Income Tax Act 2007

Summary

The Income Tax Act 2007 (ITA 2007) is the principal income tax statute for individuals in the United Kingdom, produced as part of the Tax Law Rewrite Project to restate existing law in clearer and more accessible language. It consolidates the income tax charging provisions, the calculation of liability, personal reliefs and allowances, and a number of investment incentive schemes. The Act sets out, in s.23, the sequential 'steps' for calculating a taxpayer's income tax liability: calculating net income, deducting personal allowances, identifying the tax bands, and applying the relevant rates to each component of income (non-savings income at the main rate, savings income at the savings rates, and dividends at the dividend rates). The annual Finance Acts update the rates and thresholds in ITA 2007 but the structural framework remains constant. The Act also contains the detailed provisions governing the Enterprise Investment Scheme (EIS), Seed EIS, Venture Capital Trusts (VCTs), the Community Investment Tax Relief scheme, and the anti-avoidance provisions on disguised remuneration and transactions in securities.

Key Points

• Calculation of income tax liability — seven sequential steps for computing tax payable (s.23), from net income to income tax charged
• Personal allowance — basic personal allowance available to all UK residents (s.35); tapered away for incomes above £100,000 by £1 for every £2 of excess (s.35(2)); updated by Finance Acts
• Tax rates and bands — basic rate (20%), higher rate (40%), additional rate (45%); savings rates and dividend rates differ from the main rates (s.10, updated by Finance Acts)
• Enterprise Investment Scheme (EIS) — 30% income tax relief on qualifying investments up to £1m per year (Part 5); investments also exempt from CGT if held 3 years
• Seed EIS (SEIS) — 50% income tax relief on qualifying investments in very early-stage companies up to £200,000 per year (Part 5A, inserted by Finance Act 2012)
• Venture Capital Trusts (VCT) — 30% income tax relief on subscriptions up to £200,000 per year; dividends exempt from income tax (Part 6)
• Gift Aid — donors paying basic rate tax can make Gift Aid declarations on charitable donations, allowing charities to reclaim the basic rate tax; higher and additional rate taxpayers can claim the higher rate relief in their returns (Part 8, Chapter 2)
• Anti-avoidance — transactions in securities (Part 13) and income charged as a result of anti-avoidance provisions; disguised remuneration provisions supplemented by Finance (No.2) Act 2017

Parts & Sections

Amendments History

Frequently asked questions

How is my income tax liability calculated under the Act?

The Income Tax Act 2007 sets out a seven-step process for calculating tax. This involves identifying total income, deducting reliefs and personal allowances to find taxable income, allocating that income to specific tax bands, and applying the relevant rates to non-savings, savings, and dividend income. Finally, tax on other income is added, and any remaining reliefs are deducted from the total charge.

What is the personal allowance and how does it work for high earners?

The basic personal allowance is available to all UK residents and is deducted during the tax calculation process. However, it is tapered away for higher earners. Specifically, for every £2 of income above £100,000, the allowance is reduced by £1. This means the allowance can potentially fall to nil for individuals with very high incomes, although the specific amount is updated annually by Finance Acts.

What are the current income tax rates and bands?

The Act defines three main tax rates: basic rate at 20%, higher rate at 40%, and additional rate at 45%. These rates apply to non-savings income. Savings income and dividends are subject to different, specific rates. While the structural framework of these bands remains constant, the exact rates and thresholds are updated annually through the Finance Acts.

How much tax relief can I get through the Enterprise Investment Scheme?

Under the Enterprise Investment Scheme, investors can receive income tax relief equal to 30% of the amount they subscribe for qualifying shares. This relief is capped at an annual subscription of £1 million, or £2 million if at least £1 million is invested in knowledge-intensive companies. The relief reduces the taxpayer's income tax liability for the year of investment and can be carried back to the previous year if unused.

What is the Seed Enterprise Investment Scheme and who is it for?

The Seed Enterprise Investment Scheme offers 50% income tax relief on qualifying investments in very early-stage companies. This scheme was inserted into the Act by the Finance Act 2012. The initial limit was £100,000 per year, which has subsequently been increased. It is designed to support seed-stage businesses and provides a higher rate of relief than the standard EIS.

How does the Act deal with tax avoidance and disguised remuneration?

The Act includes specific provisions to prevent tax avoidance. Part 13 deals with transactions in securities, while Part 7A contains rules on disguised remuneration. These provisions were significantly updated by the Finance (No. 2) Act 2017 to tackle avoidance through employment benefit trusts and similar arrangements. These rules ensure that income derived from such structures is correctly charged to tax.