Office of Public Sector Information
91.Again, it is important that this is done by reference to the components of total income, to pave the way for Step 4.
92.Step 4 applies the rates of tax specified in Chapter 2 (and, where the taxpayer is a trustee, the relevant Chapters of Part 9 of this Act) to the amounts of the components remaining after Step 3.
93.Step 5 adds together the amounts of tax on each component.
94.Step 6 then deducts any tax reductions. These are listed in section 26. Further rules about how these tax reductions are made are in sections 27 to 29.
95.Step 7 then adds on certain other amounts of income tax for which a taxpayer may be liable, as listed in section 30.
96.This section lists all the reliefs that may be deducted from components of total income at Step 2 of the calculation. It is based on many provisions in the source legislation.
97.The section is arranged to highlight those reliefs which apply only to individuals, and to avoid duplication of references to particular reliefs.
98.This section, and others in the Chapter, contains lists of provisions some of which are in this Act and some which are elsewhere. Such lists are arranged by reference to the order that the provisions appear in this Act and by reference to the date on which other legislation was enacted.
99.The entries in the lists are not each given their own sub-paragraph reference. This will reduce the scope for confusion should any amendments need to be made to the lists in future Finance Acts.
100.One of the reliefs deducted at this step is for annual payments and patent royalties under Chapter 4 of Part 8. See Change 81 in Annex 1 and the overview commentary on Chapter 4 of Part 8.
101.The opportunity has been taken to clarify the way in which reliefs under sections 446 and 454 of ITTOIA work. See the amendments made to those sections in Schedule 1.
102.The list of reliefs does not include section 811 of ICTA. That section allows a reduction of a component of income for foreign tax suffered on that income where no credit is available. It has been excluded on the basis that the relief reduces the amount of income from the source (and where appropriate can create or augment a trading loss) before it enters into the calculation in section 23.
103.For the same reason, the list does not include relief under section 798C of ICTA which was introduced by FA 2005.
104.For the rules about what (if anything) may be done with any excess relief over the amount of income from which it can be deducted it is necessary to refer to the particular provisions dealing with the relief concerned. But see also the provisions of section 25.
105.This section contains rules about the way deductions are made against components of income. It is based on section 835(3), (4) and (5) of ICTA.
106.The main rule, in subsection (2) is that deductions are allowed in the way that results in the greatest reduction of income tax liability.
107.This rule means that where a deduction may be set against more than one component of income or there are two or more deductions available, they are allowed in the way that produces the least income tax liability. The order in which deductions that are allowable against a particular component of income are made under Step 2 cannot affect the liability for the tax year concerned. If there is sufficient income then all deductions are allowed in full. If there is insufficient income then unrelieved income is nil. But the order in which they are made can affect the amount of relief that is available to carry forward or back (in the case of reliefs where that is a possibility).
108.Subsection (3) is a signpost to provisions that modify the rule in subsection (2), in particular in the case of reliefs given only against certain types of income.
109.Subsections (4) and (5) ensure that a deduction is only given to the extent that there is income to absorb the deduction, taking into account deductions already made.
110.Some, but not all, of the source provisions contain the rule that income cannot be reduced below nil, but even where not explicitly mentioned, it has always been the accepted practice that a deduction can only be made from income to the extent that there is income to absorb the deduction. The position is now explicit for all income deductions.
111.A similar point arises in connection with deductions that operate as tax reductions. See the commentary on section 29.
112.This section lists the tax reductions that are allowed in terms of tax at Step 6 of the calculation in section 23. It is based on many provisions in the source legislation.
113.The approach adopted to the layout of this section is in line with that adopted in relation to section 24.
114.One of the tax reductions is for relief under section 539 of ITTOIA. See Change 3 in Annex 1.
115.This section provides rules about the order in which tax reductions are to be given for individuals. It is based on many provisions in the source legislation.
116.In the source legislation, many of the provisions dealing with tax reductions contain rules which specify how that reduction interacts with other tax reductions. These rules, so far as they relate to individuals, are brought together in subsections (4) to (6).
117.But those rules are not comprehensive. As well as bringing the existing rules together into one place, the section introduces a new rule in subsections (2) and (3) providing that, subject to the following subsections, the reductions are allowed in the way that gives the greatest reduction in liability for the year. See Change 4 in Annex 1.
118.Subsections (4) and (5) list those provisions where rules setting out some priority are contained in the source legislation. Subject to the point mentioned in the next paragraph, the provisions are listed in the order in which the source rules require the reliefs to be allowed. If any other reduction (except double taxation relief) is due then it may be allowed at whatever stage (before or after any of the provisions in subsection (5)) gives the maximum reduction.
