Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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Step 1

Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

The sum of those amounts is "total income".

Each of those amounts is a "component" of total income.

Step 2

Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

See section 25 for further provision about the deduction of those reliefs.

The sum of the amounts of the components left after this step is "net income".

Step 3

Deduct from the amounts of the components left after Step 2 any allowances to which the taxpayer is entitled for the tax year under Chapter 2 of Part 3 of this Act or section 257 or 265 of ICTA (individuals: personal allowance and blind person's allowance).

See section 25 for further provision about the deduction of those allowances.

Step 4

Calculate tax at each applicable rate on the amounts of the components left after Step 3.

See Chapter 2 of this Part for the rates at which income tax is charged and the income charged at particular rates.

If the taxpayer is a trustee, see also Chapters 3 to 6 and 10 of Part 9 (special rules about settlements and trustees) for further provision about the income charged at particular rates.

Step 5

Add together the amounts of tax calculated at Step 4.

Step 6

Deduct from the amount of tax calculated at Step 5 any tax reductions to which the taxpayer is entitled for the tax year under a provision listed in relation to the taxpayer in section 26.

See sections 27 to 29 for further provision about the deduction of those tax reductions.

Step 7

Add to the amount of tax left after Step 6 any amounts of tax for which the taxpayer is liable for the tax year under any provision listed in relation to the taxpayer in section 30.

The result is the taxpayer's liability to income tax for the tax year.

24 Reliefs deductible at Step 2

(1) If the taxpayer is an individual, the provisions referred to at Step 2 of the calculation in section 23 are--

(a) the following--

section 72 (early trade losses relief),
Chapter 6 of Part 4 (share loss relief),
Chapter 3 of Part 8 (gifts of shares, securities and real property to charities etc),
sections 457 and 458 of this Act or section 266(7) of ICTA (payments to trade unions or police organisations),
section 193(4) of FA 2004 (pension schemes: relief under net pay arrangement: excess relief), and
section 194(1) of FA 2004 (pension schemes: relief on making of claim), and

(b) the following--

section 64 (trade loss relief against general income),
section 83 (carry-forward trade loss relief),
section 89 (terminal trade loss relief),
section 96 (post-cessation trade relief),
section 118 (carry-forward property loss relief),
section 120 (property loss relief against general income),
section 125 (post-cessation property relief),
section 128 (employment loss relief against general income),
section 152 (loss relief against miscellaneous income),
Chapter 1 of Part 8 (interest payments),
Chapter 4 of Part 8 (annual payments and patent royalties),
section 574 (manufactured dividends on UK shares: payments by non-companies),
section 579 (manufactured interest on UK securities: payments not otherwise deductible),
Part 2 of CAA 2001 (plant and machinery allowances), in a case where the allowance is to be given effect under section 258 of that Act (special leasing of plant and machinery),
Part 3 of CAA 2001 (industrial buildings allowances), in a case where the allowance is to be given effect under section 355 of that Act (buildings for miners etc: carry-back of balancing allowances),
Part 8 of CAA 2001 (patent allowances), in a case where the allowance is to be given effect under section 479 of that Act (persons having qualifying non-trade expenditure),
section 555 of ITEPA 2003 (deduction for liabilities related to former employment),
section 446 of ITTOIA 2005 (strips of government securities: relief for losses),
section 454(4) of ITTOIA 2005 (listed securities held since 26 March 2003: relief for losses: persons other than trustees), and
section 600 of ITTOIA 2005 (relief for patent expenses).

(2) In any other case, the provisions referred to at Step 2 of the calculation in section 23 are--

(a) the provisions listed in subsection (1)(b), and

(b) section 505 (relief for trustees of unauthorised unit trust).

25 Reliefs and allowances deductible at Steps 2 and 3: supplementary

(1) This section supplements the provisions about reliefs and allowances in Steps 2 and 3 of the calculation in section 23.

(2) At Steps 2 and 3, deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax.

