Taxation of Individuals
Core framework
Individual taxation is built on three questions: who may tax the person (residence, domicile and citizenship), what is taxed (source and character of income), and when it is taxed (cash basis, accrual, remittance). Candidates must be comfortable with employment income versus self-employment income, the deduction of allowable expenses, personal allowances and reliefs, and the interaction of income tax with social security contributions and withholding.
Concepts to master
- Residence and domicile tests, including day-count and tie-breaker rules.
- Progressive rate bands and the order in which income types are stacked.
- Personal allowances, phase-outs and credits; refundable versus non-refundable credits.
- Benefits in kind, reimbursed expenses and employer withholding.
- Deductions: trade-related expenses, pension contributions, charitable giving.
Common traps
Questions often mix gross and net figures, treat a personal allowance as a deduction from tax rather than from income, or ignore a phase-out. Watch for income that is exempt, deferred or taxed in another jurisdiction. Residence is not the same as domicile, and a treaty tie-breaker may override domestic law.
Worked example
Assume an individual has employment income of 60,000, allowable employment expenses of 2,000, a personal allowance of 10,000 and a basic-rate band of 30,000 at 20%, with the balance at 40%. Taxable income is 60,000 − 2,000 − 10,000 = 48,000. Tax = 30,000 × 20% + 18,000 × 40% = 6,000 + 7,200 = 13,200. The trap is deducting the allowance after applying rates.
Rule of thumb
Compute taxable income first, apply the correct stacking order, then apply credits. Never net a credit against income.