119.It is clear from section 256 of ICTA that reductions under Chapter 1 of Part 7 of ICTA are given after all other reductions (except double taxation relief), but no order of priority between the two reductions within that Chapter is given. Since the reduction for married couples and civil partners is transferable whereas the reduction under section 273 of ICTA is not, it will always be beneficial if any reduction under section 273 of ICTA comes first. Subsection (5) reflects this. See Change 4 in Annex 1.
120.This section provides rules about the order in which tax reductions are to be given for persons other than individuals. It is based on sections 790(3) and 796(1) of ICTA and sections 26 and 27(1) of FA 2005.
121.There are fewer tax reductions available than for individuals, so the rules are less complex. Subsection (2) corresponds to section 27(2) in providing a new rule that the reductions are allowed in the way that gives the greatest reduction in liability. See Change 4 in Annex 1 and the commentary on section 27.
122.Subsection (5) is a special rule concerning the tax reduction given to certain trustees under section 26 of FA 2005.
123.This section contains additional rules about the giving of tax reductions. It is based on a number of provisions in the source legislation.
124.Subsections (2) and (3) ensure that a reduction is only given to the extent that there is tax to absorb the reduction, taking into account reductions already made. Many of the source provisions contain the rule that the tax cannot be reduced below nil (see for example section 256(2) of ICTA). And top-slicing relief under section 535 of ITTOIA cannot give a greater tax reduction than the tax increase resulting from including the gain concerned within total income. The position is now explicit for all tax reductions. See the commentary on section 25.
125.Subsection (4) ensures that the rules in this section limiting the amount of a tax reduction by reference to the amount of tax against which it is set will not affect the calculation under section 796 of ICTA of the limit on income tax credit relief for double taxation. It also ensures that those rules will not affect the operation of any other provisions limiting the amount of a tax reduction.
126.Subsection (5) ensures that any reference in this Chapter to double taxation relief under section 788 of ICTA brings in relief allowed in accordance with arrangements made under that section.
127.This section lists provisions under which amounts of tax are added to the tax liability at Step 7 of the calculation. It is based on a number of provisions in the source legislation.
128.This section provides supplementary rules, in particular about the tax year in which income received under deduction of tax or with a tax credit is to be taken into account. It is based on section 835(6) and (7) of ICTA.
129.This section lists income tax liabilities not dealt with in the calculation. It is new.
130.These liabilities arise in connection with:
the recovery of excessive relief (eg the withdrawal or reduction of EIS relief or the recovery of excess credit for overseas tax) where the taxpayer’s self-assessment for the tax year is final;
deduction of tax at source (eg Chapters 15 to 17 of Part 15 and the reverse charge provisions), where the liability is not in respect of the person’s own liability; and
stand-alone charges (eg Chapter 1 of Part 13, or in relation to the administration of pension schemes).
131.This Part contains rules relating to personal reliefs for individuals. It is based on Chapter 1 of Part 7 of ICTA.
132.The reliefs dealt with in this Part fall into two distinct categories. First, there are two reliefs that operate as a deduction from net income. They are the personal allowance and blind person’s allowance. The rules for those reliefs are in Chapter 2.
133.Second, there is one relief which operates by way of a reduction in terms of tax. That is the tax reduction for certain married couples and civil partners. The rules for that relief are in Chapter 3.
134.Chapter 4 contains general provisions, in particular relating to residence and indexation of allowances.
135.The reliefs under Chapters 2 and 3 are available only to individuals meeting the residence etc requirements of section 56, which is based on section 278 of ICTA. Individuals who, under the source legislation, could claim these reliefs only by virtue of meeting the condition in section 278(2)(a) are catered for by corresponding provisions in ICTA, as amended by this Act, rather than by this Part. This is because if the condition concerned (which, in particular, operates by reference to whether the individual is a Commonwealth citizen) were included in this Act it would not have been possible to certify that the Act was compatible with the Human Rights Act 1998.
136.In addition, to limit the extent to which the provisions of this Act depend on reliefs given by virtue of an individual meeting the condition in section 278(2)(a) of ICTA, transfers of blind person’s allowance and married couple’s allowance will no longer be available unless the two individuals concerned make their claims to relief under the same set of provisions. This rule is subject to a transitional provision providing that it will not apply to those entitled to such allowances immediately before the Act comes into force until the start of the 2009-10 tax year. See Part 4 of Schedule 2 and Change 7 in Annex 1.
137.The figures used for allowances and income thresholds throughout this Part are those for 2006-07. An indexation order will be made before 6 April 2007 setting the figures for 2007-08 (unless those figures are then changed by FA 2007). Although that order will expressly apply only to ICTA, the continuity of the law provisions in Schedule 1 to this Act will ensure that the figures here are also updated.
138.This section explains where to find the rules relating to each relief that is dealt with in this Part. It is new.