(3) Subsection (2) is subject to--

section 65(2) to (4) (priority rule in relation to trade loss relief against general income),
section 80(2) (ring fence income),
section 83(3) and (4) (carry-forward trade loss relief against trade profits),
section 89(3) (terminal trade loss relief against trade profits),
section 93(2) (terminal trade loss relief and mineral extraction trade),
section 95(2) (foreign trades etc reliefs only against qualifying foreign income),
section 115(2) (restrictions on reliefs for firms exploiting films),
section 118(3) and (4) (carry-forward property loss relief against property business profits),
section 121(2) and (3) (priority rule in relation to property loss relief against general income),
section 129(2) to (4) (priority rule in relation to employment loss relief against general income),
section 133(4) (share loss relief against general income),
section 152(4) and (7) (loss relief against miscellaneous income),
sections 574(3) to (8) and 575 (manufactured dividends on UK shares: restrictions on deductions),
section 579(2) to (5) and 580 (manufactured interest on UK securities: restrictions on deductions),
section 258 of CAA 2001 (special leasing of plant or machinery),
section 355 of that Act (buildings for miners etc: carry-back of balancing allowances),
section 479 of that Act (persons having qualifying non-trade expenditure),
section 601 of ITTOIA 2005 (how relief for patent expenses is given), and
any other provision of the Income Tax Acts under which reliefs or allowances deductible at Step 2 or 3 are not permitted to be deducted from particular components of income or are required to be deducted from particular components of income or in a different order.

(4) A relief or allowance may be deducted at Step 2 or 3 only so far as there is sufficient income from which to deduct it.

(5) In deciding whether there is sufficient income from which to deduct a relief or allowance, reliefs and allowances already deducted at Step 2 or 3 must be taken into account.

(6) Nothing in Step 2 or 3 is to be read as permitting a relief or allowance to be deducted more than once.

26 Tax reductions

(1) If the taxpayer is an individual, the provisions referred to at Step 6 of the calculation in section 23 are--

(a) the following--

Chapter 3 of Part 3 of this Act or section 257A, 257AB, 257BA or 257BB of ICTA (tax reductions for married couples and civil partners),
Chapter 1 of Part 5 (EIS relief),
Chapter 2 of Part 6 (VCT relief),
Chapter 1 of Part 7 (community investment tax relief),
section 453 (qualifying maintenance payments),
section 459 of this Act or section 273 of ICTA (payments for benefit of family members),
section 461 (spreading of patent royalty receipts),
section 353(1A) of ICTA (relief for interest on loan to buy life annuity),
section 535 of ITTOIA 2005 (top slicing relief), and
section 539 of ITTOIA 2005 (relief for deficiencies), and

(b) the following--

section 788 of ICTA (double taxation arrangements: relief by agreement),
section 790(1) of ICTA (relief for foreign tax where no double taxation arrangements),
section 401 of ITTOIA 2005 (relief: qualifying distribution after linked non-qualifying distribution), and
sections 677 and 678 of ITTOIA 2005 (relief where foreign estates have borne UK income tax).

(2) In any other case, the provisions referred to at Step 6 of the calculation in section 23 are--

(a) the provisions listed in subsection (1)(b), and

(b) section 26 of FA 2005 (trusts with vulnerable beneficiary: income tax relief).

27 Order of deducting tax reductions: individuals

(1) This section makes provision about the order in which tax reductions are to be deducted at Step 6 of the calculation in section 23, if the taxpayer is an individual.

(2) Deduct the tax reductions in the order which will result in the greatest reduction in the taxpayer's liability to income tax for the tax year.

(3) Subsection (2) is subject to subsections (4) to (6).

(4) If the taxpayer is entitled to tax reductions for the tax year under more than one of the provisions listed in subsection (5), a tax reduction under a provision mentioned earlier in the list must be deducted before a tax reduction under a provision mentioned later in the list.

