Income Tax - Annotated

Advanced Taxation (ATX) – FA 2021
Income Tax
Fiscal Year (FY) 2021/2022
(6 April 2021 ------------------------------------- 5 April 2022)
Sources of income for an individual person
1 Property income xxx
2 Employment income xxx
3 Trading Income xxx
4 Interest income xxx
5 Dividend income xxx
6 Pension xxx
Total income xxx
Less: Qualifying Interest (xx)
Net Income xxx
Less: Personal allowance (PA) (xx)
Taxable income xxx
Income Tax Rates

Basic Rate - £1 ---------------- £37,700 20%
High Rate - £37,701 ---------------- £150,000 40%
Additional Rate - £150,000 ---------------- above 45%
Few examples that how to find taxable income, applying tax rates and calculating income tax liability:
Example 1: Total income £30,000 Required: Taxable income?
Total income =
L: PA =
Taxable income =
Example 2: Total income £10,000 Required: Taxable income?
Total income =
L: PA =
Taxable income =
Example 3: Total income £35,000 Required: Income tax liability?
Total income =
L: PA =
Taxable income =
Example 4: Total income £57,850 Required: Income tax liability?
Total income =
L: PA =
Taxable income =
Example 5: Taxable income £112,000 Required: Income tax liability?
Total income =
L: PA =
Taxable income =
Total income =
L: PA =
Taxable income =
Total income =
L: PA =
Taxable income =
What is qualifying interest?
It is an interest paid on → loan → taken out due to any of the following reasons;
1. To pay inheritance tax

2. To purchase the asset to be used in employment
3. To purchase the share of partnership
4. To purchase the asset, owned by individual, but used in business
5. To purchase the shares of a “Close Company”
Close Company: any company which is
- Controlled by 5 or less shareholders (should be individual shareholders) or

- All shareholders are directors of the company
- It should not be a public limited company
Employment Income (E.I)
Cash earnings Benefits Deductions
Add/Increase E.I Deduct/Decrease E.I
Taxable Exempt
Add/Increase E.I Do nothing/Ignore
Cash earnings include:
Salary
Commission
Bonus
These are taxable on Receipt Basis → @ Earliest of: Entitled for Income Or Cash received
Benefits:
Taxable benefits → Calculation methodology

Exempt benefits → List down
Deductions:
As allowed by HMRC and these will reduce employment income

Taxable Benefits
Car Benefit
- It is calculated when an employer provides car to employee
- Car benefit = Cost of car * CO2 emission % * No. of months
- Car benefit is month apportioned
- No business and private use distinction
- Employees’ reimbursement (Partial or Full) is allowed to be deducted from car benefit if he
reimbursed employer against the use of the car
Cost of car:
Undiscounted list price xxx
Add: Any improvement incurred before 6 April 2020 xxx
Less: Capital contribution by employee in purchasing the car (xx) → Max. £5,000
Cost of car xxx
Note: All improvements which incurred before start of FY are to be added to cost of car, except the
following;
- Installation of cell phone in the car
- Any personal equipment for disabled person

Car benefit percentage
CO2 Emissions For Electric Cars:
1% (Electric-powered motor cars with zero CO2 emissions)
CO2 Emissions For Hybrid Cars:
Electric motor cars with CO2 emissions between
- 1 g/km – 50 g/km, the electric range of a motor car is relevant in determining the car benefit
percentage, as follows:
Electric range
130 miles or more 1%
70 to 129 miles 4%
40 to 69 miles 7%
30 to 39 miles 11%
Less than 30 miles 13%
- 51 g/km – 54 g/km 14%
- 55g/km 15%
- 55g/km – above (xxx – 55) / 5 = xxx % (Round down)
- The percentage rates (including the lower rate of 13) are increased by 4% for diesel cars which
do not meet the real driving emissions 2 (RDE2) standard.
- Company diesel cars meeting the RDE2 standard are treated as if they were petrol cars.
- Car benefit percentage cannot go 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 2022 to 31 March 2023 is:
Question: During the tax year 2021–22, Fashionable plc provided the following employees with
company motor cars:
Amanda was provided with a hybrid-electric company car throughout the tax year 2021–22. The motor
car has a list price of £32,200, an official CO2 emission rate of 24 grams per kilometre and an electric
range of 90 miles.
Betty was provided with a new diesel-powered company car throughout the tax year 2021–22. The
motor car has a list price of £16,400 and an official CO2 emission rate of 104 grams per kilometre. The
motor car meets the RDE2 standard.
Charles was provided with a new diesel-powered company car on 6 August 2021. The motor car has a
list price of £13,500 and an official CO2 emission rate of 107 grams per kilometre. The motor car does
not meet the RDE2 standard.
Diana was provided with a new petrol-powered company car throughout the tax year 2021–22. The
motor car has a list price of £84,600 and an official CO2 emission rate of 183 grams per kilometre. Diana
paid Fashionable plc £1,200 during the tax year 2021–22 for the use of the motor car.
Fuel Benefit
- It is calculated when an employer provides fuel to employee

- Fuel benefit must be months apportioned
- Employees’ reimbursement (only Full reimbursement) is allowed to be deducted from fuel
benefit. Hence, there would be no benefit in that scenario.
- Fuel benefit = (Fuel Scale Charge £24,600) * (CO2 emission % as used in car benefit) * x/12
Question: Continuing with data given in above question:
Amanda was provided with fuel for private use between 6 April 2021 and 5 April 2022.
Betty was provided with fuel for private use between 6 April 2021 and 31 December 2021.
Charles was provided with fuel for private use between 6 August 2021 and 5 April 2022.
Diana was provided with fuel for private use between 6 April 2021 and 5 April 2022. She paid
Fashionable plc £600 during the tax year 2021–22 towards the cost of private fuel, although the actual
cost of this fuel was £1,000.
Ancillary Benefits of Car
Apart from car and fuel benefit, an employer may also provide the following ancillary benefits of car
which are exempt, except of the provision of Chauffer / Driver that is taxable benefit as it costs to
employer.
Exempt ancillary benefits of car:
- Repair
- Maintenance
- Insurance
- Tracker
- Road tax
- Car parking
Company Van – Usage Benefit
- It is calculated when an employer provides van to employee
- Van’s carriage capacity = 2,500 Lbs above
- Van benefit must be month apportioned
- Reimbursements are not allowed
- There is no calculation for van benefit
- It is a fixed and notional amount of £3,500
- Vans producing zero CO2 emissions (zero emission vans) have a zero-benefit charge.
Company Van – Fuel Benefit
- Van fuel benefit must be month apportioned
- Reimbursements are not allowed
- There is no calculation for van fuel benefit
- It is a fixed and notional amount of £669
- There is no fuel benefit for a company van which produces zero CO2 emissions (a zero emission
van).
Accommodation Benefit
- It is calculated when as employer provides accommodation to employee.
- There may be two types of accommodation as follows:
Employer owned property Rented property

There may be 2 benefits calculations here Means, employer paying the rent of property for
employee accommodation.
1. Accommodation benefit = Annual rental value
In this case, the accommodation benefit would
be the Higher of;
2. Expensive accommodation benefit
- Annual rental value
- Rent paid by employer
- Accommodation benefit is months apportioned.

- Reimbursements (Partial of Full) are allowed to be deducted.
Concept of expensive / additional accommodation benefit:

- It is calculated when as employer provides accommodation to employee in that property which
he purchased for more than £75,000
- Expensive accommodation benefit is calculated as follows:
(Value of property - £75,000) * (Official rate of interest of 2%) * (No. of months)
Concept of Value of property:

Which value to be used in above calculation?
Let’s take a general understanding as follows:
Value of property
(Cost + Improvements before 6 April 2021) Market Value
It is used when cost is more than 6 years old

It is used when cost is less than 6 years old when
when property was first time provided to
property was first provided to employee.
employee.
Example: Example:
Property purchase on 1 Jan 2008 for £125,000. Property purchase on 1 Jan 2008 for £125,000.
It was provided to employee on 1 Jul 2009 when It was provided to employee on 1 Jul 2016 when
its M.V was £145,000. its M.V was £195,000.
Which value of property to be used in the Which value of property to be used in the
calculation of exp accommodation benefit? calculation of exp accommodation benefit?
Ancillary Benefits of Accommodation
The following are examples of taxable ancillary benefits of accommodation:
- Utility bills
- Domestic helpers
- Generator fuel
- Repair
- Maintenance
- Council tax
- Water charges
- Heating
- Lighting
- Cleaning
- Decoration of the premises
Job Related Accommodation
There is no taxable benefit in respect of job-related accommodation.
Accommodation is job related if accommodation is:
(a) Necessary for the proper performance of the employee's duties, or
(b) Provided for the better performance of the employee's duties and the employment is of a kind
in which it is customary for accommodation to be provided, or
(c) Provided as part of arrangements of a special threat to the employee's security.
Asset Usage Benefit
- It is calculated when an employer provides any of the following assets on temporary basis to the
employee:
- Laptop
- Mobile
- Generator
- Furniture
- T.V
- A.C
- PS
- Etc…
- It is calculated as:
Cost of asset * 20% (fixed) * x/12
- No business or private use distinction.

- Reimbursements (Partial of Full) are allowed.
Asset Purchase Benefit
- It is calculated when an employee purchases an asset from his employer at less than M.V.
- The asset could be the old asset or a new asset.
- Higher-off from the following would be considered as asset purchase benefit:
Method 1 Method 2
M.V xxx Cost xxx
L: Cash paid (xx) L: Benefit taxed to date (xx)
Benefit xxx xxx
L: Cash paid (xx)
Benefit xxx
Example:
Employer provides an asset to employee for use on 6 April 2019 which had a cost of £10,000. On 31
December 2021, employee purchased that asset from employer by paying a price of $3,000 when its
M.V was £4,500.
Required:
1. Asset usage benefit for the FY 21/22?
2. Asset purchase benefit for the FY 21/22?
3. Total benefit for the FY 21/22?
Asset Gift Benefit
- It is calculated when an employee gets an asset from his employer for fee.
- The asset could be the old asset or a new asset.
- Higher-off from the following would be considered as asset purchase benefit:
Method 1 Method 2
M.V xxx Cost xxx
L: Cash paid NIL L: Benefit taxed to date (xx)
Benefit xxx xxx
L: Cash paid NIL
Benefit xxx
Example:
Employer provides an asset to employee for use on 6 April 2019 which had a cost of £10,000. On 31
December 2021, employee gets that asset from employer for free when its M.V was £4,500.
Required:
1. Asset usage benefit for the FY 21/22?
2. Asset gift benefit for the FY 21/22?
3. Total benefit for the FY 21/22?
Loan Benefit
- It is calculated when an employer provides loan to an employee

- Interest free
- Or at a rate which is less than the official rate of interest of 2%
- Loan benefit would be the LOWER of the following two:
Accurate method Average method
Outstanding loan * official rate * x/12 = xxx Average loan * official rate * x/12 = xxx
L: Interest paid by employee = (xx) L: Interest paid by employee = (xx)
Loan benefit = xxx Loan benefit = xxx
Example:
Mr. A (employee) took a loan of £ 100,000 from his employer on 1 Jan 2021.
He rapid the loan as follows:

£30,000 on 1 Jul 2021
£45,000 on 1 Jan 2022
£25,000 on 1 July 2022
Required: Loan benefit for FY 21/22?

