Taxation of Individuals: Income Tax, Employment and Personal Reliefs
Framework
UK income tax is charged on total income for the tax year (6 April to 5 April). Compute statutory total income, deduct allowable reliefs (trading losses, qualifying loan interest), then apply the personal allowance. Allowances and rate bands are then allocated in the statutory order: non-savings income, savings income, dividends. This ordering matters more than any single rate, because the savings nil rate and the dividend nil rate depend on how much band the other income has already used.
Concepts to master
- Personal allowance (12,570) tapered by 1 for every 2 of adjusted net income above 100,000, so it is fully lost at 125,140.
- Savings nil rate (1,000 basic, 500 higher, nil additional) and the 500 dividend allowance: these are nil-rate bands, not exemptions. The income still uses up band.
- Gift Aid and relief-at-source pension contributions extend the basic and higher rate limits by the gross contribution; net pay contributions reduce income and can restore a tapered allowance.
- Employment income: earnings, benefits in kind (cars, beneficial loans, vouchers), termination payments above 30,000, and the interaction with Class 1, 1A, 1B and Class 4 NIC.
Traps
Questions love the 60% effective marginal rate created by tapering, the high income child benefit charge, and treating the dividend allowance as tax-free income. Watch Scotland: Scottish rates apply only to non-savings, non-dividend income; savings and dividends use UK rates. Marriage allowance is only 10% transferable and is not available where either party is a higher rate taxpayer.
Rule of thumb
Reliefs that reduce net income (gross pension contributions, trading losses, Gift Aid) are worth 40% or 45% to a tapered taxpayer. Reliefs given only as a tax reducer (EIS, SEIS, VCT) are worth only the basic rate element. Always test whether a relief reduces income or reduces tax.