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UK Taxation for Students: A Simplified Approach by Malcolm Finney

Malcolm Finney, author of ‘UK Taxation for Students: A Simplified Approach’, sets out an eight step process to help students when preparing a tax computation for an individual.The following is a set of rules to follow for individual tax computations:

Step 1

Work out the various amounts of income which are taxable.

Step 2

Categorise the individual incomes into one of three categories:

• Non-Savings income (i.e. property business income, trading income and employment income)

• Savings income (i.e. interest)

• Dividend income (i.e. dividends)

Step 3

Add up the amounts under each of these three categories to give three separate sub‐totals.

Step 4

Deduct from the total for Non-Savings income under Step 3 the amount of any charges on income.

If total charges on income exceed the total for Non-savings income then deduct the surplus from Savings then Dividend income.

The total of the three categories will comprise Statutory Total Income (STI).

Step 5

Deduct from Non‐Savings income STI (arrived at under Step 4) the personal allowance to give Non-Savings Taxable income.

If the personal allowance exceeds the total for Non-savings income STI deduct the surplus from Savings STI then Dividend STI.

(The total of the three categories gives total Taxable income.)

Step 6

Compute tax liability by applying rates of income tax to each of the three taxable income figures obtained under Step 5 for each of Non-savings income; Savings income; and Dividend income.

Step 7

Add back any income tax deducted when making any charge on income payments to give total income tax liability.

Step 8

Deduct from the total in Step 7 any income tax which may have been deducted at source from income received (e.g. tax on bank interest received; PAYE on salary) to get total income tax payable.

When actually working out an income tax liability the above layout should be used but do not include the references to the various “Steps” as they have been included for illustration purposes only.

Some important points to note:

• all figures included in a tax computation are gross

• it is necessary to keep three separate columns for each category of income

• deduct the charges on income against the Non-savings income column first

• deduct the personal allowance against the Non-savings income column first

• the personal allowance is fixed for a tax year; £4,895 for tax year 2005/2006

• the personal allowance is deducted from STI to give Taxable income

• Non-savings then Savings then Dividends are taxed in that order

• add back any tax deducted when making charges on income payments (only applies to patent royalty payments)

• deduct any tax deducted at source from income received

• income tax liability is different from income tax payable

Income tax liability versus income tax payable

An individual’s income tax liability is the liability based upon aggregate income less certain deductions.

However, where some income has been received after tax at source has been deducted (e.g. bank interest) in effect this tax deducted represents a partial settlement of the individual’s ultimate income tax liability on this income.

This is therefore why any tax deducted on income received must be deducted from the income tax liability calculated (see Steps 7 and 8) as only the balance is actually payable.

Summary

The categories of income which fall within Non-Savings, Savings and Dividend Income and/or the payments which suffer deduction of tax at source need to be remembered.

The basis of assessment for each category of income is very important (as will be seen later in the book).

The proforma layout used to calculate an individual’s income tax liability is also very important and must be remembered.

September 2005

Malcolm Finney B.Sc M.Sc (Bus Admin) M.Sc (Org Psy) MCMI C Maths MIMA

About the author

Malcolm Finney is an international tax consultant and founder of Management Dynamics which specialises in both tax and management training and consultancy. Malcolm has also lectured on taxation at many of the London based accountancy colleges.

Formerly, Malcolm was Head of Domestic and International Tax at the London based law firm Nabarro Nathanson; Head of International tax at international accountancy firm Grant Thornton; and prior to Grant Thornton worked for J F Chown & Co Ltd, J Henry Schroder Wagg & Co Ltd and Duncan C Fraser & Co.

Malcolm is joint editor of the leading text International Corporate and PersonalTaxation published by Tolley/Butterworth and has recently published Inheritance Tax for Students: A Simplified Approach a book also intended for accountancy students (Spiramus Press, 2005). Malcolm has written extensively for numerous tax journals both domestic and international and has also spoken at both domestic and overseas conferences on a variety of taxation topics.

The above article is adapted from ‘UK Taxation for Students: A Simplified Approach’ published by Spiramus Press Ltd. To order UK Taxation for Students: A Simplified Approach click here