Institute of Chartered Accountants in England and Wales (ICAEW) ACA Professional Level: Taxation Syllabus

Professional Level: Taxation syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Professional Level: Taxation in Institute of Chartered Accountants in England and Wales (ICAEW) ACA, not a summary of it.

1. 1

   Income Tax and National Insurance

   4 topics

   • Computation of taxable income
     • Employment income and benefits in kind
     • Property and investment income
   • Trading income and basis periods
     • Adjustment of profits and capital allowances
     • Trading losses and relief options
   • Pensions and tax-efficient investments
   • National insurance for employees, employers and the self-employed
2. 2

   Capital Gains Tax

   4 topics

   • Chargeable persons, assets and disposals
   • Computation of gains and losses
     • Allowable costs and the annual exempt amount
     • Part disposals and chattels
   • Reliefs for individuals
     • Business asset disposal relief
     • Rollover, holdover and gift relief
   • Shares, securities and the matching rules
3. 3

   Corporation Tax

   4 topics

   • Computation of taxable total profits
     • Trading profits and capital allowances
     • Chargeable gains for companies
   • Loss relief and group relief
     • Carry-forward and current-year reliefs
     • Group relief and consortium relief
   • Close companies and associated companies
   • Payment of tax and quarterly instalments
4. 4

   VAT, Stamp Taxes and Tax Administration

   4 topics

   • VAT registration, supplies and recovery
     • Output and input tax and partial exemption
     • Special schemes and the capital goods scheme
   • Stamp duty and stamp duty land tax
   • Compliance, penalties and interest
   • Ethics in tax practice and HMRC powers

Professional Level: Taxation flashcards for Institute of Chartered Accountants in England and Wales (ICAEW) ACA

24 of 50 cards from the Professional Level: Taxation deck — real questions with worked answers.

1. What are the three steps in the basic structure for computing an individual's income tax liability?

   Step 1: Compute total income, then deduct reliefs and the personal allowance to get taxable income (split into non-savings, savings and dividend income). Step 2: Apply the relevant tax rates to each type of income to find the income tax liability. Step 3: Deduct tax reducers and tax already suffered (e.g. PAYE) to arrive at the income tax payable.

2. What is the standard UK personal allowance, and how is it tapered for high earners?

   The personal allowance is $\pounds 12{,}570$. It is reduced by $\pounds 1$ for every $\pounds 2$ of adjusted net income above $\pounds 100{,}000$, so it is fully withdrawn once adjusted net income reaches $\pounds 125{,}140$. Reduction $= \frac{\text{ANI} - 100{,}000}{2}$.

3. In what order are the three categories of income taxed, and why does ordering matter?

   Income is taxed in the order: non-savings income first, then savings income, then dividend income. Order matters because each band (basic, higher, additional) fills with non-savings income first, so the rates applied to savings and dividends depend on how much of the bands the non-savings income has already used up.

4. State the UK income tax rates and band thresholds for non-savings income (basic, higher and additional rate).

   Basic rate $20\%$ on taxable income up to $\pounds 37{,}700$; higher rate $40\%$ from $\pounds 37{,}701$ to $\pounds 125{,}140$; additional rate $45\%$ above $\pounds 125{,}140$.

5. How are dividends taxed for individuals, including the dividend allowance and rates?

   The first $\pounds 500$ of dividends is taxed at $0\%$ (dividend allowance, but it still uses up part of the band). Dividends above this are taxed at $8.75\%$ (basic rate band), $33.75\%$ (higher rate band) and $39.35\%$ (additional rate band).

6. What is the savings income nil rate band (personal savings allowance) for basic, higher and additional rate taxpayers?

   Basic rate taxpayers get a $\pounds 1{,}000$ savings nil rate band; higher rate taxpayers get $\pounds 500$; additional rate taxpayers get $\pounds 0$. The starting rate band of $\pounds 5{,}000$ at $0\%$ may also apply to savings income if non-savings income is low.

7. How is trading profit adjusted from accounting profit to taxable trading profit?

   Start with net accounting profit, add back disallowable expenditure (e.g. depreciation, client entertaining, fines), deduct income taxed elsewhere or non-trading income, deduct capital allowances, and adjust for any allowable items not in the accounts. The result is the tax-adjusted trading profit.

8. Under the current tax year basis, how is a sole trader's trading profit allocated to tax years?

   From 2024/25 onwards the tax year basis applies: a trader is taxed on the profits arising in the tax year (6 April to 5 April), regardless of their accounting period end. Profits from accounting periods are apportioned (usually on a time/monthly basis) to match the tax year.

9. What were 'overlap profits' and how are they relieved under the transition to the tax year basis?

   Overlap profits were profits taxed twice in the opening years under the old current year basis (where the accounting date was not 31 March/5 April). Any remaining overlap profits are given as a deduction (overlap relief) in the 2023/24 transition year, reducing the profits assessed.