(5) The provisions are--

Chapter 2 of Part 6 (VCT relief),
Chapter 1 of Part 5 (EIS relief),
Chapter 1 of Part 7 (community investment tax relief),
section 353(1A) of ICTA (relief for interest on loan to buy life annuity),
section 453 (qualifying maintenance payments),
section 459 of this Act or section 273 of ICTA (payments for benefit of family members), and
Chapter 3 of Part 3 of this Act or section 257A, 257AB, 257BA or 257BB of ICTA (tax reductions for married couples and civil partners).

(6) If the taxpayer is entitled to a tax reduction under--

(a) section 788 of ICTA (double taxation arrangements: relief by agreement), or

(b) section 790(1) of ICTA (relief for foreign tax where no double taxation arrangements),

that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year.

28 Order of deducting tax reductions: other persons

(1) This section makes provision about the order in which tax reductions are to be deducted at Step 6 of the calculation in section 23, if the taxpayer is a person other than an individual.

(2) Deduct the tax reductions in the order which will result in the greatest reduction in the taxpayer's liability to income tax for the tax year.

(3) Subsection (2) is subject to subsections (4) and (5).

(4) If the taxpayer is entitled to a tax reduction under--

(a) section 788 of ICTA (double taxation arrangements: relief by agreement), or

(b) section 790(1) of ICTA (relief for foreign tax where no double taxation arrangements),

that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year, subject to subsection (5).

(5) If the taxpayer is a trustee and is entitled to a tax reduction under section 26 of FA 2005 (trusts with vulnerable beneficiary: income tax relief) that tax reduction must be deducted after any other tax reduction to which the taxpayer is entitled for the tax year.

29 Tax reductions: supplementary

(1) This section supplements the provisions about tax reductions in Step 6 of the calculation in section 23.

(2) A tax reduction may be deducted at Step 6 only so far as there is sufficient tax calculated at Step 5 of the calculation from which to deduct it.

(3) In deciding whether there is sufficient tax calculated at Step 5 from which to deduct a tax reduction, tax reductions already deducted at Step 6 must be taken into account.

(4) Subsections (2) and (3) apply in addition to--

(a) section 796(1) and (2) of ICTA (limits on credit for foreign tax), and

(b) any other provision of the Income Tax Acts that limits the amount of a tax reduction.

(5) For the purposes of this Chapter, a person is treated as being entitled to a tax reduction under section 788 of ICTA if the person is entitled to credit against income tax under double taxation arrangements.

30 Additional tax

(1) If the taxpayer is an individual, the provisions referred to at Step 7 of the calculation in section 23 are--

section 424 (gift aid: charge to tax),
section 205 of FA 2004 (pension schemes: the short service refund lump sum charge),
section 206 of FA 2004 (pension schemes: the special lump sum death benefits charge),
section 208(2)(a) of FA 2004 (pension schemes: the unauthorised payments charge),
section 209(3)(a) of FA 2004 (pension schemes: the unauthorised payments surcharge),
section 214 of FA 2004 (pension schemes: the lifetime allowance charge),
section 227 of FA 2004 (pension schemes: the annual allowance charge), and
section 7 of F(No.2)A 2005 (social security pension lump sum).

(2) If the taxpayer is a trustee, the provision referred to at Step 7 of the calculation in section 23 is section 496 (discretionary payments by trustees: tax pool adjustment).

31 Total income: supplementary

(1) This section applies for the purposes of calculating total income.

(2) Income from which a deduction in respect of income tax is to be made (or treated as made) at the basic or savings rate in force for a tax year is treated as income of that tax year.

(3) If--

(a) a dividend is paid, or another distribution is made, in a tax year,

(b) a person is entitled to a tax credit in respect of the dividend or other distribution, and

(c) the amount or value of the dividend or other distribution is treated under section 398 of ITTOIA 2005 as increased by the amount of the tax credit,

the amount or value as increased is treated as income of that tax year.

