Principles of Taxation: Foundations, Computations and Compliance
This section covers the Principles of Taxation domain: the building blocks the exam uses to test whether you can identify the right tax, period, taxpayer, taxable amount, rate and compliance date. Expect short computations and explanations across income tax, NIC, VAT and corporation tax.
Core rules
- The UK individual tax year runs 6 April to 5 April; the corporation tax financial year runs 1 April to 31 March. VAT return periods are usually quarterly.
- Income tax starts with total income, deducts reliefs and the personal allowance (£12,570 for 2024/25), then applies rates to taxable income. The allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
- Employee Class 1 NIC is 8% between the primary threshold (£12,570 annual) and upper earnings limit (£50,270), then 2% above.
- VAT is output tax less input tax. Standard rate 20%, reduced rate 5%, zero rate 0%. Registration is required when taxable turnover exceeds £90,000 in any rolling 12 months.
- Corporation tax is 19% below £50,000 of profits, 25% above £250,000, with marginal relief between.
Worked example
An employee has salary £60,000 and no other income. Taxable income = £60,000 − £12,570 = £47,430. Income tax = £37,700 × 20% + £9,730 × 40% = £7,540 + £3,892 = £11,432. Employee NIC = (£50,270 − £12,570) × 8% + (£60,000 − £50,270) × 2% = £3,016 + £194.60 = £3,210.60. Total deductions are £14,642.60, leaving net salary £45,357.40. The reasoning matters: apply allowances before rates, and split NIC at the upper earnings limit.
Traps that cost marks
Mixing the tax year with the financial year; applying basic rate to total salary instead of taxable income; forgetting the personal allowance taper; confusing the VAT registration threshold with the deregistration threshold (£88,000); and missing the 31 January online return and balancing-payment deadline, including payments on account where required.