INCOME TAX | INCOME TAX ACT 2007
STEP 1 Trading Income (if applicable)
Chargeable Receipts
This includes receipts of the trade which derive from the trading activity itself. This
must be income in nature, as opposed to capital.
Less Deductible Expenditure
Any expenditure of income nature incurred wholly and exclusively for the trade,
including payment of salaries, rent, utility bills and stock.
Less Capital Allowances
Annual Investment Allowance (CAA 2001, ss51A-ss51N)
All businesses receive an annual investment allowance (AIA) of up to £1,000,000
on qualifying expenditure on plant/ machinery (being reduced to £200,000 in
January 2021). For example, John has an existing pool of machinery with a written
down value of £200,000. If John buys new machinery for £1,300,000, the first
£1,000,000 is included in the AIA will not impact his trading income figure. The
remaining £300,000 is pooled together with the existing £200,000. The total of
£500,000 benefits from a written down allowance of 18%.
Written Down Allowance (CAA 2001, ss52-ss59)
Capital assets purchased can enjoy an 18% ‘written down’ allowance. This
allowance is deducted when calculating trading income. For example, in 2019/20,
John bought new machinery for £10,000. The written down value of £10,000 -
18% is £9,820. The 18% (£180) is deducted during calculation of trading
income. During next year’s calculation, a further 18% writing down allowance is
taken from the remaining £9,820. Multiple assets can be ‘pooled’ together.
STEP 2 Calculate TOTAL Income (Trading Income plus other Income Sources)
ITTOIA 2005 Part 2 Trading income (profits of a trade, profession or vocation)
ITTOIA 2005 Part 3 Property income
ITTOIA 2005 Part 4 Savings and investments (Interest, annuities and dividends)
ITTOIA 2005 Part 5 Certain miscellaneous income
ITTOIA 2005 Part 6 Specifies sources EXEMPT from income tax
ITEPA 2003 Employment and pensions income
STEP 3 Deduct Allowable Reliefs, resulting in NET income
1. A loan to buy a share in a partnership of contribute to capital
2. A loan to invest in a close trading company
3. A loan to personal representatives to pay inheritance tax
STEP 4 Deduct Personal Allowance, resulting in TAXABLE income
£12,500 - (NET Income - £100,000 = Adjusted Personal Allowance
2
Personal Allowance of £12,500, reduced by £1 for every £2 exceeding the income limit
of £100,000. Therefore, incomes over £125,000 cannot enjoy relief.
STEP 1 Trading Income (if applicable)
Chargeable Receipts
This includes receipts of the trade which derive from the trading activity itself. This
must be income in nature, as opposed to capital.
Less Deductible Expenditure
Any expenditure of income nature incurred wholly and exclusively for the trade,
including payment of salaries, rent, utility bills and stock.
Less Capital Allowances
Annual Investment Allowance (CAA 2001, ss51A-ss51N)
All businesses receive an annual investment allowance (AIA) of up to £1,000,000
on qualifying expenditure on plant/ machinery (being reduced to £200,000 in
January 2021). For example, John has an existing pool of machinery with a written
down value of £200,000. If John buys new machinery for £1,300,000, the first
£1,000,000 is included in the AIA will not impact his trading income figure. The
remaining £300,000 is pooled together with the existing £200,000. The total of
£500,000 benefits from a written down allowance of 18%.
Written Down Allowance (CAA 2001, ss52-ss59)
Capital assets purchased can enjoy an 18% ‘written down’ allowance. This
allowance is deducted when calculating trading income. For example, in 2019/20,
John bought new machinery for £10,000. The written down value of £10,000 -
18% is £9,820. The 18% (£180) is deducted during calculation of trading
income. During next year’s calculation, a further 18% writing down allowance is
taken from the remaining £9,820. Multiple assets can be ‘pooled’ together.
STEP 2 Calculate TOTAL Income (Trading Income plus other Income Sources)
ITTOIA 2005 Part 2 Trading income (profits of a trade, profession or vocation)
ITTOIA 2005 Part 3 Property income
ITTOIA 2005 Part 4 Savings and investments (Interest, annuities and dividends)
ITTOIA 2005 Part 5 Certain miscellaneous income
ITTOIA 2005 Part 6 Specifies sources EXEMPT from income tax
ITEPA 2003 Employment and pensions income
STEP 3 Deduct Allowable Reliefs, resulting in NET income
1. A loan to buy a share in a partnership of contribute to capital
2. A loan to invest in a close trading company
3. A loan to personal representatives to pay inheritance tax
STEP 4 Deduct Personal Allowance, resulting in TAXABLE income
£12,500 - (NET Income - £100,000 = Adjusted Personal Allowance
2
Personal Allowance of £12,500, reduced by £1 for every £2 exceeding the income limit
of £100,000. Therefore, incomes over £125,000 cannot enjoy relief.
