ACCA ATX: Income Tax — Advanced Guide

Employment Income at ATX Level

Salary and the PAYE System

Employment income is taxed under PAYE, with the employer deducting income tax and Class 1 National Insurance Contributions (NICs) at source. For ATX, you need to understand how PAYE operates as a system — not just the mechanics — because exam scenarios involve advising employees and employers on the implications of remuneration packages.

Class 1 employee NICs are charged at 8% on earnings between the primary threshold (£12,570) and the upper earnings limit (£50,270), then 2% above that. Class 1 employer NICs are charged at 13.8% on earnings above the secondary threshold (£9,100), with no upper limit. The total employer NIC cost is a key consideration when comparing salary-based remuneration with dividends or pension contributions.

Benefits in Kind: Company Cars

The car benefit charge is a percentage of the car's list price — the manufacturer's published price including standard accessories, delivery, and VAT, but before any discount. The percentage is determined by CO2 emissions:

• Electric vehicles (0g/km): 2%

• 1–50g/km (zero-emission range 130+ miles): 2%

• 51–75g/km: 5%

• 76–94g/km: 15%, rising by 1% per 5g/km bracket thereafter

• Maximum charge: 37% at 170g/km and above

A fuel benefit arises if the employer also meets the cost of private fuel. It is calculated by applying the same CO2 percentage to a fixed multiplier of £27,800 (2024/25). The fuel benefit is almost always disproportionately expensive relative to actual private fuel consumed — ATX planning questions often ask whether the employer should withdraw it, requiring you to compare the benefit charge against the cost of reimbursing the employee for actual business mileage instead.

Living Accommodation

The basic benefit charge is the higher of the property's annual value (rateable value) and the rent paid by the employer. An additional charge applies where the employer's cost of providing the accommodation exceeded £75,000 — the excess above £75,000 is multiplied by the official rate of interest (2.25% for 2024/25) and added to the basic charge. Where accommodation is job-related (e.g., necessary for proper performance of duties, or customary in the type of employment), the additional charge does not apply. ATX scenarios frequently require you to determine whether accommodation is job-related before computing the benefit.

Beneficial Loans

Where an employer provides a loan at below the official rate, the employee is taxed on the difference between the interest actually paid and interest at the official rate. The benefit can be calculated using the average method (opening and closing loan balances averaged, multiplied by the official rate) or the strict method (daily balance approach). The de minimis exemption applies where the total of all cheap/interest-free loans does not exceed £10,000 at any point in the year.

Allowable Employment Expenses

Employment expenses are only deductible if incurred wholly, exclusively, and necessarily in the performance of the employment duties. This is a stricter test than for trading income. Qualifying expenses include subscriptions to professional bodies approved by HMRC, travel costs on business journeys (but not ordinary commuting), and flat-rate allowances for specific occupations. The "necessarily" element means the expense must be required by the nature of the duties, not merely convenient.

Trading Income: Key ATX Issues

Adjustment of Profit

Tax-adjusted trading profit begins with accounting profit and requires adjustment for disallowable expenditure (added back) and non-taxable income (deducted). Common disallowable items include:

• Depreciation — replaced by capital allowances

• Capital expenditure included in revenue accounts

• UK customer entertaining (overseas customer entertaining is allowable)

• Fines and penalties for breaking the law

• Provisions that are general rather than specific

• Excessive remuneration paid to connected parties

The capital vs revenue distinction is a regular ATX exam issue. Repairs that restore an asset to its original working condition are revenue expenditure (deductible); improvements that enhance the asset beyond its original state are capital expenditure (disallowable for trading income purposes, but may attract capital allowances).

Basis Period Reform: The Tax Year Basis

From 2024/25, all unincorporated businesses — sole traders and partnerships — are assessed on profits arising in the tax year itself, regardless of their accounting date. The transitional year was 2023/24, when all businesses with non-5 April year-ends brought their assessments into line. Overlap profits accumulated under the old current year basis were relieved in full during 2023/24. Any additional transitional profits arising from the extended period could be spread over five years (2023/24 to 2027/28).

For ATX, the key implication is that the old opening year rules and overlap relief calculations no longer apply to periods from 2024/25 onwards. However, transitional spreading elections and the relief of overlap profits may still appear in exam questions set in the 2024/25 period.

Trading Losses

Trading loss relief options for unincorporated businesses:

• Current year and carry back (s.64 ITA 2007): offset against total income of the tax year of the loss and/or the preceding year, in any order

• Carry forward (s.83): offset against future profits from the same trade — relief is mandatory and applied before other income

• Opening year losses (s.72): carry back against total income of the three years before the year of loss, on a LIFO basis

• Terminal loss relief (s.89): the terminal loss (broadly the loss in the final 12 months of trading) is carried back against profits of the same trade in the final year and the three preceding tax years, latest year first

ATX loss questions require you to identify all available reliefs, calculate the tax saving under each, and recommend the most beneficial option — considering the timing of relief, the rates at which relief is obtained, and the impact on personal allowances and other reliefs.