Other Taxable Benefits
- Any facility/activity owned by employer (e.g. gymnasium), if;
- Only for employees → exempt benefit
- Outsiders are also allowed to avail that facility against a price, and then it would become
a taxable benefit to employee. Direct cost to employer would be the taxable benefit to
employee.
- Example: Employer has a gymnasium and employees may use this facility without pying
any consideration. However, the outsiders can also avail this facility by paying a fee of
£1,000.
Break-up of above selling price is → Direct cost = £400

Overheads = £450
Profit = £150
Required: Amount of taxable benefit for employee?
- Club membership, Education fee and Medical insurance are taxable benefits for an employee at
cost to employer.
Exempt Benefits
1. Small loans totaling not more than £10,000 in one year
2. Subscription of professional association by employer
3. Employers contribution to a registered Pension Scheme
4. Use of Free or Subsidized canteen, if available to all employees
5. Gifts from third parties, costing not more than £250 in a year from one source. If exceed,
whole amount is taxable.
6. Entertainment (seats to sporting/cultural) events provided by third parties.
7. Free car parking space near office (including reimbursements)
8. One mobile phone
9. Work buses, subsidies to public transport, bicycle and its safety equipment (aimed to
encourage employees not to use cars)
10. Employer funded training – both full time and part time, to increase employees’ skills. For full
time £15,000 limit. If exceeds whole is taxable
11. Festival parties, annual dinners for staff up to £150 per person. If exceed whole is taxable.
12. First £8,000 of removal / relocation expenses.
13. Medical insurance when employee is working abroad
14. Expenses on overnight stay on company business exempt up to £5 per night in UK, and £10 on
international travel. If exceed, whole is taxable.
15. Employee liability insurance
16. Home worker’s additional household expense - Payments towards costs of working from home
(no need of supporting documents if upto £6 per week or £26 per month)
17. Work place nurseries for children (without any limit)
18. Upto £55 per week for BRTP, upto £28 per week for HRTP and upto £25 per week of childcare
is exempt
19. Long service awards in kind (e.g. gold watches) to mark employment of 20 years or more are
exempt up to a cost of £50 for each year of service.
20. An annual £500 exemption per employee where an employer pays for medical treatment
21. Trivial benefits (cost less than £50/employee, not cash nor cash voucher)
Further discussion on important points from above list:

Point (2)
Subscription of professional association
If paid by
His employer Employee himself
Exempt benefit for employee Deduction from employment income
Point (3)
Registered Pension Scheme
If Contributed by
His employer Employee himself
Exempt benefit for employee Deduction from employment income

Point (17 & 18)
Childcare
If
Employer has its own daycare center Employer paying charges of a daycare, then it is
exempt as follows;
Upto £55/week for BRTP

Exempt benefit for employee Upto £28/week for HRTP
Upto £55/week for ARTP
If exceed, then excess would be taxable
Deductions From Employment Income

✓ Contribution by employee to occupational pension scheme (as discussed earlier)
✓ Professional subscriptions in case where employee paying himself (as discussed earlier)
✓ Give As You Earn (GAYE / Payroll giving) → Charity Donation, paid by employee via employer
✓ Any expenses bear by employee wholly, exclusively, and necessarily for the performance of
duties
✓ Approved Mileage Allowances (first 10,000 miles @ 45 p/mile, above @ 25 p/mile)
Approved Mileage Allowance

Car:
- It is applicable when an employee uses his own vehicle for official purposes
- Then, employer is required to reimburse the amount to employee on business miles as follows;
0 -------- £10,000 business miles = 45 p/mile

£10,000 -------- above business miles = 25 p/mile
- But employer can pay excess or lower amount as compared to that it should have been
according to above calculation
- If employer reimburse excess amount → termed as → Net mileage BENEFIT →

Treatment → Add to employment income
- If employer reimburse lower amount → termed as → Net mileage ALLOWANCE →

Treatment → Deduct from employment income
Motorcycle → 24 pence/mile Cycle 20 pence/mile

Example
Mr. A drove his own vehicle for a total 20,000 miles of which 70% pertains to official purposes.
Requirements:
1. Find business miles?
2. Calculate the amount of mileage allowance according to standard reimbursements?
3. Find Net Mileage and their tax treatment considering the following;
A. Employer reimburse @30p/mile B. Employer reimburse @43p/mile
Concept of Passenger Rate: If you are using your own motor car, motorcycle or cycle, and carrying
a passenger in it (staff/customer/supplier) on the request on employer for official purpose, then
HMRC gives further allowance of 05 pence/mile.
If employer reimbursed the amount against passenger rate, then it will reduce the allowance but
cannot create benefit.
Share Options
Event Approved Unapproved
1 - Option Grant No Tax Implications at grant date
M.V (@exercise date) XX M.V (@exercise date) XX
L: (Exercise price L: (Exercise price

2 - Option Exercise + +
Cash pay for option) (X) Cash pay for option) (X)
Benefit (Exempt) XX Benefit (Taxable) XX
Sale proceeds x Sale proceeds x

L: Cost L: Cost
(Exercise price (Exercise price
+ +
3 - Shares Transfer/
Benefit taxed Benefit taxed
Sale
@ exercise, if any, @ exercise, if any,
+ +
Cash paid for option) (x) Cash paid for option) (x)
Gain x Gain x
Approved Share Options:
1. Company Share Option Plan Abbreviated as → (CSOP)

2. Enterprise Management Incentive Abbreviated as → (EMI)
3. Save As You Earn Abbreviated as → (SAYE)
4. Share Incentive Plan Abbreviated as → (SIP)
Question 1:
Income tax Implications for Duncan for tax year 2021/22 will be?
Duncan McByte is a computer programmer living in Scotland. He has recently accepted offer of a
contract of employment with Mainframe plc (a large company worth over £50 million) for a period of
three years commencing on 1 July 2021. Duncan will be based in London during the period of the
contract. The remuneration package comprise of;
a) A salary of £108,000 pa, together with a termination bonus of £40,000 upon satisfactory
completion of the contract.
b) Mainframe plc will provide a flat for Duncan in London. It was purchased in year 2007 for
£135,000 and was improved at a cost of £45,000 during 2008. It has a rate able value of £36,000
and is currently valued at £320,000. The furniture in the apartment has cost Mainframe £21,000
and the company will also bear running costs of £6,000pa.
c) Duncan used his private motor car for business mileage till December 2021. The motor car is
leased at a cost of £980 per month, and annual running costs including fuel of £5,600. He drives
a total of 1,700 miles per month, of which 1,500 miles are for business purposes. Mainframe plc
pays a mileage allowance of 30 pence per mile for business mileage.
d) From January 2022, Duncan was provided a new diesel-powered car along with fuel for official
and personal use. The car is a hybrid-electric car with official CO2 emission of 43 g/km and an
electric range of 50 miles and company had purchased it at a 10% discounted value paying
£28,800. Duncan had to make a capital contribution of £7,000 for the purchase of the car, and
was further required to pay £300 and £100 monthly for personal use of the car and fuel.
e) On 1 July 2021, Mainframe provided Duncan with a loan of £60,000 to purchase a holiday
cottage in France. The loan is on 1% interest pa and will be repaid in six half yearly installments
of £10,000 each.
f) An allowance of £14 per night was given to Duncan for 35 nights, to cover miscellaneous
expenses while he was away on business trips to other cities within the country.
g) The company had negotiated group membership of a nearby gymnasium. Duncan availed
himself of this benefit paying £350 per month compared with a normal monthly membership
fee of £750.
h) Mainframe will pay for Duncan’s annual subscription of £125 pa to the Institute of Chartered
Computer Consultants, an approved professional body. Duncan will pay £200 per month for
riding club membership starting from July 2020. Mainframe will pay £1,200 for liability insurance
of Duncan, and £1,800 for his golf club subscription (which costs £2,200 if he had taken it
himself).
i) Duncan was provided child benefit of £100/week by his employer during the year for 20 weeks.
j) On 1 July 2021 Duncan was granted options to purchase 15,000 £1 ordinary shares of
Mainframe plc at their value of that date. The options were provided free of cost and will be
exercised by Duncan upon termination of his contract. Mainframe’s shares are quoted at £1.70
on 1 July 2021 and are estimated to be worth £5 at termination of his contract. These options
are approved by HMRC.
Solution - Q1:
Further Discussion on Point “j” from “Q1” above:
j) On 1 July 2021 Duncan was granted options to purchase 15,000 £1 ordinary shares of
Mainframe plc at their value of that date. The options were provided free of cost and will be
exercised by Duncan upon termination of his contract. Mainframe’s shares are quoted at £1.70
on 1 July 2021 and are estimated to be worth £5 at termination of his contract. These options
are approved by HMRC.
Question 2
Calculate her income tax liability for the year.
Zara is employed as Finance Manager in Newco Ltd since 2008 at annual salary of £60,000. She paid
£350 per month to the company’s occupational pension scheme and tax of £12,165 under the PAYE
system during 2021/22.
She is provided a rent-free flat since 2009 with annual rental value of £30,000. Newco Ltd. had bought
the flat in July 2009 for £178,000 and incurred a subsequent capital expense of £12,000 in August 2010
to improve the flat. Market value of the flat was £425,000 in early 2021. She is also provided a laptop
computer costing £2,500 for personal use.
During the year Newco Ltd paid £3,500 into her occupational pension plan. Zara had agreed with her
employer that the company would deduct £90 a month during the whole of 2021/22 in respect of
charitable payments under the payroll deduction scheme. In December 2021 she paid £215 membership
fees to ACCA, a HMRC approved professional body.
In addition, the company also paid £750 to the local golf club in respect of her yearly membership. She
was provided a new diesel car for personal and official use with fuel having cost of £32,600 with official
CO2 emission of 157 g/km from 1 October 2021. The motor car meets the RDE2 standard. Newco Ltd
gave her a mileage allowance of 55p per mile for the 6,000 business miles traveled by her in own car till
September 2021.
Employment Income ➔ National Insurance Contribution (NIC):
It’s a State pension payment

2 types of NICs in employment income are Class 1 NIC and Class 1A NIC.
1. Class 1 NIC → paid by both the employee and employer on “Gross Cash Earnings” as follows;
Class 1 Employee Class 1 Employer
£1 – £9,568 per year Nil £1 – £8,840 per year Nil
£9,569 – £50,270 per year 12.0 % £8,841 and above per year 13.8 %
£50,271 and above per year 2.0 % *Employment allowance £4,000
What are gross cash earnings?
Cash earnings (salary + commission + bonus) xxx

Add:
Taxable benefits received in the form of cash
(Net mileage BENEFIT* + excess relocation + travel reimbursement + WFH allowance) xxx
Gross Cash Earnings xxx
NOTES:
- *Net Mileage Benefit → For NIC purpose, allowance is always @45p/mile (i.e., no 25p scene)
- Exempt benefits and any deductions are ignored for NIC purposes.
2. Class 1A NIC → Only the employer pays Class 1A NIC on “Net Taxable Benefits” amount @
13.8%.
What are net taxable benefits?
All taxable benefits not covered in gross cash earnings.
Share Options @ Exercise - Unapproved
Class 1 → Quoted Company Shares (are considered as a liquid asset – readily

converted into cash)
Class 1A → Un – Quoted Company Shares (are not considered as liquid asset – not
Readily converted into cash)
Calculating NICs – Q2
*Employment Allowance → Available to Employer → On Total Class 1 Employer NIC
For Example: There are 100 employees
Class 1 employer NIC – For Employee 1 XXX

. .
. .
. .
Total Class 1 Employer NIC XXX
Less: Employment Allowance (4000)
Class 1 Employer NIC Payable XXX
For the tax year 2021-22, the employment allowance is not available:
• To companies where a director is the sole employee.
• Where employers’ contributions are £100,000 or more for the previous tax year.
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 2022 to 31 March 2023.
Termination / Redundancy Payment:
Partially Exempt /
Taxable Exempt
Partially Taxable
Regular Emoluments Ex-gratia payments Statutory redundancy payment
Notice pay / contractual pay Golden handshake Payments due to sickness,

death
Covenant pay Compensation for loss of office
Damages for breach of contract Lump-sum payment from

approved Pension
Wrongful dismissal
Redundancy payments including

benefits
Partially Exempt:
First 30,000 is exempt (but this limit is reduced by statutory redundancy payment)
Example:
Mr. A received the following:

Covenant pay £10,000
Statutory Redundancy Pay £4,000
Golden handshake £32,000
Explain the tax implications of above payments.