(4) Subsections (2) and (3) apply even if all or part of the income, or the dividend or other distribution, accrued or will accrue in a different tax year.

(5) An assessment that has become final and conclusive for income tax purposes for a tax year is also final and conclusive for the purposes of calculating total income.

32 Liability not dealt with in the calculation

The liabilities referred to in section 22(2) are income tax liability--

under section 79(1) (capital allowances restrictions: withdrawal of relief),
under section 81(6) (dealings in commodity futures: withdrawal of relief),
under section 112(5) (non-active partners: withdrawal of relief),
under section 235 (withdrawal or reduction of EIS relief),
under sections 266 to 270 (withdrawal or reduction of VCT relief),
under section 372 (withdrawal or reduction of CITR),
under section 512 (heritage maintenance settlements: application of property for non-heritage purposes),
under Chapter 1 of Part 13 (transactions in securities),
under regulations made under section 918(4) (foreign payers of manufactured dividends: Real Estate Investment Trusts: the reverse charge),
under section 920 or 923 (foreign payers of manufactured interest or manufactured overseas dividends: the reverse charge),
under Chapter 15, 16 or 17 of Part 15 (deduction of tax at source: collection mechanisms),
under section 804(5B)(a) of ICTA (recovery of excess credit for overseas tax),
under paragraph 11(3) of Schedule 20 to FA 1994 (recovery of excess credit for overseas tax: changes for facilitating self-assessment),
of the person who is (or persons who are) the responsible person in relation to an employer-financed retirement benefits scheme under section 394(2) of ITEPA 2003,
under Chapter 5 of Part 4 of FA 2004 (registered pension schemes: tax charges), except any liability under a provision mentioned in section 30(1), and
under section 682(4) of ITTOIA 2005 (assessments, adjustments and claims after the administration period), so far as the liability represents a tax reduction given effect at Step 6 of the calculation in section 23.

Part 3 Personal reliefs

Chapter 1 Introduction

33 Overview of Part

(1) This Part provides for personal reliefs.

(2) Chapter 2 provides for entitlement to a personal allowance and a blind person's allowance.

(3) Chapter 3 provides for tax reductions for married couples and civil partners.

(4) Chapter 4 contains provision applicable for the purposes of Chapters 2 and 3, in particular--

(a) requirements about residence etc of claimants to allowances under Chapter 2 or tax reductions under Chapter 3, and

(b) indexation of the amounts of those allowances and tax reductions.

Chapter 2 Personal allowance and blind person's allowance

Introduction

34 Allowances under Chapter

(1) In this Chapter--

(a) sections 35, 36 and 37 deal with entitlement to a personal allowance,

(b) section 38 deals with entitlement to a blind person's allowance, and

(2) An allowance under this Chapter is given effect at Step 3 of the calculation in section 23.

Personal allowances

35 Personal allowance for those aged under 65

An individual who makes a claim is entitled to a personal allowance of £5,035 for a tax year if the individual--

(a) is under the age of 65 throughout the tax year, and

(b) meets the requirements of section 56 (residence etc).

36 Personal allowance for those aged 65 to 74

(1) An individual who makes a claim is entitled to a personal allowance of £7,280 for a tax year if the individual--

(a) is 65 or over at some time in the tax year, but under 75 throughout the tax year, and

(b) meets the requirements of section 56 (residence etc).

(2) For an individual whose adjusted net income for the tax year exceeds £20,100, the allowance under subsection (1)--

(a) is reduced by half the excess, but

(b) is not reduced below the amount of a personal allowance under section 35.

(3) For the meaning of "adjusted net income" see section 58.

37 Personal allowance for those aged 75 and over

(1) An individual who makes a claim is entitled to a personal allowance of £7,420 for a tax year if the individual--

(a) is 75 or over at some time in the tax year, and

(b) meets the requirements of section 56 (residence etc).