Property Income

Furnished Holiday Lettings

Furnished holiday letting (FHL) income receives special treatment because FHL properties are regarded as a business activity rather than passive investment. The qualifying conditions for UK FHL are:

• The property must be available for commercial letting for at least 210 days in the tax year

• It must actually be commercially let for at least 105 days

• Periods of longer-term occupation (more than 31 consecutive days) must not exceed 155 days in aggregate

The tax advantages that ATX candidates must be able to explain and apply:

• Capital allowances on furniture, fixtures, and equipment — unlike ordinary property, no furniture replacement allowance restriction

• FHL profits count as relevant UK earnings for pension annual allowance purposes

• Business Asset Disposal Relief (BADR) on disposal — 10% CGT rate instead of 18%/24%

• CGT rollover relief — proceeds from FHL sale can be reinvested in qualifying business assets

• Holdover relief on gifts of FHL property

Rent-a-Room Relief

Individuals letting furnished accommodation in their only or main residence can receive up to £7,500 gross rent per year completely tax-free (halved to £3,750 where the income is shared with another person). Where gross rents exceed £7,500, the taxpayer may elect to be taxed on the excess above £7,500 rather than on actual net profit — advantageous where expenses are low.

Property Business Losses

Ordinary property business losses are carried forward automatically and set against future property income profits. They cannot be set against other income sources. FHL losses are ring-fenced separately and carried forward only against future FHL profits — they cannot be mixed with ordinary property losses.

Savings and Investment Income

Savings Income

A savings income starting rate of 0% applies to the first £5,000 of savings income, but only to the extent that non-savings income does not already use up this band. Above the starting rate band, the personal savings allowance (PSA) provides a further 0% band: £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers receive no PSA. Savings income above these thresholds is taxed at 20%, 40%, or 45% depending on the band it falls into.

Dividend Income

The dividend allowance for 2024/25 is £500. Dividends above this are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). Dividends always sit at the top of the income tax stack — above non-savings income and savings income — making them the first income to suffer from the reduction in the additional rate threshold. ATX planning questions often compare dividends versus salary remuneration, requiring you to consider both income tax and NIC costs.

Personal Allowance and High-Income Planning

The £100,000 Taper

The personal allowance for 2024/25 is £12,570. Where adjusted net income (ANI) exceeds £100,000, the allowance is reduced by £1 for every £2 above £100,000. The allowance is completely withdrawn at £125,140 (£100,000 + 2 × £12,570). This taper creates an effective marginal income tax rate of 60% on income between £100,000 and £125,140 — one of the most important planning traps in ATX.

Using Pension Contributions to Restore the Allowance

Pension contributions reduce ANI. A taxpayer with ANI of £112,570 has lost their entire personal allowance, paying an effective 60% rate on the band above £100,000. A personal pension contribution of £12,570 (net £10,056) would reduce ANI to £100,000 and restore the full personal allowance. The combined saving — 40% income tax relief on the contribution plus 20% income tax on the restored personal allowance — can be quantified precisely in an ATX answer.

Reliefs: Pensions and Gift Aid

Pension Contributions

Tax relief is available on pension contributions up to the lower of relevant UK earnings and the annual allowance. For 2024/25, the annual allowance is £60,000. Relief is given at source for personal contributions (basic rate deducted by the pension provider, higher/additional rate claimed through self-assessment). Employer contributions attract no income tax charge and are deductible for corporation tax, but count toward the annual allowance.

The tapered annual allowance reduces the allowance by £1 for every £2 by which adjusted income exceeds £260,000, down to a minimum of £10,000. Unused annual allowance from the three preceding tax years may be carried forward, provided the individual was a member of a registered pension scheme in those years — current year allowance is always exhausted first.

Gift Aid

Charitable donations under Gift Aid are treated as paid net of 20% basic rate tax. The gross donation (net payment × 100/80) is used to extend the basic rate band and the savings starting rate band, giving higher and additional rate taxpayers relief at their marginal rates through self-assessment. Gift Aid donations also reduce ANI, which may help restore the personal allowance or avoid the tapered annual allowance — a secondary planning benefit that ATX questions may ask you to identify.

ATX Exam Planning: Income Tax Strategies

Income tax planning is a core ATX skill. The examiner expects candidates to identify opportunities, quantify the tax saving, and consider implementation risks. Key strategies:

• Income shifting between spouses: transferring income-producing assets to a spouse or civil partner taxed at a lower rate to exploit their personal allowance, basic rate band, PSA, and dividend allowance — subject to the settlements legislation anti-avoidance rules where arrangements lack genuine commercial substance

• Pension planning to restore the personal allowance: calculating the 60% effective rate trap and demonstrating the value of contributions that pull ANI below £100,000

• FHL structuring: advising on whether a letting portfolio qualifies for FHL status and the advantages of restructuring to meet the qualifying conditions

• Timing of income and expenditure: deferring income into a lower-income tax year or accelerating deductions to obtain relief at a higher marginal rate

In every planning scenario, present a clear before-and-after tax comparison, calculate the net saving, and note any commercial or practical risks. Marks in ATX planning questions are typically allocated to the quality of advice and the accuracy of calculations in equal measure.

For a complete overview of the ATX syllabus and exam structure, visit the ATX study hub or explore Learnsignal's Advanced Taxation course page.

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