Question3
Calculate his Income tax liability of 2021/22 and 22/23, assuming he has no other income and rates of
tax for both years are the same as of 2021/22.
Peter Pan was employed by Flick plc, an unquoted company, at an annual gross salary of £60,000. He
was dismissed on 15 February 2022, and on that day was paid salary for the remaining days of February,
along with advance salary for next month, as per his contract.
Additionally, he received redundancy payments of £65,000. This amount included statutory redundancy
payment of £2,800, holiday pay of £1,800 and £6,000 for agreeing not to work for a rival company. The
balance of payment was compensation for loss of office; £10,000 out of the amount was not paid till 31
May 2022.
During his employment, he was provided with diesel driven car (RDE2 standard) costing £22,000 with
official CO2 emission of 127 g/km with Fuel. On his dismissal, he was allowed to keep the car till 30 June
2022 with fuel provided by Flick plc.
Interest Income
- Income received from investment in bank, loan notes/debentures or building society account
Whereby, Building society is a special account, whereby a city government acquire loan for the
development of city.
- Interest income is taxed on “Receipt Basis”.
- Interest income is received Gross (means, no tax is deducted at source), but with one exception
→ Interest received from Debentures/Loan notes of Un-Quoted Company are received

after deducting 20% tax at source, i.e., 80% amount received
→ We will record it as Gross Amount and then will deduct Tax Credit from I.T.L (Same as
PAYE)
Example: Interest income of £5,000 from investment in Loan notes of Unquoted company
Requirement 1: How much tax is deducted at source?
Requirement 2: Actual interest income Received?
Requirement 3: How much interest income should be recorded in income sheet of person?
Requirement 4: What is the treatment of Tax Deducted at Source if ITL is £14,300?
The main types of exempt interest income are:
Interest on Individual Savings Account (ISA)
Interest on National Savings Certificate (NSC)
Prizes received from premium bonds / Prize bond winnings / Lottery winnings
Savings certificates are issued by National Savings and Investments (NS&I). On maturity, the profit is tax
exempt. This profit is called as interest.
Dividend Income
- Income received from investments in shares.
- Dividend income is taxed on “Receipt Basis”.
- It is always received gross (no tax deducted at source)
Real Estate Investment Trust (REIT)

- Company / Entity → Who receives funds from public and then invest in Property &
Real Estate
- Source of Income → Rental Income & Property Income (from property)
- REIT then distributes earnings to investors
REIT Income Taxation For Individuals:
- Investors treat REIT income as “Property Income”
- REIT deduct / withhold 20% tax at source and pay remaining 80% to investors
- Individual person will record REIT income as Gross Amount and then will take Tax Credit from
ITL (same as PAYE)
Income Sheet – Individual Person:
Non-
Income Head Savings/ Savings Dividend Total
Other
Property xx xx
Employment xx xx
Trading xx xx
Pension xx xx
Interest xx xx
Dividend xx xx
Total income xx xx xx xx
L: Qualifying Interest (xx) (xx) (xx) (xx)
Net income xx xx xx xx
L: Personal allowance (Tapering – ANI) (xx) (xx) (xx) (xx)
Taxable Income xx xx xx xx
Tax Rates:
1 --------------------- 37,700 20% 20% 7.5%
37,701 ------------- 150,000 40% 40% 32.5%
150,000 ----------- Above 45% 45% 38.1%
Exemptions:
£1,000
for BRTP
No
& £2,000 for all
Exemption
£500
for HRTP
Special Rule:
- Applies to Saving Income

- When Non-Savings Income is less than £5,000, then
- Saving Income will be taxed @ 0%, if it falls within £5,000
Qualifying Interest
It is an interest paid on → loan → taken out due to any of the following reasons;
1. To pay inheritance tax

2. To purchase the asset to be used in employment
3. To purchase the share of partnership
4. To purchase the asset, owned by individual, used in business
5. To purchase the shares of a “Close Company”
Close Company: any company which is
- Controlled by 5 or less shareholders (should be individual shareholders) or

- All shareholders are directors of the company
- It should not be a public limited company
Tapering of Personal Allowance:

- Standard personal allowance is £12,570
- This starts decreasing (tapering) when “Adjusted Net Income (ANI)” exceeds an Income limit of
£100,000.
- Every £2 increase in ANI → £1 decrease in personal allowance
Example 1: ANI is £108,000 Available personal allowance?
Example 2: ANI is £118000 Available personal allowance?

Example 3: ANI is 128000 Available personal allowance?
Note: if ANI > £125,140, then we will not perform any calculations. Personal allowance would
automatically be taken as NIL (as in example 3 above).
How adjusted net income is calculated?
ANI = *Net income - Personal pension contribution (gross) / Gift aid donation (gross)
Question 4: Calculate the Income Tax liability (ITL) of the following?
Q4 (a): For the tax year 2021–22, Ingrid has a salary of £52,500 and savings income of £1,800.
Non-
Income head Savings/ Savings Dividend Total
Other
Employment
Interest
Total income
L: Qualifying interest
Net Income
L: Personal allowance (Tapering – ANI working)
Taxable income
Q4 (b): For the tax year 2021–22, Ali has pension income of £14,200 and savings income of £6,000.
Non-
Other
Pension
Interest
Total income
Net income
Taxable income
Q4 (c): For the tax year 2021–22, Ezra has a salary of £62,500 and dividend income of £3,800.
Non-
Other
Employment
Dividend
Total income
Net income
Taxable income
Q4 (d): For the tax year 2021–22, Erica has a salary of £44,000 and dividend income of £8,500.
Non-
Other
Employment
Dividend
Total income
Net income
Taxable income
Q4 (e): For the tax year 2021–22, Ming has property income of £26,700, savings income of £700 and
dividend income of £1,200.
Non-
Other
Property
Interest
Dividend
Total income
Net income
Taxable income
Q4 (f): For the tax year 2021–22, Joe has a salary of £46,700, 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 £6,826 in PAYE from his earnings.
Non-
Other
Employment
Interest
Dividend
Total income
Net income
Taxable income
Question 5: (Different Allocation of Personal Allowance)
For the tax year 2021/22, Able has pension income of £10,000, savings income of £4,500 and dividend
income of £9,000. His income tax liability will be?
Non-Savings/
Income head Savings Dividend Total
Other
Pension
Interest
Dividend
Total income
Net income
L: Personal allowance
(Tapering – ANI working)
Taxable income
Transferable Amount of Personal Allowance OR Marriage Allowance OR Marriage Tax Allowance:
Married couples (Husband/Wife or Civil partners) can transfer personal allowance to other spouse if the
meet the following criteria:
- Both should be Basic rate taxpayers

- Either of them should have Net Income → lower than the → standard amount of personal
allowance of £12,500
Then, the spouse with lower-level income → can transfer an amount of £1,260 for the tax year 21/22
Following the transfer, transferee spouse will get relief at 20% of the transferred amount i.e., £252 (20%
* £1,260).
The amount of £252 is then deducted from income tax liability of transferee spouse.
Example:
Mr. A Net income is £8,000

Mrs. A Net income is £20,000
Requirements:
1. Personal allowance can be transferred or not and who will transfer it?
2. What will be the amount of transferred personal allowance?
3. What will be the remaining amount of personal allowance retained by transferor spouse?
4. What are the implications of the transferred personal allowance for the transferee spouse
assuming that income tax liability is £5,000?
Question 6: (Transferable amount of Personal Allowance)
Paul and Rai are a married couple. For the tax year 2021/22, Rai has a salary of £40,000 and Paul has a
trading profit of £10,000.
Calculate the Total ITL of couple:
Case A: No transfer of personal allowance between spouses.
Case B: Transfer of personal allowance between spouses.

Pension Payments
Govt. / State Owned Non – Govt. / State Owned
NIC
Employed Self-Employed
Employee pays
See Next Table
Class 1 NIC
Class 2 NIC
Employer pays
&
Class 4 NIC
Class 1 NIC
&
Class 1A NIC
Non – Govt. / State Owned
Occupational Pension
Personal Pension
(Already covered in Employment Income)
Maintained by → Employer Maintained by → Bank / Insurance Co. / Financial

Institution
Participants → Employees Participants → Employed / Self – Employed or

Others
Contribution By → Employee & Employer Contribution By → Any person as above
Tax Treatment: Tax Treatment:
If contributed by employee → Deduction For persons → On next Page
If contributed by employer → Exempt If contributed by employer → Exempt

Personal / Private Pension Contribution (PPC)
and
Gift Aid Donation (GAD)
Gift Aid Donation (GAD) is a donation to Charity paid by person himself.
Person pay 80% Net amount
Government 20%
Total 100% Gross amount
Tax Treatment or Tax Benefit of PPC / GAD Contribution:
- Used in the calculation of ANI to find available amount of personal allowance after tapering
- Basic-rate and High-rate band limits → extend → by gross amount of PPC / GAD
Example 1:
Mr. A’s Total income is £150,000 and the qualifying interest for the year is £20,000. He has not
contributed in PPC/GAD.
Requirements:
1. Net Income? 2. ANI?
3. Available P.A? 4. Taxable income?
5. Extended band limits due to PPC/GAD? 6. ITL?

Example 2:
Mr. A’s Total income is £150,000 and the qualifying interest for the year is £20,000. The contribution in
PPC/GAD is £10,000 (gross).
Requirements:
1. Net Income? 2. ANI?
3. Available P.A? 4. Taxable income?
5. Extended band limits due to PPC/GAD? 6. ITL?
Learning from above examples:
Personal Allowance Income Tax Liability
Example 1 Example 1
Example 2 Example 2
Reduction in Income Tax

Personal Allowance Saved
Liability
Question 7:
Required: Compute the tax payable by Michael Selby and by Josie Selby for 2021/22.
Michael Selby (aged 45) and Josie Selby (age 47) received the following income in 2021/22.
Michael Josie
£ £
Salary (gross) 163,540 100,000
PAYE tax deducted 57,400 33,000
Dividends 10,900 5,538
Interest from unquoted co. loan notes (amount received) 6,000 760
Building society interest (amount received) 5,920 4,200
Josie made a gift aid donation of £3,600 in December 2021.
Michael – Income Sheet

Non-Savings/
Other
Employment
Interest
Dividend
Total income
Taxable income
Josie – Income Sheet
Non-Savings/
Other
Employment
Interest
Dividend
Total income
Taxable income
Pension Contribution
Higher of
Relevant Earnings £3,600
- FHL property income

- Trading income
- Employment income
Example 1: Mr. X has the following income:
FHL = £5,000
Trading = £3,000
Employment = £2,000
Interest = £2,000
Dividend = £1,000
Total = £13,000
What is the maximum pension contribution limit?
Example 2: Mr. X has the following income:
FHL = £700
Trading = £200
Employment = £100
Interest = £1,000
Dividend = £1,000
Total = £3,000
What is the maximum pension contribution limit?
Note:
After checking ‘Higher of’, then check for ‘Specific Limit’.
Example:
Let say, you have relevant earnings of £300,000 but if your allowed specific limit is £200,000 (assume)
for pension contribution.
Now, if you contribute to the extent of specific limit, that’s fine. But if you contribute more than the
specific limit, then there would be a charge, named as “Annual Allowance Charge”.
Specific Limit for FY 21/22 is calculated as:
Annual Limit of 21/22 xxx

Person
Un-used limit of 20/21 xxx (£40,000 – Contribution in 20/21) should be
member
Un-used limit of 19/20 xxx (£40,000 – Contribution in 19/20)
of
Un-used limit of 18/19 xxx (£40,000 – Contribution in 18/19) pension
scheme in
xxx that year
Tapering of Annual Limit:
- Standard Annual Limit for 21/22 is £40,000
- This starts decreasing (tapering) when “Adjusted Income (AI)” exceeds an “Income limit” of
£240,000
- Every £2 increase in AI → £1 decrease in Annual Limit
- Minimum annual limit should be restricted to £4,000
Adjusted Income (AI)
For Employed Person For Self-Employed Person

Adjusted income
=
Net income
Adjusted income
+
=
Employee contribution in occupational pension
Net income
+
Employer’s contribution in occupational
pension & personal pension
Question 8 (Limit of Annual Allowance)
Edith annual allowance limit will be?
Edith has the following income and benefits in the tax year 2021/22; Salary £200,000 Company car
£5,000 Dividends £4,000 Employer pension contribution £50,000
Question 9
Ted is a sole trader. His gross contributions to his personal pension scheme have been as follows:
2017/18 £21,000 2018/19 £26,000

2019/20 £46,000 2020/21 £35,000
In 2021/22 Ted has a good trading year and wishes to make a large pension contribution. Ted income is
below income threshold for annual allowance purposes.
(a) What is the maximum gross pension contribution Ted can make in 2021/22 without incurring an
annual allowance charge, taking into account any brought forward annual allowance?
(b) If Ted makes a gross personal pension contribution of £53,000 in 2021/22, what are the unused
annual allowances he can carry forward to 2022/23?
Threshold Income → Disposable Income / Consumable Income
If “Threshold Income” is less than £200,000, then tapering of annual limit would not be applicable,
irrespective of “Adjusted Income”.
Threshold Income = Net Income – Gross Personal Pension Contribution by Person
Question 10 (Limit of Annual Allowance)
Gary has the following income and benefits in the tax year 2021/22; Salary £200,000 Employee
occupational pension contribution (net pay) £10,000 Dividends £10,000 Interest £5,000 Company car
£10,000 Employer pension contribution £30,000. Gary annual allowance limit will be?
As discussed earlier, If you make the pension contribution (the whole contribution would get tax
benefit) above the SPECIFIC LIMIT, then on excess contribution, then there is a tax charge, named as
“Annual Allowance Charge”.
How to Calculate AAC?
AAC = Excess Contribution X Top most rate of tax, according to tax bands,
After taxing complete taxable income
And then ACC is included in Income Tax Liability.
Example:
Mr. A total income is £95,000 and he contributed £50,000 (Gross) in private pension. No un-used b/f
annual allowance available.
Calculate the Annual Allowance Charge.

