ICAEW Principles of Taxation (ICAEW) common mistakes
ICAEW Principles of Taxation · Understand the traps and how to avoid them.
Computing income tax on the taxable income figure and then applying the tax bands, instead of applying the bands to taxable income and then deducting the tax reducers (personal allowance is already removed at the taxable-income stage, so candidates re-deduct it or forget the 20% basic-rate extension for savings).
Candidates memorise 'gross income minus allowances equals taxable income' but then conflate the allowance with a tax credit, so they subtract 20% of the personal allowance from the tax bill, or double-count the allowance. The distinction between an allowance (reduces income) and a reducer/credit (reduces tax) is the single most common conceptual slip.
What to do instead
Write a fixed five-line proforma every time: total income; less reliefs; less personal allowance = taxable income; split taxable income into non-savings, savings and dividend slices; apply rates to each slice and only then apply tax reducers (marriage allowance, married couple's allowance) at the end. Practise ten short computations where the personal allowance is tapered or partly lost so the proforma is automatic.
Treating the personal allowance as available in full when adjusted net income exceeds £100,000, rather than reducing it by £1 for every £2 of excess and identifying the £125,140 point at which it is fully withdrawn.
The taper is buried in the detail of the allowance rules and candidates rarely see it in textbook examples, so they apply the full allowance to a high earner and understate tax. They also miss that the effective marginal rate in the taper band is 60%.
What to do instead
Before any computation, calculate adjusted net income (total income less gross pension contributions and gift aid) and test it against £100,000. If above, compute the reduction as (ANI − 100,000)/2 and cap the allowance at nil. Keep a one-line note of the 60% marginal rate band so you recognise when a question is deliberately testing it.
Missing the £1,000 savings nil-rate band and applying the personal savings allowance to the wrong taxpayer, or stacking savings and dividend income in the wrong order so the starting rate for savings is misapplied.
Three separate savings reliefs (starting rate for savings, personal savings allowance, savings nil-rate band) interact with the ordering rules, and candidates treat them as interchangeable or forget that the PSA is nil for additional-rate taxpayers and £500 for higher-rate taxpayers.
What to do instead
Always lay income out in the statutory order: non-savings, then savings, then dividends, with the personal allowance set against non-savings first. Then apply the £5,000 starting rate for savings only to the extent non-savings income is below £5,000, and the PSA to the remaining savings income. Do three worked examples with a basic-rate, higher-rate and additional-rate taxpayer side by side.
Computing the dividend nil-rate band as a deduction from dividend income rather than as a 0% rate applied to the first £500 of dividend income that falls within the bands, and then forgetting dividends sit on top of other income for band allocation.
The £500 dividend allowance behaves like a nil-rate band, not an allowance, so it still uses up band capacity. Candidates deduct it like the personal allowance and then apply 8.75%/33.75% to the wrong amount, and they forget that dividends are the top slice.
What to do instead
Treat the £500 as a slice taxed at 0% within the dividend tax bands, and remember it consumes basic- or higher-rate band. Draw a band diagram with the personal allowance, savings and dividend slices stacked, and shade the 0% slice rather than removing it. Check the answer by confirming total taxable income is unchanged by the allowance.
Calculating capital gains tax on chargeable gains without first deducting the annual exempt amount, or applying the exempt amount to each gain separately instead of once to the aggregate, and using the wrong rate where residential property or carried interest gains fall in the higher-rate band.
Candidates carry over the income tax allowance habit and assume an allowance per gain, or they forget the AEA is applied after losses and before the rate. The 18%/24% residential property rates and the interaction with unused basic-rate band are frequently missed.
What to do instead
Use the fixed order: consideration less allowable cost less incidental costs = gain; less capital losses; less annual exempt amount; = taxable gain. Then allocate the taxable gain to any unused basic-rate band at 18% (or 24% for residential property) and the balance at 24%. Practise one disposal of shares and one of a residential property in the same session to fix the rate difference.
Answering an inheritance tax question by applying the nil-rate band to the estate without first checking the transferable nil-rate band from a predeceased spouse and without deducting liabilities and reliefs before the band is applied.
The transferable nil-rate band and the residence nil-rate band taper are the two most examinable IHT mechanics, and candidates default to the single £325,000 figure. They also apply the band to gross assets rather than to the net chargeable estate after debts, funeral costs and reliefs.
What to do instead
Build the estate in a fixed sequence: gross assets; less liabilities and funeral expenses; less business and agricultural relief; less spouse exemption and charity exemption; = chargeable estate. Then compute the available nil-rate band as £325,000 plus any unused percentage transferred from the deceased spouse, and apply the residence nil-rate band only if a qualifying residence passes to direct descendants, tapering it above £2 million. Do one full worked estate with a transferable band and one without.
Mixing the cash basis and accruals basis for trading profits, or forgetting the opening and closing year rules and the overlap relief when a sole trader starts or ceases, so profits are double-counted or omitted.
The basis period rules changed and candidates learn one version and apply it to all scenarios. They also forget that capital allowances, not capital costs, are the deduction for plant and machinery, and they treat private-use adjustments as optional.
What to do instead
For each trading question, state the basis period explicitly before computing anything, then list adjustments in a standard order: net profit per accounts; add back disallowable expenditure and depreciation; deduct capital allowances; deduct private-use proportions. For opening and closing years, draw a timeline of tax years against accounting periods and mark which profits fall in each. Memorise that overlap relief arises only on cessation under the current rules.
Computing capital allowances on the whole cost of an asset without applying the annual investment allowance cap, the 100% first-year allowance eligibility, or the 6% special rate for integral features, and ignoring the restriction for assets used partly privately.
The AIA limit, the full expensing rules for companies, the special rate pool and the private-use restriction are four separate rules that candidates collapse into 'deduct the cost'. They also forget that cars are excluded from AIA and go into the main or special rate pool according to emissions.
What to do instead
Before computing, classify each asset into: plant and machinery eligible for AIA or full expensing; integral features and long-life assets at 6%; cars by CO2 emissions; and assets with private use. Apply the AIA cap to the eligible pool only, then compute writing-down allowances on the reducing balance. Write the classification table out first and compute second.
Treating VAT output tax as payable on the net amount of an invoice without accounting for the VAT fraction on gross figures, and failing to distinguish zero-rated from exempt supplies when deciding whether input tax is recoverable.
Candidates see 'zero-rated' and 'exempt' as synonyms because both produce no output tax, but only zero-rated supplies give recoverable input tax. They also apply 20% to a VAT-inclusive figure instead of the 1/6 VAT fraction, and forget partial exemption and the option to tax.
What to do instead
Learn the distinction as a rule: zero-rated supplies are taxable supplies at 0%, so input tax is recoverable; exempt supplies are outside the scope of VAT, so related input tax is not recoverable. For gross-to-net conversions use the VAT fraction 1/6 at 20%. For each scenario, first classify the supply, then decide recoverability, then compute. Do a mixed-supply example with both zero-rated food and exempt insurance.
Ignoring the administration and payment deadlines - payment on account dates, the 31 January filing deadline, the 30-day CGT reporting window for residential property disposals, and penalty and interest consequences - and answering a compliance question with only the tax computation.
Candidates treat compliance as background reading and focus revision on computations, so they cannot state dates or penalty percentages. Marks are lost on short factual parts that are easy to secure.
What to do instead
Build a one-page deadline sheet: 31 January for the return and balancing payment, 31 July for the second payment on account, 30 days after completion for residential property CGT, and the penalty scale for late filing and late payment. Test yourself weekly by writing the dates from memory. In any scenario question, add a final line stating the payment date and any penalty exposure even when not explicitly asked.