Income Tax

Introduction

**Income tax** is one of the most heavily examined taxes in the SQE1 FLK1 'Tax' syllabus, and it sits at the heart of advising business clients. This chapter explains **who is chargeable** to income tax (individuals, companies, trusts and partnerships), the **basis of charge** on trading profits, the **five-step calculation** of an individual's income tax liability for the **2023/24** tax year (including the separate treatment of **non-savings non-dividend income**, **savings income** and **dividend income**), and the **anti-avoidance** framework (**GAAR**, **TAAR** and **DOTAS**). Income tax is charged principally under the **Income Tax Act 2007**, with employment income charged under the **Income Tax (Earnings and Pensions) Act 2003 ('ITEPA 2003')**.

Assessment focus

For the SQE1 FLK1 assessment you must be able to **apply** the income tax rules to a realistic client scenario, not merely recite them. You should be able to: determine an individual's **UK residence status** using the **statutory residence test** (automatic overseas tests, automatic UK tests, and the **sufficient ties test**); identify the **chargeable person** for a sole trade, company, trust or partnership; carry out the **five-step income tax calculation**; apply the **personal allowance** (and its taper above £100,000), the **starting rate band**, the **personal savings allowance** and the **dividend allowance**; and recognise the operation of the **GAAR** and related anti-avoidance provisions. Questions are single best answer questions (SBAQs) and often require **arithmetic**, so practise the calculation under timed, closed-book conditions.

Study tips

1) Memorise the **statutory residence test** order: **automatic overseas tests first**, then **automatic UK tests**, then the **sufficient ties test** (cross-referenced against the days-in-UK table). 2) Learn the **five steps**: total income → deduct reliefs → deduct personal allowance → tax NSNDI, then savings, then dividends → add together. 3) Remember the **2023/24 rates**: PA £12,570; basic 20% (to £37,700 taxable / income to £50,270); higher 40%; additional 45% (over £125,140). 4) Note the **personal allowance taper** (£1 lost for every £2 of income over £100,000; fully gone at £125,140). 5) Distinguish the **starting rate band** (up to £5,000 savings at 0% if NSNDI ≤ £5,000), the **personal savings allowance** (£1,000 basic / £500 higher / £0 additional) and the **dividend allowance** (£1,000 for all taxpayers); dividend rates are **8.75% / 33.75% / 39.35%**. 6) **A day counts** if the individual is present in the UK **at midnight**.