Steps → Pensions
Step 1: Check the max. limit
Higher of £3,600 or Relevant Earnings
Step 2: Check the threshold income
- If threshold income < £200,000, No tapering of Annual Limit

- If threshold income > £200,000, Tapering of Annual Limit, might
be applicable
Step 3: Check the Adjusted Income
- If adjusted income < £240,000, No tapering of Annual Limit

- If adjusted income > £240,000, Tapering would be applicable
Step 4: Check the specific limit, including un-used b/f limits and tapering concept
Step 5: Assess, whether contribution is > specific limit?
- If yes, Annual Allowance Charge would apply

- If no, Annual Allowance Charge would not apply
Adjusted Net Income (ANI) Adjusted Income (AI) Threshold Income (TI)
Net income
+
Employee contribution in
Net Income – Gross Personal
occupational pension
Net Income – PPC(G) / GAD(G) Pension Contribution by Person
+
Employer’s contribution in
occupational pension &
personal pension
It is used in the calculation of It is used in the calculation of It is used in the calculation

- Personal Allowance tapering of annual limit if If TI < 200K, no tapering of
- Child Benefit – IT Charge AI > 240k specific limit, irrespective of AI.
Pension Income
- Minimum pension age is 55 years
- After 55 years of age, person can / has to still contribute into pension
- However, cannot contribute into pension beyond the age of 75 years.
Withdrawal From Pension Fund

(Non – Govt. / State Owned)
Purchase Annuity (No Limit)
Lump-Sum Amount Withdrawal (Invest pension fund with some bank/insurance

company/financial institution which will give you
an income per year through out life)
Max. 25% lump-sum withdrawal → Tax Free No immediate tax implications
25% of the Lower of:
- Pension Fund Future income would be taxed at 20%, 40% or

45%
- Lifetime Allowance Limit of £1,073,100
If annuity is purchased from “above the limit”

amount of £1,073,100, then pension income
If excess withdrawal → Tax charge @ 55%
received above the limit amount, is taxed @ 25%,
irrespective of taxable income of person
Example 1:
Pension fund has an amount of £900,000

Example 2:
Pension fund has an amount of £1,500,000

Employment Vs Self-Employment
Factors / Badges of
Employed Self-Employed
Trade
Timings
Method and manner of work
Financial risk
Other risks and rewards
Tools and equipment
Uniform
TRADING / BUSINESS INCOME
There are always differences between the accounting treatment of transactions and tax treatment of
transactions. Therefore, we have to make following adjustments to reach at “Taxable Trading Profits
(TTP)” on which tax is calculated.
Tax is calculated on → Taxable Trading Profits (TTP) and not on trading profits.
Four adjustments to be made to accounting profit
Accounting Treatment Taxation Authority

Adjustment Required
in P/L
(As per IASs & IFRSs) (HMRC – Tax Laws)
You did not consider an HMRC says, it should

1. Trading income amount as sale/trading be considered as
income sales/trading income
You considered an HMRC says, it should

2. Trading income amount as trading not be considered as
income trading income
HMRC says, these

You deducted few
3. Trading expenses expenses are not
expenses from P/L
allowed to be deducted
HMRC says, these

You did not deduct few
4. Trading expenses expenses are allowed
expenses from P/L
and do deduct it.
Adjustment # 1:
You did not consider an amount as sales / trading income

Or
Sales / trading Income not included in P&L
Example:
Goods taken from business for personal use (Drawings of Inventory)
In accounting → drawings of inventory are normally recorded at cost, but
HMRC Tax Laws → no concept of drawings
→ Drawings to be considered as sales and record it at normal Selling

Price
Now, there could be two scenarios:
Drawings are recorded at cost No entry made for drawings
S.P = XXX S.P = XXX

Cost = (XX) Cost = (XX)
Profit = XXX Profit = XXX
Adjustment # 2:
You considered an amount as trading income

Or
Income included in P&L account which is not trading income
Examples:
- Interest received
- Dividends received
- Rent received
- Gain on disposal
➔ All of the above amounts are normally added in accounting P/L, but
➔ HMRC says that the above amounts are not your trading income as they have separate
head for taxation purposes such as follows:
Interest received → is taxed under the head “Interest income”
Dividends received → is taxed under the head “Dividend income”
Rent received → is taxed under the head “Property income”
Gain on disposal → is taxed under the head “Capital gain”
So, if you have added any of the above amounts in accounting P/L, then
Do deduct that from trading profits.

Adjustment # 3:
You deducted few expenses from P/L

Or
Expenses not allowed to be deducted from P&L, which have been deducted
Examples:
a) Expenditure not incurred wholly and exclusively for business (because it is too remote from
purposes of business or it has more than one purpose, and one of it is not trading)
b) Capital expenses are not allowed to be deducted
c) Subscriptions to political parties are not allowed to be deducted
Trade of professional association subscriptions are allowed
d) Provisions / estimates are not allowed, including depreciation
Write off of trade debts is allowed expense.
Recovery of previously written off debt is taxable
e) Small gifts up to £50 to customers are allowed, provided that they carry conspicuous
advertisement.
f) Food hampers and cash vouchers not allowed
g) Gifts to employees are allowed, but taxable as employment income for them
h) Cost of entertaining customers is not allowed. Cost relating to staff is allowed if for meals,
food etc.
i) Legal and professional charges for acquiring capital assets not allowed.
j) Legal charges relating to business are allowed (to collect bad debts, defending title to
fixed assets, renewal of short lease)
k) Cost relating to issue of shares is not allowed
l) Appropriations are not allowed (salary, other allowances).
m) Owner's personal expenses are not allowed
n) Qualifying interest is deducted from total income, so added back in the accounting profit.
o) Interest on borrowings and loans is allowed on accrual basis, if relating to business

p) Pre-trading expenditure is allowed as deduction on first day of business.
For Manufacturing / Trading Business → Time Limit → Upto 07 years of expenses
For Service Business → Time Limit → Upto 03 years of expenses
q) Leasing charge for car (rentals) is allowed as deduction
r) For lease of cars no adjustments where the CO2 emissions of a leased motor car do not
exceed 50g per kilometre, regardless of the retail price. Where CO2 emissions are more
than 50g/km, then 15% of the leasing costs are disallowed in calculating taxable profits.
s) Cost of registering patents, trademarks, and fee to arrange bank loan is allowed
t) Educational courses (only for business) allowed as expense
u) In fines/penalties, only Parking fines of employees are allowed
v) Expansionary move or expense relating to personal relocation of proprietor is not allowed
w) Donation to Local charity is allowed. Donation to National Charity is not allowed. Donation to
charity under gift aid scheme is not allowed (whether local or national)
Charity is Gid Aid Scheme is such a charity which is registered with Tax authority. In simple
words, Tax Approved charity is Gid Aid Scheme.
Adjustment # 4:
You did not deduct few expenses from P/L

Or
Expenses not charged to P&L, which are allowed to be deducted
Examples:
a) Capital allowances (See later)
b) Commercial Structure & Building Allowance (SBA)
c) Lease premium amortization of premium paid for business premises
Lease Premium Amortization
In property income, we studied the concept of “Taxable Lease Premium” for the person who “Receives
Lease Premium” during a FY, but
Now, let’s talk about the tax treatment of lease premium paid by any person for leasing of business
premises;
➔ A person who “Pays Lease Premium” during a FY, he will deduct “Lease Premium Amortization”
expense form his accounting P/L in future time periods.
How to calculate Lease Premium Amortization Expense?
LPAE = Taxable premium of head-lease * x/12

Duration of lease
Example:
In FY 19/20, Mr. A entered into a 30 years lease arrangement with Mr. B and Mr. A received a lease
premium of £35,000 from Mr. B.
Taxable Lease Premium Lease Premium Amortization Expense

(For Mr. A → Property Income) (For Mr. B → Trading Income)
Question 1:
Required: State how you would deal with each of the items.
The following items have been charged against profit in the accounts of William Oakley, a shoe
manufacturer, for the year ended 31 March 2022:
1. In Repairs and Renewals an amount of £2,000 was included for the fitting of security bars over the
factory windows as a precaution against theft.
2. A loan of £100 to a former employee was written off.
3. Gifts of ‘Oakley’ calendars in December 2020 costing £12 each.
4. Incidental costs incurred in obtaining a bank loan, £350.
5. A donation of 5 pairs of running shoes, costing a total of £200, when sponsoring a local charity raising
money by organizing a marathon.
6. A lease rental of £4,000 per annum on a car provided for a senior employee. The car cost £14,000 and
has CO2 emission of 115g/km.
7. Registering a patent for a new shoe design, £1,275.
8. A parking fine of £100 incurred by an employee on a business trip to Manchester.
9. Payment of £6,000 re-location expenses to a new employee.
10. In Repairs and Renewals an amount of £2,000 to re-condition a second-hand stitching machine
bought for £10,000. The repairs were necessary before the machine could be used in the business.
11. Cost of a course in computer skills, costing £350, for William himself who had no previous computer
experience.
Capital Allowances:
- Tax Authority → Disallowed → accounting depreciation expense

Instead of accounting depreciation expense
- Capital allowance is an allowed expense (example in Adjustment # 4)
- It is actually a tax depreciation on plant and machinery calculated according to the taxation laws
- Plant and machinery further include;
- Office furniture, fittings, and furnishings

- Computer and its equipment (including hardware and software)
- Lifts / escalators / elevators
- Central heating and cooling system
- Motor vehicles
- Commercial vehicles (Trucks / Buses / Fork lifters / Crain / Vans / Trains / Ships / Aircrafts)
- Cost of complying with fire regulations
- Cost of complying with security assets
How to calculate Capital Allowances (CA)?
Main Pool /
Plant and machinery pool
b/d xxx
A: Additions xxx
L: Disposals (xx) → Always → Lower of → Cost or Proceeds
xxx
CA @ 18% (xx)
c/d xxx
CA rate on main pool is → 18%

CA is calculated on → Reducing balance basis
CA is based on → Full year convention
CA is months apportioned → Where accounting period is less or more than 12 months
Question 1: (Capital Allowances)
Calculate capital allowances for the two years ending on 30 June 2022 and 30 June 2023 respectively.
Opening balance of P&M pool on 1 July 2021 is £62,000
Purchases:
- Furniture & Fittings costing £142,000 purchased in August 2021

- Car costing £18,000 purchased in March 2022 having CO2 emission of 103 g/km
- Machinery costing £990,000 purchased in October 2022
- Computer equipment costing £80,500 purchased in February 2023
Disposals:
- Machinery bought for £1,200 sold in October 2021 for £900

- Computer bought in 2019 for £3,000 sold in December 2021 for £600
- Car purchased in March 2022 for £18,000 sold for £19,500 in May 2023
Annual Investment Allowance (AIA) in Capital Allowances:
- AIA limit is £1,000,000 for a period of 12 months (months apportioned where accounting period
is less or more than 12 months)
- AIA is available on all P&M items purchased in a year, except Motor Vehicles
Question 1 Again: (Capital Allowances) → Considering the concept of AIA
Calculate capital allowances for the two years ending on 30 June 2022 and 30 June 2023 respectively.
Opening balance of P&M pool on 1 July 2021 is £62,000
Purchases:
- Furniture & Fittings costing £142,000 purchased in August 2021

- Car costing £18,000 purchased in March 2022 having CO2 emission of 103 g/km
- Machinery costing £990,000 purchased in October 2022
- Computer equipment costing £80,500 purchased in February 2023
Disposals:
- Machinery bought for £1,200 sold in October 2021 for £900