(2) For an individual whose adjusted net income for the tax year exceeds £20,100, the allowance under subsection (1)--

(a) is reduced by half the excess, but

(b) is not reduced below the amount of a personal allowance under section 35.

(3) For the meaning of "adjusted net income" see section 58.

Blind person's allowance

38 Blind person's allowance

(1) An individual who makes a claim is entitled to a blind person's allowance of £1,660 for a tax year if the individual--

(a) meets the first or second condition for the whole or part of the tax year, and

(b) meets the requirements of section 56 (residence etc).

(2) The first condition is that the individual is registered as a blind person in a register kept under section 29 of the National Assistance Act 1948 (c. 29) (registers kept by local authorities in England and Wales).

(3) The second condition is that--

(a) the individual is ordinarily resident in Scotland or Northern Ireland, and

(b) because of the individual's blindness, the individual is unable to do any work for which eyesight is essential.

(4) If an individual who is entitled to a blind person's allowance for a particular tax year--

(a) became registered as a blind person in a register kept under section 29 of the National Assistance Act 1948 in the tax year, but

(b) obtained the evidence of blindness on the basis of which the registration was made in the preceding tax year,

the individual is treated as having met the first condition for the whole of the preceding tax year.

39 Transfer of part of blind person's allowance to a spouse or civil partner

(1) This section applies to an individual who is entitled to a blind person's allowance under section 38 for a tax year if--

(a) the individual is a person whose spouse or civil partner is living with the individual for the whole or any part of the tax year, and

(b) the spouse or civil partner meets the requirements of section 56 (residence etc).

(2) If--

(a) the allowance exceeds the individual's remaining relievable income,

(b) the individual makes an election, and

the individual's spouse or civil partner is entitled to an allowance for the tax year equal to the amount of the excess.

(3) The individual's remaining relievable income is the amount found by--

(a) taking the amount of the individual's net income, and

(b) subtracting any personal allowance to which the individual is entitled for the tax year.

40 Election for transfer of allowance under section 39

(1) An election under section 39--

(a) must be made on or before the fifth anniversary of the normal self-assessment filing date for the tax year to which it relates, and

(b) cannot be withdrawn.

(2) If an individual makes an election for a tax year under section 39 the individual is treated as also giving notice under section 51(4) that section 51(1) (tax reductions for married couples and civil partners: transfer of unused relief) is to apply for the tax year.

Supplementary

41 Allowances in year of death

(1) Any allowance to which an individual is entitled under this Chapter for any tax year, including the tax year in which the individual dies, is given in full.

(2) If an individual was due to reach the age of 65 in a tax year, but dies in the tax year before reaching that age, the individual is treated for the purposes of section 36 as having reached the age of 65 in the tax year.

(3) If an individual was due to reach the age of 75 in a tax year, but dies in the tax year before reaching that age, the individual is treated for the purposes of sections 36 and 37 as having reached the age of 75 in the tax year.

Chapter 3 Tax reductions for married couples and civil partners

Introduction

42 Tax reductions under Chapter

(1) This Chapter contains provisions about entitlement to tax reductions in a case where a party to a marriage or civil partnership was born before 6 April 1935.

(2) Individuals are entitled to tax reductions under the following provisions of this Chapter--

(a) section 45 (marriages before 5 December 2005),

(b) section 46 (marriages and civil partnerships on or after 5 December 2005),

(d) section 48 (joint election to transfer relief under section 45 or 46),

(e) section 49 (election for partial transfer back of relief),

(f) section 51 (transfer of unused relief), and

(g) section 52 (transfer back of unused relief).

(3) The tax reductions under sections 45 to 49 are subject to section 54 (tax reductions in the year of marriage or entry into civil partnership).

(4) A tax reduction under this Chapter is given effect at Step 6 of the calculation in section 23.

43 Meaning of "the minimum amount"

In this Chapter "the minimum amount" means £2,350.

