When preparing the income tax return, income and expenses must disclosed accurately.
One of the guaranteed areas in any tax exam is an income tax computation.
The important thing is to tax income in the right order-first non-savings, then savings and finally dividends (essentially the personal allowance is allocated to the non-savings income).
Don’t forget to restrict the personal allowance once the income exceeds £100,000 using the formula 50% (Adjusted net income -£100,000).
Personal pension contributions and gift aid payments are treated as paid net of 20% income tax. These payments are grossed up x 100/80 and extend both the basic and higher rate bands.
You also must allocate the correct nil rate band for savings: £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers.
With dividends, everyone gets the nil rate band of £2,000.
Computing the correct income tax will earn you a chunk of marks in the tax exam.
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