Income Tax

• Topic 01

  Income Tax

  53 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A taxpayer has employment income of £42,000 and receives £4,000 in savings interest in 2025/26. They are a basic-rate taxpayer on employment income alone. How is the savings interest taxed?

   • A
     The £4,000 savings interest is taxed entirely at 40% because it sits above the total income threshold of £42,000
   • B
     Taxable employment income is £29,430 (£42,000 minus £12,570 PA). Basic-rate band headroom = £37,700 minus £29,430 = £8,270. Savings interest: £1,000 PSA at 0%; remaining £3,000 within basic-rate band at 20%; no higher-rate tax arises
     Correct answer
   • C
     All £4,000 of savings interest is covered by the £1,000 Personal Savings Allowance; no further tax is due
   • D
     All savings interest is tax-free as it is covered by the starting rate for savings band
   Explanation

   Employment taxable income = £42,000 minus £12,570 = £29,430. Basic-rate band headroom = £37,700 minus £29,430 = £8,270. Savings income is stacked above non-savings income. The PSA for a basic-rate taxpayer is £1,000 (taxed at 0%). The remaining £3,000 of savings interest falls within the remaining £8,270 of the basic-rate band headroom and is taxed at 20%. Adding savings income does not push total income above £50,270 (total = £46,000), so no higher-rate savings tax arises. The PSA for a higher-rate taxpayer would be only £500.

2. An additional-rate taxpayer has adjusted net income of £135,000 and receives dividends of £3,000 in 2025/26. What is the income tax liability on the dividends, and why does no personal allowance apply?

   • A
     £1,180.50 — the personal allowance is reduced but not fully withdrawn above £125,140
   • B
     £0 — the Dividend Allowance covers the first £3,000 of dividends for all taxpayers
   • C
     £983.75 — no personal allowance because ANI exceeds £125,140; dividends are all in the additional-rate band; £500 Dividend Allowance at 0%; remaining £2,500 at 39.35% = £983.75
     Correct answer
   • D
     £1,200 — all £3,000 at 40% because the taxpayer is in the highest income bracket
   Explanation

   When ANI exceeds £125,140, the personal allowance is reduced to nil (the taper runs from £100,000 at £1 per £2 above £100,000; at £125,140 the PA = £0). All income is taxed without any personal allowance. Dividends stack last: £500 Dividend Allowance at 0%; remaining £2,500 at the additional-rate dividend rate of 39.35% = £983.75. Total dividend income tax = £983.75.

3. How is the taxable value of a company car benefit calculated for income tax purposes?

   • A
     The taxable benefit is calculated as the fuel costs incurred by the employee during private use
   • B
     The list price of the car is multiplied by a CO2-based percentage to give the annual taxable benefit
     Correct answer
   • C
     The market value of the car when first provided is taxed at 20% of the purchase price
   • D
     The employer's annual cost of providing the car is divided equally among all employees who receive one
   Explanation

   The company car benefit is calculated under Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) by multiplying the car's list price (including accessories, excluding first-year registered vehicle surcharges) by a CO2-based percentage set by HMRC. The percentage varies by the car's CO2 emissions: fully electric vehicles attract 2% in 2025/26, while higher-emission vehicles attract higher percentages (up to 37%). The resulting figure is added to the employee's employment income for income tax purposes.