139.This Chapter makes provision for the personal allowance and the blind person’s allowance. It is based on sections 256(1), 257, 265 and 278 of ICTA.
140.The residence requirement for each allowance has been built into sections 35 to 39 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty’s Revenue and Customs. Claims for allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.
141.This section introduces the Chapter and explains where to find the rules relating to those allowances given by deduction from income. It is new.
142.This section sets out the conditions for an individual aged under 65 to be entitled to a personal allowance. It is based on sections 256(1), 257 and 278 of ICTA.
143.Section 256 of ICTA makes it clear that a claim is required. Although in practice this personal allowance is often given automatically for years for which a valid claim would still be possible (a practice which will continue), it is necessary to retain the formal claims procedure in order to provide a mechanism to resolve disputed claims. For claims generally, see Change 5 in Annex 1 and the overview commentary on this Chapter.
144.This section provides a higher level of allowance for individuals aged 65 to 74. It is based on sections 256(1), 257 and 278 of ICTA.
145.Subsection (2) is the rule that the allowance is reduced if the individual’s adjusted net income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in section 35.
146.This section provides a higher level of allowance for individuals aged 75 and over. It is based on sections 256(1), 257 and 278 of ICTA.
147.As in section 36, subsection (2) rewrites the rule that provides for the reduction of the allowance if the claimant’s income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in section 35.
148.This section deals with the conditions for blind person’s allowance. It is based on sections 256(1), 265 and 278 of ICTA.
149.As with the personal allowances, the residence requirement has been built into subsection (1). In fact, due to the particular conditions of the relief set out in the following subsections, it is very rare for a non-resident to be entitled to the allowance.
150.Section 265(1) of ICTA requires the claimant to be a “registered blind person”. This term is defined in section 265(7) in two legs.
151.The first leg refers to registers compiled under section 29 of the National Assistance Act 1948. That Act never applied to Northern Ireland and was repealed in relation to Scotland by the Social Work (Scotland) Act 1968 (section 95(2) and Part 1 of Schedule 9). It follows that any registers maintained by local authorities in Scotland or Northern Ireland or by Societies for the Blind on their behalf are not registers under section 29. So subsection (2) makes it clear that this condition can only apply to registers kept by local authorities in England and Wales.
152.The second leg of the definition in section 265(7), which applies only to Scotland and Northern Ireland, refers to persons who are blind within the meaning of section 64(1) of the National Assistance Act 1948. This definition, which is that the individual is unable to do any work for which eyesight is essential, is the same as that underpinning entitlement to registration by local authorities in England and Wales, and is set out in subsection (3).
153.Subsection (4) legislates ESC A86. This treats a claimant as satisfying the registration condition in the year prior to formal registration where evidence of blindness on which registration is based had been obtained in that prior year. See Change 6 in Annex 1.
154.This section allows the transfer of any excess allowance due to a blind person to his or her spouse or civil partner if the blind person’s income is insufficient to absorb the allowance fully. It is based on sections 256(1), 265 and 278 of ICTA.
155.It is implicit in section 265 of ICTA that a spouse or civil partner receiving all or part of an allowance under this provision must be an individual entitled to claim allowances in their own right. Subsection (1) makes this explicit by incorporating the residence requirement for the receiving spouse or civil partner.
156.Subsection (2) specifies that it is only the excess allowance that can be transferred, that the transferor must make an election (see section 40), and makes it clearer that in order to be entitled to the allowance the transferee must claim it.
157.Subsection (3) provides rules for determining the amount by which the allowance exceeds income for the purposes of this section. It takes the amount of net income as the starting point. The appropriate personal allowance is then deducted.
158.Section 265(3)(c) of ICTA has not been rewritten as it is obsolete.
159.This section sets out rules about elections under section 39. It is based on section 265(5) and (6) of ICTA.
160.There is no need to specify that the election must be in the form specified by the Commissioners for Her Majesty’s Revenue and Customs since paragraph 2(3) of Schedule 1A to TMA achieves that result.
161.Subsection (2) provides that if an individual has made an election for the transfer of his or her excess blind person’s allowance in a tax year then this is also treated as an election for the transfer of any excess tax reduction for married couples and civil partners.
162.This section addresses the position if an individual dies in the tax year for which an allowance may be due. It is based on section 257(4) of ICTA.
163.Subsection (1) is new, but states what is implicit in the current legislation. The amount of the allowance for any tax year is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.
164.Subsections (2) and (3) provide that the age-related personal allowances are given for a tax year on the basis that an individual will reach 65 or 75 in that year and are not affected if death occurs before the relevant birthday.
