______
Taxable total profits 15,500 41,300

_______ _______
 Claiming loss relief on this basis means that taxable total profits over the two
years are £2,700 (59,500 – 15,500 – 41,300) lower.
 It is not possible to claim £2,700 of the loss against taxable total profits for the
year ended 31 March 2019, with £15,500 then claimed against total income for the year
ended 31 March 2018 – leaving sufficient total income to offset the qualifying charitable
donation of £3,000.
A restriction on the amount of carried forward losses that can be offset has been
introduced, but, given that this only applies to companies with profits in excess of £5
million, this restriction is not examinable at TX-UK.
A question will not be set involving carried forward losses arising prior to 1 April 2017.
Indexation allowance
An indexation allowance is given when calculating chargeable gains for a limited
company. However, the indexation allowance has been frozen at December 2017. This
means that:
 When an asset is purchased prior to December 2017 and subsequently sold,

then the indexation allowance will be given from the month of acquisition up to December
2017.
 When an asset is purchased from January 2018 onwards and subsequently sold,
then no indexation allowance will be available.
As far as TX-UK is concerned, where the indexation allowance is available then just
indexation factors will be provided. Indexation factors (rounded to three decimal places)
will also be provided where a share pool is involved. The calculation of the indexation
factors themselves is no longer examinable.
You will still be expected to know that the indexation allowance cannot create or
increase a capital loss.
EXAMPLE 39
Delta Ltd sold a factory on 15 February 2019 for £420,000. The factory was purchased
on 24 October 1995 for £164,000, and was extended at a cost of £37,000 during March
2018.
Indexation factors are as follows:
October 1995 to December 2017 0.856
October 1995 to February 2019 0.899
March 2018 to February 2019 0.029

£
Disposal proceeds 420,000
Cost (164,000)
Enhancement expenditure (37,000)

________
219,000
Indexation allowance (164,000 x 0.856) (140,384)

________
78,616

________
There is no indexation allowance for the enhancement expenditure of £37,000 because

this was incurred after December 2017.
Loan relationship rules as regards interest payable

Although not a Finance Act change, for exams in the period 1 June 2019 to 31 March
2020 onwards you will be expected to be able to identify whether loan interest payable
is for trading or for non-trading purposes.
Trade purposes include loans used to:
 Purchase plant and machinery.

 Provide working capital.
 Purchase property used for trading purposes such as an office, warehouse or
factory.
Non-trade purposes include loans used to:
 Purchase property which is then let out.

 Acquire the share capital of another company.
Administration
Late payment interest and repayment interest
The assumed rates of late payment interest and repayment interest on underpaid and
overpaid income tax, class 4 NIC, capital gains tax and corporation tax are based on the
actual rates in force (for income tax purposes) at 6 April 2018. For exams in the period 1
June 2019 to 31 March 2020, the assumed rate of late payment interest will therefore
be 3.00% and the assumed rate of repayment interest will be 0.5%. Note that the rate of
late payment interest (3.00%) is not the same as the official rate of interest (2.50%).
Value added tax (VAT)
Registration and deregistration limits
The limit of annual turnover above which VAT registration is compulsory is unchanged
at £85,000. The deregistration limit is also unchanged at £83,000.
Standard rate of VAT
The standard rate of VAT is unchanged at 20%.
EXAMPLE 40
Gwen is in the process of completing her VAT return for the quarter ended 31 March
2019. The following information is available:
 Sales invoices totalling £128,000 were issued in respect of standard rated sales.
 Standard rated materials amounted to £32,400.
 Standard rated expenses amounted to £24,800.
 On 15 February 2019, Gwen purchased machinery at a cost of £24,150. This
figure is inclusive of VAT.
Unless stated otherwise, all of the above figures are exclusive of VAT.
VAT Return – Quarter ended 31 March 2019
£
Output VAT
Sales (128,000 x 20%) 25,600
Input VAT
Materials (32,400 x 20%) (6,480)
Expenses (24,800 x 20%) (4,960)

£
Machinery (24,150 x 20/120) (4,025)

_______
VAT payable 10,135

_______
Written by a member of the Taxation – United Kingdom (TX-UK) examining team

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Rates of income tax

Normal rates Dividend rates

Basic rate £1 to £34,500 20% 7.5%

Higher rate £34,501 to £150,000 40% 32.5%

Savings income nil rate band

Dividend nil rate band £2,000

The personal allowance for the tax year 2018–19 is £11,850.

Trading profit 184,000

Taxable income 184,000

No personal allowance is available because June’s adjusted net income of £184,000

Trading profit 159,000

Personal allowance (8,350)

Taxable income 150,650

Employment income 48,900

Savings income 1,800

Personal allowance (11,850)

Taxable income 38,850

Tax liability 8,440

Employment income 43,000

Savings income 10,000

Personal allowance (11,850)

Taxable income 41,150

6,850 (38,500 – 31,150 – 500) at 20% 1,370

Tax liability 8,660

Pension income 13,600

Savings income 6,000

Personal allowance (11,850)

Taxable income 7,750

Tax liability 700

Employment income 59,000

Dividend income 3,800

Personal allowance (11,850)

Taxable income 50,950

Tax liability 12,545

Employment income 40,400

Dividend income 8,200

Personal allowance (11,850)

Taxable income 36,750

Tax liability 6,737

Employment income 43,000 43,000

Savings income 2,000 2,000

Dividend income 6,000 6,000

Interest paid (300) (300)

Tax liability 7,770

Income tax payable 1,540

Property income 23,200

Savings income 700

Dividend income 1,200

Personal allowance (11,850)

Taxable income 13,250

Sam is currently self-employed. If he continues to trade on a self-employed basis, his

Sam’s income tax liability will be:

Dividend income 40,500

Personal allowance (11,850)

Taxable income 28,650

Tax liability 1,999

Transferable amount of personal allowance

__ _ ______