- Computer bought in 2019 for £3,000 sold in December 2021 for £600
- Car purchased in March 2022 for £18,000 sold for £19,500 in May 2023
Question 2: (Capital Allowances) → Considering less than 12 months accounting period
Calculate capital allowances for the period ending on 30 June 2022 & year ending on 30 June 2023
respectively.
Opening balance of P&M pool on 1 October 2021 is £220,000
Purchases:
- Furniture & Fittings costing £1,080,000 purchased in December 2021
- Car 1 costing £9,000 purchased in January 2022 (with zero CO2 emission)
- Car 2 costing £28,000 purchased in March 2022 (CO2 emission of 65 g/km)
- Car 3 costing £26,000 purchased in April 2022 (CO2 emission of 22 g/km)
Disposals:
- Car 1 sold in October 2022 for £9,500
- Car 2 sold in May 2023 for £18,500
- Car 3 sold in June 2023 for £19,000
Capital Allowances for Motor Vehicles:
- New electric-powered motor cars with zero CO2 emissions qualify for the 100% first-year
allowance (FYA), so the cost is effectively deducted as an expense in the year of purchase.
- Capital allowances at the rate of 18% are available where a motor car’s CO2 emissions are
between 1 and 50 grams per kilometre. These are included in the main pool.
- Capital allowances at the rate of 6% where CO2 emissions are over 50 grams per kilometre.
These 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.
Privately Used Assets (PUA) in Capital Allowances:
- Few assets → partly business and partly private use → are termed as PUA
- PUA → capital allowance → on business use portion only
- PUA are recorded in separate column (not in MP)
- Separate column name should be → Privately Used Asset
- As No. of PUAs in business → Same No. of PUAs columns
- When PUA is sold → balancing adjustment required
Concept of Special Rate Pool (SRP) in capital allowances:
- Capital allowance at 6%
- SRP includes:
- Long Life Assets (useful life more than 25 years)

- Thermal insulations
- Features integral to a building, such as
→ Electrical and lighting equipment

→ Water (heating or cooling) system
→ Ventilation, cooling, or air-conditioning system
→ Lifts and escalators
- Certain motor vehicles (Cars having CO2 emission more than 50 g/km)
Calculate Ling’s capital allowance claim for the year ended 31 March 2022.
Ling prepares accounts to 31 March. On 1 April 2021, the tax written down value of plant and machinery
in her main pool is £16,700.
The following transactions took place during the year ended 31 March 2022:
Cost / (proceeds) £
8 April 2021
Purchased motor car (1)
It has CO2 emissions of 40 grams per kilometre
and used by Ling and 20% of the mileage is for private journeys 15,600
14 April 2021
It has CO2 emissions of 75 grams per kilometre 10,100
12 August 2021
Purchased equipment 98,750
2 September 2021
It has CO2 emissions of 45 grams per kilometre 28,300
19 November 2021
It is a new electric-powered motor car with zero CO2 emissions 16,800
12 December 2021
Sold motor car (2) (8,300)
Solution:
- Motor car (1) is kept separately because there is private use by Ling. This motor car has CO2
emissions between 1 and 50 grams per kilometre and therefore qualifies for writing down
allowances at the rate of 18%.
- Motor car (2) had CO2 emissions over 50 grams per kilometre and therefore qualifies for writing
down allowances at the rate of 6%. 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 1 and 50 grams per kilometre and therefore qualifies
for writing down allowances at the rate of 18% in the main pool.
- Motor car (4) has zero CO2 emissions and therefore qualifies for the 100% first year allowance.
Concept of Balancing Adjustment for → 18% Main Pool or 6% Special Rate Pool:
- There are multiple assets in the pool (not a single asset)
- Pool → Once created → its balance cannot be “NIL” → but → 2 situations
- 2 situations where pool = “NIL”
1. Pool balance is less than £1,000 (it is termed as small pool balance)
2. Business cessation → assets dispose off
In these situations, we have to make “Balancing Adjustment” to make pool balance = NIL
Balancing Adjustment
Gain on disposal Loss on disposal
Alan has traded for many years, making up accounts to 30 April each year. On 1 May 2021, the tax
written down value of his main pool was £15,000. On 1 October 2021, he sold some plant and
machinery for £14,200 (original cost £16,000).
Calculate the maximum capital allowances claim that Alan can make for the period ending 30 April
2022.
Short Life Assets (SLA) in Capital Allowances:
- SLAs are the assets which have useful life → less than 8 years
- Capital allowance at 18%
- SLAs are not recorded in MP (even if the % rate of MP and SLA is same)
- SLAs are to be recorded in separate column named as Short Life Asset
- As No. of SLAs in business → Same No. of SLAs columns
- When SLA is sold → balancing adjustment required
In exam question, it will be mentioned in question whether to treat any asset as SLA.
Calculate capital allowances for the two years ending on 5 Apr 22 and 5 Apr 23, respectively.
Opening balance of P&M pool on 6 April 2021 is £125,000 & Computer equipment is claimed to be
‘short life asset’.
Purchases:
Machine purchased for £990,000 in May 2021
Computer purchased for £18,000 in June 2021
Car purchased for £21,000 in August 2021, CO2 emission of 30g/km
Disposals:
Car sold in November 2022 for £7,500
Computer equipment sold in March 2023 for £3,000
Calculate capital allowances for the two years ending on 5 April 22 and 5 April 23, respectively.
On 6 April 2021, opening balances of P&M & SRP are £80,000 & £60,000 respectively. Computer is
claimed to be ‘Short Life Asset’. Escalator will be part of ‘Special Rate Pool’.
Purchases:
Machinery costing £600,000 purchased in May 2021
Computer costing £180,000 purchased in June 2021
Escalator costing £750,000 purchased in July 2021
Car costing £21,000 purchased in August 2021 having CO2 emission of 75g/km.
Disposals:
As we have already discussed the concept of Annual Investment Allowance (AIA) in capital allowances,
now, it is important to understand the planning strategy for the allocation of AIA which results in capital
maximum capital allowances:
Claiming AIA on Priority
Special Rate Pool assets 1st

Main pool assets 2nd
Short life assets 3rd
By allocating AIA as per above planning strategy, you will see the impact on allowances amount claimed
by attempting question 6 again according to this concept.
After attempting Question 6 with planning AIA, put your values in the following table to see the
comparative results:
Q6: Without planning AIA Q6: With planning AIA
CA in year 1 CA in year 2 CA in year 1 CA in year 2

Question 6 Again: With Planning AIA
Calculate capital allowances for the two years ending on 5 April 22 and 5 April 23, respectively.
On 6 April 2021, opening balances of P&M & SRP are £80,000 & £60,000 respectively. Computer is
claimed to be ‘Short Life Asset’. Escalator will be part of ‘Special Rate Pool’.
Purchases:
Machinery costing £600,000 purchased in May 2021
Computer costing £180,000 purchased in June 2021
Escalator costing £750,000 purchased in July 2021
Car costing £21,000 purchased in August 2021 having CO2 emission of 75g/km.
Disposals:
Commercial Structures & Buildings Allowance (SBA):
- Relief is given as an annual straight-line allowance of 3% over a 33 1/3 years period (33 years
and 4 months period)
- SBA is only available where building or structure has been constructed on or after 29 October
2018 (For TX & ATX papers purposes, after 6 April 2020) and (1 April 2020 for limited
companies).
Key Features of SBA are:
- Offices, retail & wholesale premises, factories & warehouses can all qualify for SBA.
- The value of land is excluded.
- Expenditure which qualify for P&M, cannot also qualify for SBA and vice versa.
- Where an un-used building is purchased from a builder or developer, then qualifying expenditure
would be the price paid less the value of land.
- The building or structure must be used for a qualifying purpose/activity (such as trade or property
letting)
- The SBA can only be claimed from when the building or structure is bought into qualifying use. It
means, SBA would be time apportioned for the period when 1st bought into use. (Unlike P&M,
where capital allowances are always given for full accounting period).
- The separate SBA is given on each building or structure qualifying for relief.
- Relief is also given for the cost of subsequent improvement, or where a building is renovated or
converted.
Disposal of Building/Structure:
- There is no balancing allowance or charge.
- The allowances that have been claimed by the seller, are added to the Disposal Proceeds in order
to determine the chargeable gain or allowable loss arising on the sale.
- The purchaser of the building simply continues to claim 3% allowance based on original cost for
the remainder of the 33 1/3 years period.
Question: (SBA)
Mr. H prepares accounts to 31 March. On 1 July 2021, he purchased a newly constructed factory from a
builder for £470,000 (including land of £110,000). The factory was brought into use on 1 September 2021.
a) What will be SBA for the year ended 31 March 2022 and subsequent years?
b) What will be implications if Mr. H sold its factory to Gentrified Ltd on 31 March 2023 for £500,000
(including land of £120,000)?
c) What will be implications if Mr. H renovated a disused warehouse at a cost of £82,000 (originally
purchased in 2012), with the warehouse subsequently brought into use on 1 January 2022.
Sources of income for an individual person


6 Pension xxx
Total income xxx

Less: Qualifying Interest (xx)
Net Income xxx
Less: Personal allowance (PA) (xx)

Taxable income xxx
In Trading Income, till yet, we have discussed all the things/adjustments according to the company’s
year-end dates but not talked about the Fiscal Year 21/22 (6 April 2021 -------- 5 April 2022)
Ongoing businesses pay their tax according to Current Year Basis (CYB).
Means, check that in which FY, accounting period end date falls – The whole of the trading income
would be taxed in that fiscal year. For Examples
Business year start date Business year end date FY
1 January 2021 31 December 2021 21/22
1 July 2020 30 June 2021 21/22
A May 2020 30 April 2021 21/22
1 April 2020 31 March 2021 20/21
1 October 2019 30 September 2020 20/21
1 January 2019 31 December 2019 19/20
1 June 2021 31 May 2022 22/23

3 Situations where CYB Not applicable
1 2 3
Business Start Change in Accounting Date Business Cease
In these situations, we apply some special rules or special steps to find the TTP for an accounting period
and its relevant FY to tax it.
These special rules or special steps are → BASIS PERIOD
Business Start – Basis Period
Step 1 Business start date Nearest FY end date
Step 2 (a) Complete 12 months back A/c period end date
(b) Business start date Complete 12 months forward
(By applying step 2(a), we arrive at a date where no business is existed. So, 2(b) is applicable)
(c) Complete FY count 6.Apr.xxx 5.Apr.xxx
(By applying step 2(a), few months remained un-tax. So, 2(c) is applicable)
Step 3 Complete 12 months back A/c period end date
After step 3, CYB will be started.

Example 1: (Understanding of the application of Step 1, 2a and 3)
Business started on 1.1.21
1.1.21 ------------------------------- 31.12.21 = £12,000
1.1.22 ------------------------------- 31.12.22 = £18,000
As the new business started, we shall apply basis period rules for newly started business as follows,
irrespective of the months of accounting period:
Step 1 1.1.21 ---------------------- 5.4.21 = £12,000
Step 2a 1.1.21 ---------------------- 31.12.21 = £12,000
Step 3 1.1.22 ---------------------- 31.12.22 = £18,000
After Step 3, CYB start.
Note:
If an A/c period end date is covered any step, then we use next A/c period end date in next step.
Overlap Profits:
What they are → Profits which are taxed twice
How to calculate them → Identify the # of overlapping months & then find the profits
attributable to the overlapping months
What to do with them → (See later)

Question 7: Business started on 1.09.20. Taxable profits are:
Business started on 1.09.21. Taxable profits are:
1.9.21 ------------------------------- 31.12.21 = £32,000
1.1.22 ------------------------------- 31.12.22 = £36,000
1.1.23 ------------------------------- 31.12.24 = £40,000

Example 2: (Understanding of the application of Step 1, 2b and 3)
1.1.21 ------------------------------- 30.9.21 = £18,000
1.10.21 ------------------------------- 30.9.22 = £30,000
Question 8:
Business started on 1.02.21. Taxable profits are:
1.02.21 – 30.09.21 = £16,000

1.10.21 – 30.09.22 = £36,000
Example 3: (Understanding of the application of Step 1, 2c and 3)
1.1.21 ------------------------------- 30.6.22 = £18,000
1.7.22 ------------------------------- 30.6.23 = £24,000
Question 9:
Business started, and taxable profits are for:
21 months ending on 30.09.21 = £42,000

Year ending on 30.09.22 = £36,000
Change of Accounting Date – Conditions:
From Accounting Rules & Corporate Law perspective, a business is allowed to change its accounting
date, but the following 3 conditions should me met:
1. There should be no change in last 5 years