44 Election for new rules to apply

(1) In this Chapter "an election for the new rules to apply" means an election made by a husband and wife who got married before 5 December 2005 for the new rules to apply to them instead of the old rules.

(2) In subsection (1)--

"the new rules" means the rules for relief under section 46 (marriages and civil partnerships on or after 5 December 2005), and
"the old rules" means the rules for relief under section 45 (marriages before 5 December 2005).

(3) An election for the new rules to apply--

(a) must be made jointly by the parties to the marriage,

(b) must be made before the first tax year for which it is to be in force,

(d) cannot be withdrawn.

Married couple's allowance

45 Marriages before 5 December 2005

(1) If a man--

(a) makes a claim for a tax year, and

(b) meets the conditions set out in subsection (2),

he is entitled to a tax reduction for the tax year of 10% of the amount specified in subsection (3)(a) or (b) (as applicable).

(2) The conditions are that--

(a) for the whole or part of the tax year he is married and his wife is living with him,

(b) the marriage took place before 5 December 2005 and no election for the new rules to apply is in force for the tax year,

(d) he meets the requirements of section 56 (residence etc).

(3) The amount is--

(a) £6,135, if either the man or his wife is aged 75 or over at some time in the tax year, and

(b) £6,065, in any other case.

(4) For a man whose adjusted net income for the tax year exceeds £20,100, the amounts specified in subsection (3) are reduced by--

(a) half the excess, less

(b) any reduction in his personal allowance under section 36(2) or 37(2).

(5) But subsection (4) does not reduce the amounts specified in subsection (3) below the minimum amount.

(6) For the meaning of "adjusted net income" see section 58.

46 Marriages and civil partnerships on or after 5 December 2005

(1) If an individual--

(a) makes a claim for a tax year, and

(b) meets the conditions set out in subsection (2),

the individual is entitled to a tax reduction for the tax year of 10% of the amount specified in subsection (3)(a) or (b) (as applicable).

(2) The conditions are that--

(a) for the whole or part of the tax year the individual is married or in a civil partnership and is living with the spouse or civil partner,

(b) the marriage took place, or the civil partnership was formed, on or after 5 December 2005 or, if the marriage took place before that date, an election for the new rules to apply is in force for the tax year,

(d) the individual meets the requirements of section 56 (residence etc), and

(e) the individual's net income for the tax year exceeds that of the spouse or civil partner or, if they have the same amount of net income for the tax year, the individual is specified in an election as the person to be entitled to relief under this section for the year.

(3) The amount is--

(a) £6,135, if either the individual, or the spouse or civil partner, is aged 75 or over at some time in the tax year, and

(b) £6,065, in any other case.

(4) For an individual whose adjusted net income for the tax year exceeds £20,100, the amounts specified in subsection (3) are reduced by--

(a) half the excess, less

(b) any reduction in the individual's personal allowance under section 36(2) or 37(2).

(5) But subsection (4) does not reduce the amounts specified in subsection (3) below the minimum amount.

(6) An election under subsection (2)(e)--

(a) is to be made jointly by the parties to the marriage or civil partnership, and

(b) is to be made on or before the fifth anniversary of the normal self-assessment filing date for the tax year to which the election relates.

(7) For the meaning of "adjusted net income" see section 58.

Elections to transfer relief

47 Election by individual to transfer relief under section 45 or 46

(1) If--

(a) an individual's spouse or civil partner is entitled to a tax reduction under section 45 or 46 for a tax year, and

(b) the individual meets the conditions set out in subsection (2),

the individual is entitled to a tax reduction for that tax year of 10% of half the minimum amount.

(2) The conditions are that the individual--

(a) has made an election which is in force for the tax year,

(b) makes a claim, and

(3) If an individual is entitled to a tax reduction under subsection (1), the tax reduction to which the individual's spouse or civil partner is entitled under section 45 or 46 is calculated for the tax year as if the appropriate amount were reduced by half the minimum amount.

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