10. What is the annual allowance for pension contributions, and how is it tapered?

    The standard annual allowance is $\pounds 60{,}000$. It is tapered by $\pounds 1$ for every $\pounds 2$ of adjusted income over $\pounds 260{,}000$, down to a minimum of $\pounds 10{,}000$ (reached at adjusted income of $\pounds 360{,}000$). Unused allowance can be carried forward up to three years.

11. How does income tax relief work for personal pension contributions made by an individual?

    Contributions are paid net of $20\%$ basic rate tax (the fund reclaims it). Higher/additional rate relief is given by extending the basic rate and higher rate band limits by the gross contribution. Tax relief is limited to the higher of $\pounds 3{,}600$ and $100\%$ of relevant earnings.

12. What are the key tax advantages of an ISA (Individual Savings Account)?

    Income (interest and dividends) and capital gains within an ISA are completely tax-free. The annual subscription limit is $\pounds 20{,}000$. There is no tax relief on contributions, but no tax on withdrawals or growth.

13. Compare the income tax relief available for EIS, SEIS and VCT investments.

    EIS gives $30\%$ income tax relief on up to $\pounds 1{,}000{,}000$ (or $\pounds 2{,}000{,}000$ for knowledge-intensive companies). SEIS gives $50\%$ relief on up to $\pounds 200{,}000$. VCT gives $30\%$ relief on up to $\pounds 200{,}000$. Each has minimum holding periods and CGT advantages.

14. State the Class 1 NIC primary (employee) rates and thresholds.

    Employees pay Class 1 primary NIC at $8\%$ on earnings between the primary threshold ($\pounds 12{,}570$) and the upper earnings limit ($\pounds 50{,}270$), and $2\%$ on earnings above the upper earnings limit.

15. State the Class 1 secondary (employer) NIC rate, threshold and the employment allowance.

    Employers pay Class 1 secondary NIC at $13.8\%$ on earnings above the secondary threshold ($\pounds 9{,}100$). Eligible employers can claim the employment allowance of up to $\pounds 5{,}000$ to offset against their secondary Class 1 liability.

16. What are Class 1A NICs and when are they due?

    Class 1A NICs are paid by employers at $13.8\%$ on the value of most taxable benefits in kind provided to employees. They are payable by 22 July (electronically) following the tax year, reported on form P11D(b).

17. Describe Class 2 and Class 4 NICs for the self-employed.

    From 2024/25 Class 2 is effectively abolished as a charge but the self-employed with profits above the small profits threshold are treated as having paid it (gaining benefit entitlement). Class 4 NIC is $6\%$ on profits between $\pounds 12{,}570$ and $\pounds 50{,}270$, and $2\%$ on profits above $\pounds 50{,}270$.

18. What three conditions must be met for a chargeable gain to arise (the scope of CGT)?

    There must be: (1) a chargeable disposal, (2) of a chargeable asset, (3) by a chargeable person. If any element is missing (e.g. an exempt asset or exempt person), there is no chargeable gain.

19. List four examples of exempt assets for capital gains tax.

    Examples include: cars (private motor vehicles), wasting chattels (e.g. greyhounds, with life under 50 years), gilts and qualifying corporate bonds, ISA investments, National Savings certificates, and most chattels sold for $\pounds 6{,}000$ or less.

20. What is the standard formula for computing a chargeable gain on a disposal?

    $$\text{Gain} = \text{Proceeds} - \text{Incidental costs of disposal} - \text{Allowable cost (base cost)} - \text{Enhancement expenditure}$$ For a gift or sale to a connected person, market value replaces actual proceeds.

21. What is the CGT annual exempt amount, and what are the current CGT rates for individuals?

    The annual exempt amount is $\pounds 3{,}000$. For disposals, gains falling in the basic rate band are taxed at $18\%$ and gains in the higher/additional band at $24\%$ (these unified rates apply to most assets including residential property from 30 October 2024).

22. How is the chattels marginal relief gain calculated when a chattel is sold for more than £6,000?

    If a non-wasting chattel is sold for more than $\pounds 6{,}000$, the gain is capped at $\frac{5}{3} \times (\text{gross proceeds} - \pounds 6{,}000)$. The lower of this figure and the normal computed gain is the chargeable gain.

23. How is a part disposal of an asset calculated for CGT?

    The allowable cost attributed to the part disposed of is $\text{Cost} \times \frac{A}{A+B}$, where $A$ = gross proceeds of the part sold and $B$ = market value of the part retained. The remaining cost is carried forward for the retained part.

24. Explain the conditions and effect of Business Asset Disposal Relief (BADR).

    BADR applies to qualifying business disposals (e.g. all or part of a trading business, or a $5\%+$ shareholding in a trading company where the individual is an officer/employee) held for at least 2 years. Qualifying gains are taxed at $14\%$ (rate from April 2025), subject to a lifetime limit of $\pounds 1{,}000{,}000$.

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