2. It should be for bonafide commercial reason
3. It should not be part of tax avoidance scheme
Whenever There is Change of Accounting Date,

Then
New Set of Accounts Can Either be:
Less than 12 months More than 12 months
& then check that if; Hence;
Old P/E & New P/E

Old P/E & New P/E
Are always in different FY
Are in same FY Are in different FY And If No FY Skip And If FY Skip
Then; Then; Then; Then;

Count complete 12
Count new period Split new period into 2
Merge both periods months back from New
as it is periods
P/E date
& & & &
Overlap Profits Overlap Profits Overlap Profits Overlap Profits
Release / Reduce Arise / Increase Release / Reduce Arise / Increase
Example 1 Example 2 Example 3 Example 4

Example 1:
Business started OLP (9m) £9,000
1 July 2019 ------------------------------ 30 June 2020 = £18,000
Change in Accounting Date To 31 December
1 July 2020 ----------------------------- 31 December 2020 = £20,000
1 January 2021 ------------------------- 31 December 2021 = £30,000
Solution:
Example 2:
Business start OLP (9m) £9,000
1 July 2019 ------------------------------ 30 June 2020 = £18,000
Change in Accounting Date To 30 April
1 July 2020 ------------------------------- 30 April 2021 = £20,000
1 May 2021 ------------------------------ 30 April 2022 = £30,000
Solution:
Example 3:
1 October 2018 ------------------------------ 30 September 2019 = £18,000
Change in Accounting Date To 31 December
1 October 2019 ------------------------------- 31 December 2020 = £30,000
1 January 2021 ------------------------------- 31 December 2021 = £36,000
Solution:
Example 4:
1 October 2018 ------------------------------ 30 September 2019 = £18,000
Change in Accounting Date To 30 April
1 October 2019 ------------------------------- 30 April 2021 = £38,000
1 May 2021 ------------------------------------ 30 April 2022 = £48,000
Solution:
As accounting end date have implications on tax, so which accounting end date
to select?
There are three broad dimensions which we need to consider before deciding it:
1. Pattern of overlap profits
2. Time to pay tax / liquidity position
3. Trend of profitability
Pattern of Overlap Profits:

- If accounting year-end date is same as FY or 31-March-XX, then there would be no concept of
overlap profits. Hence, No basis period adjustment is required.
- No. of overlap months are always according to a pre-defined pattern at the time of deciding the
accounting end date.
6.4.xx 5.4.xx
30 Apr 30 Jun 30 Sep 31 Dec
Time To Pay Tax / Liquidity Position:

FY 2020-21
6.4.20 5.4.21
31 Jan
after FY
Year 30 30 31 31
End Jun Sep Dec Mar
- Arrange the cash, if needed

- Opportunity cost of cash
- We get time to plan the tax
Trend of Profitability:
Business started on 1 Jan 2019
Forecasted profits for the year end 31 Dec 2020 = 1500/month

Two Possibilities
Planning year-end date 30 June Planning year-end date 31 December
Business Cessation – Basis Period
Last A/c period end date & Last A/c period end date &
Business cessation date are Business cessation date are
In same FY In different FY
E.g., E.g.,
Last A/c period Last A/c period
1.10.20 --------------- 30.9.21 1.10.20 --------------- 30.9.21
Business cessation Business cessation
1.10.21 --------------- 31.1.22 1.10.21 --------------- 31.5.22
Last period TTP Last period TTP
Less Less
Overlap profits Overlap profits

Question 10: (Business Closure)
Sana started business on 1.10.19. Her taxable profits are:
1.10.19 – 30.06.20 = £20,000

1.07.20 – 30.06.21 = £30,000
1.07.21 – 30.06.22 = £40,000
She closed her business on 31.01.23.
Taxable profits for the period were:

1.07.22 – 31.01.23 = £45,000
Question 11: (Business Closure)
Rio started business on 1.07.16. His taxable profits are:
Period ending 31.08.17 = £10,500

Year ending 31.08.18 = £18,000
Year ending 31.08.19 = £22,500
Year ending 31.08.20 = £31,500
Year ending 31.08.21 = £27,000
He closed his business on 31.05.22.
Taxable profits for the period were:

Period ending 31.05.22 = £8,400
Trading Income ➔ National Insurance Contribution (NIC):
It’s a State pension payment
There are 2 types of NICs in trading income:
3. Class 2 NIC
£3.05/week
Class 2 NIC is payable where profits exceed a small profits threshold of £6,515.
4. Class 4 NIC
£1 – £9,568 per year Nil
£9,569 – £50,270 per year 9.0%
£50,271 and above per year 2.0%
Example:
Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2021–22 is respectively
£25,000 and £60,000. The class 4 NIC liabilities are:
£
Jimmy
15,432 (25,000 – 9,568) at 9% 1,389
Jenny
40,702 (50,270 – 9,568) at 9% 3,663
9,730 (60,000 – 50,270) at 2% 195
3,858
PARTNERSHIP
From tax perspective, every partner in partnership → treated as → a separate sole trader
Partnership Business
A/c P/L xxx
Tax adjustments xx/(xx)
L: Capital allowances (xx)
Tax adjusted trading profits XXX
Partnership P/L Appropriation A/c

A B C Total
Tax adjusted trading profits XXX
Partners’ salaries X X X (XX)
Interest on capital to partners X X X (XX)
Interest on drawings from partners (X) (X) (X) XXX
Remaining profits XXX
Share of profit to partners (according to %) X X X (XX)
Total share of profit for each partner XXX XXX XXX NIL
Trading income of A B C
* Class 2 NIC and Class 4 NIC are applicable on trading income of A, B and C.
* Basis periods (start and cessation) adjustments at the time when a partner is joining partnership
business or leaving the partnership business.
3 Reasons → When → P/L appropriation A/c is prorated (months apportioned)
1. During an A/c period → A new partner joining partnership business
2. During an A/c period → An existing partner leaving partnership business
3. During an A/c period → Profit sharing ratios are changing

Q1: On 1.1.18, Ali and Babar started business in a partnership, with a profit-sharing ratio of 1:3. On
1.7.20, Cyrus joined the partnership. The new partnership ratio was 1:1:2. The financial results were:
1.1.18 - - - - - - -12m - - - - - - - 31.12.18 = 20,000

1.1.19 - - - - - - -12m - - - - - - - 31.12.19 = 40,000
Tax adjusted trading profits
1.1.20 - - - - - - -12m - - - - - - - 31.12.20 = 60,000
1.1.21 - - - - - - -12m - - - - - - - 31.12.21 = 80,000
2018 A B C Total
Net profit
Share of profit
Total share of profit
2019 A B C Total
Net profit
Share of profit
2020 A B C Total
Net profit (6m) (Jan to Jun)
Share of profit
2020
Net profit (6m) (Jul to Dec)
Share of profit
2021 A B C Total
Net profit
Share of profit
Basis period for A:
1.1.18 - ---------------- 31.12.18 =
1.1.19 - ---------------- 31.12.19 =
1.1.20 - ---------------- 31.12.20 =
1.1.21 - ---------------- 31.12.21 =
Basis period for B:
1.1.18 - ---------------- 31.12.18 =
1.1.19 - ---------------- 31.12.19 =
1.1.20 - ---------------- 31.12.20 =
1.1.21 - ---------------- 31.12.21 =
Basis period for C:
1.1.18 - ---------------- 31.12.18 =
1.1.19 - ---------------- 31.12.19 =
1.1.20 - ---------------- 31.12.20 =
1.1.21 - ---------------- 31.12.21 =

Q2: Cedric, Ding and Eli Fong commenced in partnership on 6 April 2007, preparing accounts to 5 April.
Cedric resigned as a partner on 31 December 2021, and Gordon joined as a partner on 1 January 2022.
The partnership’s trading profit for the year ended 5 April 2022 is £90,000. Profits were shared as
follows:
(1) Eli was paid an annual salary of £6,000.
(2) Interest was paid at the rate of 10% on the partners’ capital accounts, the balances on which were:
Cedric £40,000
Eli £70,000
Gordon (from 1 January 2020) £20,000
(3) The balance of profits was shared: Cedric Eli Gordon
6 April to 31 December 60 % 40 %
1 January to 5 April 70 % 30 %
Required:
Calculate the trading income assessments of Cedric, Eli and Gordon for the tax year 2021/22.
C E G Total
Net profit (9m) (Apr - Dec)
Salaries (9m)
I.O.C (9m)
Share of profit (9m)
Net profit (3m) (Jan - Mar)

Salaries (3m)
I.O.C (3m)
Total share of profit (9m + NIL

3m)
Q3: Peter, Sam and Martha have been in partnership since early 2006. Due to a fall in demand for their
services Martha decided to leave the partnership on 30 September 2021. Profits for the partnership for
the two most recent accounting periods have been:
Year to 31 December 2020 £60,000

Year to 31 December 2021 £45,000
Up to 30 September 2021 each partner received a salary of £10,000 per year and shared the remaining
profits as follows: Peter 40%, Sam 40% and Martha 20%. Following Martha’s departure, the salaries for
Peter and Sam remained the same and the remaining profits were shared equally.
Martha had unrelieved overlap profits of £4,000 from the start of the partnership.
Required:
Compute the taxable profits for the three partners for the tax years 2020/21 and 2021/22.
Year _________ P S M Total

Net profit
Salaries
Share of profit
Year _________ P S M Total

Net profit (9m)
Salaries
Net profit (3m)

Salaries
Total share of profit (9m + NIL

3m)
For P & S:
For M:
Property Income (P.I)
- Property income is earned by letting out land / building to tenants
- P. I is taxed on cash / receipt basis (But there are certain exceptions)
- Rent of land / building is termed as → Rental value, Rateable value, Annual value, or annual
market value
- Separate calculation, where you have rented out more than one property
Rent received during FY xxx

Add: Taxable lease premium received during FY xxx
Less: Allowable expenses incurred during FY (xx)
Property Income for the FY xxx
Allowable Expenses:
1. Repairs and maintenance

(a) Revenue expenses are allowed to be deducted. Capital expenses are not allowed to be
deducted
(b) Repairs / Renovation / Decoration / Re-Decoration are revenue expenses and are
allowed to be deducted
(c) Improvement is capital expense and is not allowed to be deducted
2. Insurance premium relating to the property

3. Council Tax / Water Tax
4. Bad debts expense (tenant has vacated the property / legal proceedings started)
5. Agent’s fee (lawyer, estate agent, accountant, newspaper advertisement)
6. Replacement furniture relief (RFR) – only for furnished accommodation
7. Mileage Allowance on motor car and travel relating to property
8. Mortgage interest expense is the interest on loan taken out to purchase/improve the property
or loan taken out to purchase the assets/equipment to be used in property
Treatment:
(a) Mortgage Interest – Residential property Not allowed
(But It would give relief at basic rate and will deduct from ITL)
(b) Mortgage Interest – Non-Residential or Furnished Holiday Letting Allowed
9. Incidental cost is the fee to arrange the bank loan & is treated in a same way as mortgage
interest
Replacement Furniture Relief (RFR):
- RFR is available when you let out a furnished property
- RFR is NOT available on first time acquisition of furniture
- RFR is NOT available on any improvements in property
- RFR is only available when you actually replace the furniture
Means, disposing old and buying new similar/equivalent furniture
Furniture = Furniture + electronic equipment + any household items
RFR is calculated as:
Cost of new purchased asset OR Market value of similar asset = XXX
Less: Scrap value of old furniture = (XX)
RFR = XXX
Important points to remember:

1. Owner living …………………..…… Available for letting …………………..…… Let out
Expenses Expenses Expenses
2. Landlord/Owner will deduct only those expenses which he paid himself.

If tenant is paying any expense, that will not be allowed to be deducted from rental income of
landlord.
3. If security deposit received from tenant --- security deposit should not be considered as
property income, as it is a liability for landlord to pay back the amount of security deposit to
tenant when he will leave the property.
Taxable Lease Premium (TLP):
TLP is taxed on “Receipt Basis”, means, the amount of lease premium actually received in a FY.
It is calculated as:
Lease premium xxx

Less: Relief
2% (n-1) * Lease premium (xx) where n -- > number of years of lease
Taxable lease premium xxx
Example:
In FY 21/22, Mr. A entered into a lease arrangement with Mr. B and Mr. A received a lease premium of
£20,000 from Mr. B.
Require: Calculate taxable lease premium in the following scenarios?
25 years 35 years 45 years 55 years
Lease premium
L: Relief
Taxable lease
premium
Sub-Lease:
Mr. A entered into a 25 years lease arrangement with Mr. B and received an amount of ease premium of
£20,000 from Mr. B.
Mr. B Sub-let the property to Mr. C for 15 years for £32,000.
Mr. A Mr. B
Lease Premium Lease Premium
L: Relief L: Relief
L: Sub-Lease Relief
Taxable Lease
Premium
Taxable Lease
Premium
Sub-Lease Relief is calculated as:
Duration of sub-lease / Duration of head-lease X Taxable premium of head lease

Rent-a-Room:
- When a landlord rented out a single room of his main residence
- Rent-a-room-Relief: £7,500
Calculation steps to follow in case of rent-a-room:
Method 1 Method 2
Rental income xxx Rental income xxx
Less: Allowable expenses (xx) Less: Rent-a-room-relief (£7,500)
Property income xxx Property income xxx
LOWER of method 1 and method 2 would be considered as property income of single room.
Example:
Method 1 Method 2
Rental income £8,600 Rental income £8,600
Less: Allowable expenses (£2,600) Less: Rent-a-room-relief (£7,500)
Property income Property income
Example:
Method 1 Method 2
Rental income £6,800 Rental income £6,800
Less: Allowable expenses (£7,000) Less: Rent-a-room-relief (£7,500)
Property income Property income
Due to allowable expenses, property income may be a –ve figure.
But,
A relief cannot create a negative figure.

Furnished Holiday Letting (FHL) / Furnished Holiday Accommodation (FHA):
Rules for FHL property:

a) It is available for letting for not less than 210 days in a fiscal year
b) It is actually let out for a period of not less than 105 days in a year
c) Property must not be usually let out for periods longer than 30 days.
Examples of FHL:
- Farm house
- Guest house
- Hotels etc….
FHL Income
By Definition By Nature
Property Income Trading Income
What we need to do?
- We calculate FHL as per the rules defined in Trading Income (take capital allowance/SBA while
deducting expenses).
But,
- We record FHL as Property Income
Advantages of FHL:
- FHL income qualifies for “Relevant Earnings” in the calculation of “Maximum Pension
Contribution limit”. (Pension Topic)
- FHL property/Asset is considered as “Business Asset” for “Capital Gains” purposes, (i.e. Gift
Relief, Rollover Relief and Entrepreneur Relief is available) (Capital Gains Topic)
Disadvantages of FHL:
- FHL property loss can only be adjusted with other FHL property income.
- It cannot be adjusted against property income of other normal properties.
Property income – Accruals basis:
- Property income can be calculated on Accrual Basis, when
- Property income receipts → More than £150,000
- In exam, accrual basis is only used → If question specifies
Main differences between Accrual Basis and Cash Basis:
Accrual Basis → Rental Income → Record → Earned during a FY

Accrual Basis → Expenses → Record → Incurred during a FY
Accrual Basis → Bad debts → Record → Written-off (provision not allowed)
Else all other are same as Cash Basis.

Question 1
Edmond Brick owns five properties which are let out.
Required:
Calculate Edmond’s property business profit in respect of the properties and the furnished room for the
tax year 2021/22.
Property One
This is a freehold house that qualifies as a trade under the furnished holiday letting rules. The property
was purchased on 6 April 2021. During the tax year 2021/22 the property was let for eighteen weeks at
£510 per week. Edmond spent £5,700 on furniture and kitchen equipment during April 2021. Due to a
serious flood £7,400 was spent on repairs during November 2021. The damage was not covered by
insurance. The other expenditure on this property for the tax year 2021/22 amounted to £2,710, and
this is all allowable.
Property Two
This is a freehold house that is let out furnished. The property was let throughout the tax year 2021/22
at a monthly rent of £625, payable in advance. During the tax year 2021/22 Edmond paid council tax of
£1,200 and insurance of £340 in respect of this property.
Property Three
This is a freehold house that is let out unfurnished. The property was purchased on 6 April 2021, and it
was empty until 30 June 2021. It was then let from 1 July 2021 to 31 January 2022 at a monthly rent of
£710, payable in advance. On 31 January 2022 the tenant left owing three months’ rent which Edmond
was unable to recover. The property was not re-let before 5 April 2022. During the tax year 2021/22
Edmond paid insurance of £290 for this property and spent £670 on advertising for tenants. He also paid
loan interest of £5,100 in respect of a loan that was taken out to purchase this property.
Property Four
This is a leasehold office building that is let out unfurnished. Edmond pays an annual rent of £6,800 for
this property, and had paid a premium of £7,200 for a 15 years lease when he acquired it many years
ago. On 6 April 2021 the property was sub-let to a tenant, with Edmond receiving a premium of £15,000
for the grant of a five-year lease. He also received the annual rent of £4,600 which was payable in
advance. During the tax year 2021/22 Edmond paid insurance of £360 in respect of this property.
Property Five
On 6 April 2021, Edmond Brick purchased a freehold house. The property was then let throughout the
tax year 2021/22 at a monthly rent of £800.
During April 2021, Edmond Brick furnished the property with a cooker costing £440, a washing machine
costing £330, and floor coverings costing £2,200. The cooker was sold during Dec 2021 for £110, and
replaced with a similar model costing £460. The washing machine was scrapped, with nil proceeds,
during March 2022. It was replaced by a washer-dryer costing £670, although the cost of a similar
washing machine would have been £360.
The other expenditure on the property for the tax year 2021/22 amounted to £1,310, and this is all
allowable.
Furnished Room
During the tax year 2021/22 Edmond rented out one furnished room of his main residence. During the
year he received rent of £8,040, and incurred allowable expenditure of £8,140 in respect of the room.
Edmond always computes the taxable income for the furnished room on the most favorable basis.
Administration of Tax
Her Majesty’s Revenue and Customs (HMRC) collects tax.
Self-Assessment
1. Tax Return → Document → to perform tax calculations
2. Tax Payment → → when actually paying tax in cash
Tax Return:
- HMRC send “Reminder Forms” to taxpayers as to notify to file the tax returns.
Form receiving date → 31 July after FY For FY 21/22, it is?
- Then the person is required to file the personal tax return via:
Non-Electronically (in paper form) → 31 October after the FY
Electronically (via the internet) → 31 January after the FY
There are two exceptions to this above general rule:
No. 1
- If the notice to file a tax return is issued by HMRC to the taxpayer after
31 July, but on or before 31 October. In this case, the latest filing date is:
- The end of 3 months following the notice, for a non-electronic return.
- 31 January for an electronic return.
No. 2
- If the notice to file the tax return is issued by HMRC to the taxpayer after
31 October. In this case, the latest filing date is:
The end of 3 months following the notice (for both electronic and non-electronic).
Business Record Keeping:
Must be retained until 5 years after the 31 January following the tax year.
Non-Business Record Keeping:
Must be retained until 1 years after the 31 January following the tax year.
Penalty:
The maximum penalty for each failure to keep and retain records is £3,000 per tax year/accounting
period. This penalty can be reduced by HMRC.
Late Filing of Returns → Penalty:
¤ There will be an initial £100 penalty if a self-assessment tax return is filed after the due date.
¤ If a return is more than three months late then there will be a daily penalty of £10 per day (for a
maximum of 90 days).
¤ If a return is more than six months late a penalty of 5% of the tax due will be charged (subject to
a minimum of £300).
¤ If a return is more than 12 months late a further penalty of 5% of the tax due can be charged
(subject to a minimum of £300), although a higher percentage will be charged if the failure to
submit is deliberate.
Penalty For Late payment of Tax:
A penalty is chargeable where tax is paid after the penalty date. The penalty date is 30 days after the
due date for the tax. Therefore, no penalty arises if the tax is paid within 30 days of the due date.
Date of payment Penalty
Upto one month NIL
After 1 months from the penalty date 5% of unpaid tax
More than 5 months after the penalty 10% of unpaid tax
More than 11 months after the penalty date 15% of unpaid tax
The penalties are non-cumulative and only apply to the balancing payment, and not to Payments On
Account (POA) and POA is comprises of income tax, Class 4 NIC.
Interest on late payments:
Interest is payable on both payment on account and balancing payments if they are paid late.
Interest on underpaid tax = 2.6% Interest on overpaid tax = 0.5%
Penalties For Errors:
Taxpayer behavior Maximum penalty
Careless/Failure to take reasonable care 30%
Deliberate but no concealment 70%
Deliberate with concealment 100%
Self-assessment is a calculation of the amount of taxable income and gains after deducting reliefs and
allowances, a calculation of income tax and capital gains tax payable after taking into account tax
deducted at source and tax credit of dividends.
If tax payer is filing electronic tax return, calculation of tax liability is made automatically.
If tax payer is filing a non-electronic tax return, and wants HMRC to make tax calculations on his behalf,
he should file the non-electronic tax return before 31 October
A tax return may be amended by the tax payer within 12 months after the filing date. Amendment may
be made by the HMRC also to remove any obvious error or omission (arithmetic error)
Payment on accounts (tax in installments) and the final payment:
- Mandatory / compulsory for → High and Additional rate taxpayers

- Optional for → Basic rate taxpayers
- Installment Amount → 50% X Last year tax liability
- 1st payment of account → 31 January during the tax year
- 2nd payment of account → 31 July following the tax year
- Final payment to settle balance → 31 January following the tax year
Payment on account is not required if tax payer has paid 80% or more of his liability through PAYE or
relevant amount falls below £1,000.
A taxpayer can claim to reduce POAs, at any time before 31 January following the tax year, if they expect
the actual income tax and Class 4 NIC liability (net of tax deducted at source) for 2021/22 to be lower
than 2020/21.
The claim must state the grounds for making the claim.
Following a claim:
The POAs will be reduced.
Each POA will be for half the reduced amount, unless the taxpayer claims that there is no tax liability at
all.
If POAs are paid before the claim, then HMRC will refund the overpayment.
Summary of Taxes
Employed → PAYE on monthly basis

Income Tax
Non- Employed → POA concept applicable
On monthly basis → paid by employer
Class 1 and 1A NIC Electronically → 22nd of the following month
Non-Electronically → 19th of the following month
Class 2 NIC Paid on Weekly / Annually basis
Class 4 NIC POA concept applicable
Capital Gain Tax (CGT) Paid at once → 31 January after the FY
Inheritance Tax (IHT) Paid at once → after 6 months → from → month end of death
Question 1:
Pi Casso has been a self-employed artist since 1990, making up her accounts to 30 June. Pi’s tax
liabilities for the tax years 2020/21, 2021/22 and 2022/23 are as follows:
2020/21 2021/22 2022/23

£ £ £
Income tax liability 3,240 4,100 2,730
Class 2 national insurance contributions 156 156 156
Class 4 national insurance contributions 1,240 1,480 990
Capital gains tax liability – 4,880 –
No income tax has been deducted at source.
(a) Prepare a schedule showing the payments on account and balancing payments that Pi will
have made or will have to make during the period from 1 July 2022 to 31 March 2024,
assuming that Pi makes any appropriate claims to reduce her payments on account.
Note: your answer should clearly identify the relevant due date of each payment.
(b) State the implications if Pi had made a wrong claim to reduce her payments on account for the
tax year 2021/22 to nil.
(c) Advise Pi of the latest date by which her self-assessment tax return for the tax year 2021/22
should be submitted if she wants HM Revenue and Customs (HMRC) to prepare the self-
assessment tax computation on her behalf.
Self-assessment is a calculation of the amount of taxable income and gains after deducting
reliefs and allowances, a calculation of income tax and capital gains tax payable after taking into
account tax deducted at source and tax credit of dividends.
If tax payer is filing electronic tax return, calculation of tax liability is made
automatically.
If tax payer is filing a non-electronic tax return, and wants HMRC to make tax
calculations on his behalf, he should file the non-electronic tax return before 31 October
A tax return may be amended by the tax payer within 12 months after the filing date.
Amendment may be made by the HMRC also to remove any obvious error or omission
(arithmetic error)
(d) State the date by which HMRC will have to notify Pi if they intend to enquire into her self-
assessment tax return for the tax year 2021/22 and the possible reasons why such an enquiry
would be made.
Losses of Individuals
Sources of income for an individual person Loss?

6 Pension xxx
Total income xxx

Less: qualifying interest (xx)
Net income xxx
Less: Personal allowance (Tapering – ANI working) (xxx)
Taxable income xxx
7 Capital gains XXX

Property Loss (PL)
Step 1:
Current year property loss → Adjust with → Current year property income from other properties
Step 2:
After the adjustment in step 1 above, if there is still a property loss remaining → adjust with → future
year property income (first available income and maximum possible extent)
Example:
Show the treatment of PL:
Example:
Show the treatment of PL:
20/21 21/22 22/23
(1,000) 400 2500

Property income
Capital Loss (CL)
Step 1:
Current year capital loss → Adjust with → Current year capital gains from disposal of other assets
Step 2:
After the adjustment in step 1 above, if there is still remaining capital loss → adjust with → future year
capital gains (first available gains and maximum possible extent), however, loss should be restricted to
preserver “Annual Exemption (AE) of £12,300”).
Example:
Show the treatment of CL:
(Without planning AE) 20/21 21/22 22/23
Capital gain (10,000) 15,000 20,000
Adjustment of loss
AE (not preserving)
Taxable gains
(With planning AE) 20/21 21/22 22/23
Capital gain (10,000) 15,000 20,000
Adjustment of loss
AE (preserving)
Taxable gains
Terminal Capital Loss (TCL)
- Capital loss arise in the year of death, is termed as TCL.
- It can be carried back upto 03 years, on LIFO basis against capital gains, (first available gains and
maximum possible extent), however, loss should be restricted to preserver “Annual Exemption
(AE) of £12,300”.)
- The repayment due to TCL is a Taxable receipt for IHT purposes and it is to be added in the
calculation of Estate.
Trading Loss (TL)
Current Year Trading Loss:
Option 1 Carry forward → adjust from → future trading income (first available & MPE)
Current year → adjust from → total income, if still remaining

Option 2
then, use option 1 step for remaining loss
Carry back (max 12 months) → adjust from → total income, if still remaining
Option 3
then, use option 1 step for remaining loss
Current year → adjust from → total income, if still remaining

Option 4
then, use option 3 steps for remaining loss
Carry back (max 12 months) → adjust from → total income, if still remaining
Option 5
then, use option 2 steps for remaining loss
Current year → adjust from → total income
Current year → adjust from → Capital Gains (extended current year)
Option 6 Carry back (max 12 months) → adjust from → total income
Carry back (max 12 months) → adjust from → Capital Gains (extended carry back)
if still remaining , then, use option 1 step for remaining loss
Carry back (max 12 months) → adjust from → total income
Carry back (max 12 months) → adjust from → Capital Gains (extended carry back)
Option 7
(vice
Current year → adjust from → total income
versa of
option 6)
Current year → adjust from → Capital Gains (extended current year)
if still remaining , then, use option 1 step for remaining loss

Q1: (Trading Loss and Property Loss)
17/18 18/19 19/20 20/21 21/22
Property Income (15000) 10000 12500 12000 10000

Business Income 40000 95000 (10000) 23000 (45000)
Interest Income 5000 - 5000 - -
Employment Income 25000 20000 17500 30000 25000
Solution:
17/18 18/19 19/20 20/21 21/22
Property Income 10000 12500 12000 10000
Business Income 40000 95000 23000
Interest Income 5000 - 5000 - -
Total
Adjustment
Net income
L: PA
Taxable
Memorandum of loss Memorandum of loss Memorandum of loss

How to quantify the tax saving by adjusting the loss:
Step 1: Calculate ITL without adjusting loss
Step 2: Re-calculate ITL after adjusting loss
Step 3: Take the difference of Step 1 & 2, it would be your tax saving
Question 1 Data – Loss Adjustment in FY 2018-19

Working – Tax Saving Step 1 Step 2
Total Income
Loss adjustment
Net income
L: P.A
Taxable income
Question 1 Data – Loss Adjustment in FY 2020-21

Working – Tax Saving Step 1 Step 2
Total Income
Loss adjustment
Net income
L: P.A
Taxable income
Factors → Which option to opt for loss adjustment?

1. Rate of tax saved, 45%, 40%, 20% for income tax purposes
20%, 10% or 28% , 18% for capital gains tax purposes
2. Try not to waste personal allowance & annual exemption
3. Liquidity position → Behavioral aspect (c/y, c/b, c/f)
Carry forward is generally the last option as future in uncertain

Losses Cap (Restriction)
- Only applicable on → trading loss → at time of taking adjustment from Total Income of
Current Year Carry Back

- It is also applicable on “Opening Year Loss Relief” as well
(will see in question 7)
- We cannot take loss adjustment from current year total income and carry back total income for
a full amount of loss.
- It is necessary to find the loss amount to be adjusted according to the cap concept.
CAP amount is calculated as:
CAP = Trading income (if any) + Higher of
- £50,000
- 25% of Other Total Income (OTI)
OTI = Total income (excluding trading) – PPC (g)
- CAP amount can never ever be less than £50,000
- Losses cap only applicable when total income & loss, both, > £50,000
- If either income or loss (any one thing) is < £50,000, then CAP would not be applicable
Q2: (Losses-Capping Concept)
For the year ended 5 April 2022 Gloria made a trading loss of £145,000, having made a trading profit of
£30,000 for the year ended 5 April 2021. She has employment income of £125,000 in each of the tax
years 2020/21 and 2021/22.
CAP amount is calculated as: ______ ______
CAP = Trading income (if any)

+ Higher of
- £50,000

Paul has trade losses in 2021/22 of £300,000. Paul’s other income in the previous two tax years was as
follows:
2020/21 profits from the same trade of £60,000, employment income £110,000
2021/22 employment income £110,000.
Paul paid personal pension of 5000 and 8000 in 2020/21 and 2021/22 respectively.

+ Higher of
- £50,000

Mary has losses from a business of £175,000 in 2020/21, and £100,000 in 2021/22. Mary’s other income
in 2020/21 and 2021/22 is £600,000.
Mary’s loss relief claims in 2020/21 and 2021/22 will be?

+ Higher of
- £50,000

Question5: (Trading loss-extended current year)
17/18 18/19 19/20 20/21 21/22

Business Income 20000 (165000) 10000 45000 (25000)
Capital Gains - 20000 22000 - 25000
Solution: 17/18 18/19 19/20 20/21 21/22

Business Income 20000 10000 45000
Total
Adjustment
Net income
L: PA
Taxable
Capital Gains - 20000 22000 - 25000
Adjustment
Net gains
AE
Taxable gains
Incorporation Loss Relief:
- When a sole trader get incorporation of his business as a company &
- The sole trader business is a loss-making entity
- Sole trades business loss cannot be adjusted with the results of company as it’s a separate legal
entity
Sole trader business losses can be adjusted with the income of the person which he drives from the
company (Employment + Dividend) subject to condition that the person must have shareholding of 80%
above to adjust the loss.
Opening Year Loss & Opening Year Loss Relief:

- Business starting 4 years loss would be considered as OYL
- Starting 4 years means, loss in any year or any years
- OYL → can be adjusted from → Total income of previous 3 tax years → on FIFO basis
- Although other (07 Options) are also available for OYL
Question 6: (opening year)
Business started in Tax year 19/20
17/18 18/19 19/20 20/21 21/22

Business Income - - - 45000 (65000)
Employment Income 48000 25000 35000 25000 -
Solution: 17/18 18/19 19/20 20/21 21/22
Business Income - - - 45000 NIL
Employment Income 48000 25000 35000 25000 -

Total
OYLR Adjustment
Net income
L: PA
Taxable
Question 7: (Losses-capping concept)
Thom started his business as a florist on 6 April 2021. Due to an annual investment allowance claim, his
first-year loss is £100,000. Tom’s salary in the previous three tax years was as follows:
• 2018/19 – £25,000
• 2019/20 – £27,000 plus bonus £50,000: total £77,000
• 2020/21 – £30,000
Thom wants to carry back the loss under opening year loss relief.
18/19 19/20 20/21 21/22

Employment Income 25000 77000 30000 -
Business Income - - - NIL
Total
OYLR Adjustment
Net income
When a new business starts, we always calculated Basis Period for a new business. But we always had
Profits in question; now let’s talk about what if the there is a Loss at the start of a business?
Business Start ➔ Losses ➔ Basis Periods
E.g.
Business started on 1 Jan 2020:
1.1.20 ----------------------------- 31.12.20 = (12,000)
1.1.21 ----------------------------- 31.12.21 = (18,000)
Solution:
Question 8:
Mr A is employed as a dustman until 1 January 2021. On that date he starts up his own business as a
scrap metal merchant, making up his accounts to 30 June each year. His earnings as a dustman are:
£
2017-18 5,000
2018-19 6,000
2019-20 7,000
2020-21 (nine months) 6,000
His trading results as a scrap metal merchant are:
Profit / (Loss) £
Six months to 30 June 2021 (3,000)

Year to 30 June 2022 (1,500)
Year to 30 June 2023 (1,200)
Assuming loss relief is claimed ASAP, the net income for each of the years 2017-18 to 2023-24.
.
Terminal Loss and Relief:
- Loss arising in the final 12 months prior to cessation of business is terminal loss
- Terminal loss relief is available & can be adjusted against → Trading Income of last 3 years (36
months) on LIFO basis
Example:
- Alpha commenced in business as a sole trader on 1 July 2013
- Overlap profits from the commencement of the business are 7800
- Ceased trading on 31 December 2021
- Tax-adjusted trading profits/(losses) of the business were as follows:
Year Ended Year Ended Year Ended Year Ended Six months ended
30 June 2018 30 June 2019 30 June 2020 30 June 2021 31 December 2021
44,000 32,000 21,000 (4,000) (23,000)
Requirement: Calculate terminal loss & show how it will be adjusted against trading profits.
Capital Allowances of Business cessation year:
1. AIA is not available in last accounting period
2. There is no capital allowance @18% or 6% in last accounting period, although we get balancing
adjustment (balancing charge or balancing allowance)

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Advanced Taxation (ATX) – FA 2021

Sources of income for an individual person

1 Property income xxx

2 Employment income xxx

3 Trading Income xxx

4 Interest income xxx

5 Dividend income xxx

Total income xxx

Less: Qualifying Interest (xx)

Net Income xxx

Less: Personal allowance (PA) (xx)

Taxable income xxx

Income Tax Rates

Example 2: Total income £10,000 Required: Taxable income?

Example 3: Total income £35,000 Required: Income tax liability?

Example 4: Total income £57,850 Required: Income tax liability?

Example 6: Taxable income £180,000 Required: Income tax liability?

Example 7: Taxable income £165,000 Required: Income tax liability?

1. To pay inheritance tax

Close Company: any company which is

- Controlled by 5 or less shareholders (should be individual shareholders) or

Cash earnings Benefits Deductions

Add/Increase E.I Deduct/Decrease E.I

Add/Increase E.I Do nothing/Ignore

Cash earnings include:

Taxable benefits → Calculation methodology

As allowed by HMRC and these will reduce employment income

- It is calculated when an employer provides car to employee

- Car benefit = Cost of car * CO2 emission % * No. of months

- Car benefit is month apportioned

- No business and private use distinction

- Employees’ reimbursement (Partial or Full) is allowed to be deducted from car benefit if he

reimbursed employer against the use of the car

Undiscounted list price xxx

Add: Any improvement incurred before 6 April 2020 xxx

Cost of car xxx

- Installation of cell phone in the car

- Any personal equipment for disabled person

CO2 Emissions For Electric Cars:

1% (Electric-powered motor cars with zero CO2 emissions)

CO2 Emissions For Hybrid Cars:

Electric motor cars with CO2 emissions between

- 51 g/km – 54 g/km 14%

- 55g/km – above (xxx – 55) / 5 = xxx % (Round down)

- It is calculated when an employer provides fuel to employee

Question: Continuing with data given in above question:

Exempt ancillary benefits of car:

Company Van – Usage Benefit

- It is calculated when an employer provides van to employee

- Van’s carriage capacity = 2,500 Lbs above

- Van benefit must be month apportioned

- No business and private use distinction

- Reimbursements are not allowed

- There is no calculation for van benefit

- It is a fixed and notional amount of £3,500

Company Van – Fuel Benefit

- Van fuel benefit must be month apportioned

- No business and private use distinction

- Reimbursements are not allowed

- There is no calculation for van fuel benefit

- It is a fixed and notional amount of £669

Employer owned property Rented property

- Accommodation benefit is months apportioned.