165.This Chapter provides for a tax reduction where a party to a marriage or civil partnership was born before 6 April 1935. It is based on sections 257A, 257AB, 257BA, 257BB and 278 of ICTA, as amended by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229).
166.The residence requirement has been built into sections 45 to 49 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty’s Revenue and Customs. Claims to allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.
167.A tax reduction is only due if the parties live together. The meaning of living together is in section 1011.
168.This section explains where to find the rules about the relief for married couples and civil partners given as a reduction in terms of tax. It is new.
169.These reliefs are often known as married couple’s allowances (the term referring to the amounts by reference to which the tax reductions are calculated).
170.Relief is available only if one spouse or civil partner was born before 6 April 1935.
171.The general rule in section 256(2)(b) of ICTA that prevents the tax reduction exceeding the liability is reflected in section 29.
172.This section specifies the minimum amount of the allowance by reference to which relief is given. It is based on sections 257A(5A) and 257AB(5) of ICTA.
173.The tax reduction for married couples and civil partners is a percentage of a specified amount known as the “married couple’s allowance” (see sections 45(3) and 46(3)). The allowance depends on the ages of the couple and the level of the claimant’s income. But that amount cannot be reduced below a certain level which is given a new label “the minimum amount”.
174.This section defines, and provides rules about, elections for the rules introduced by the Tax and Civil Partnership Regulations 2005 to apply. It is based on section 257AB(8) of ICTA.
175.The new rules concern marriages taking place and civil partnerships formed on or after 5 December 2005. Existing marriages are not affected. But the husband and wife of an existing marriage may jointly elect for the new rules to apply. The main effect of an election is that the spouse with the higher income, rather than the husband, is the individual entitled to make the primary claim to relief.
176.This section applies if a marriage took place before 5 December 2005 unless an election for the new rules is in force. It is based on sections 256 and 257A of ICTA.
177.Subsection (1) provides that the husband may claim the relief and that if the conditions in subsection (2) are met he is entitled to a tax reduction. The amount of the tax reduction is 10% of the amount specified in subsection (3).
178.Subsection (4) provides that the allowance is reduced if the husband’s adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under section 36(2) because it takes into account the fact that he will have already suffered a reduction in his personal allowance if he is aged 65 or over.
179.This section applies if a marriage takes place or a civil partnership is formed on or after 5 December 2005, or if a married couple elect for the new rules to apply. It is based on sections 256 and 257AB of ICTA.
180.Where a same-sex couple registered their relationship in an overseas jurisdiction listed in Schedule 20 to the Civil Partnership Act 2004 before 5 December 2005 they are treated under that Act as having formed a civil partnership on 5 December 2005. According, in those circumstances a claim may be made under this section.
181.Subsection (1) provides that on a valid claim a tax reduction is due to the individual who makes the claim. As is made clear in subsection (2), that individual is the spouse or civil partner with the higher income.
182.Subsection (2) sets out the conditions for the relief under this section. The “higher income” test operates by reference to net income. If, exceptionally, both parties have the same income, then they jointly nominate either party as the claimant.
183.Subsection (4) provides that the allowance is reduced if the claimant’s adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under section 36(2) because it takes into account the fact that the individual will have already suffered a reduction in the personal allowance if the individual is aged 65 or over.
184.This section allows an individual to claim a transfer of part of the relief available to that individual’s spouse or civil partner. It is based on section 257BA(1) of ICTA.
185.The tax reduction is claimed by and given to the husband under section 45, or to the party with the higher income under section 46.
186.The transfer that can be made (from this primary claimant) to the wife or to the lower income party (as appropriate) is of a tax reduction calculated by reference to one half of the “the minimum amount” in section 43.
187.Subsection (1) provides that the recipient is entitled to a tax reduction of 10% of one half of the minimum amount provided the primary claimant is entitled to a tax reduction, and the conditions in subsection (2) are met.
188.The procedure for making an election is set out in section 50. In addition to the election, which remains in force until withdrawn, the spouse or civil partner must claim the tax reduction for a particular tax year.
189.Subsections (3) and (4) ensure that if a spouse or civil partner does receive a tax reduction under this section then the primary claimant’s tax reduction (calculated after any reduction attributable to income exceeding the threshold or due to marriage or entry into civil partnership in the year) is correspondingly reduced.
190.This section allows spouses or civil partners to make a joint claim for the transfer between them of the part of the relief attributable to the whole of the minimum amount. It is based on section 257BA(2) of ICTA.
191.This section provides that if a joint election has been made under section 48, then the primary claimant may unilaterally elect to transfer back the tax reduction attributable to one half of the minimum amount. It is based on section 257BA(3) of ICTA.
192.This is in addition to that individual benefiting from any tax reduction attributable to the allowance in excess of the minimum that remained with that individual in the first place. The election remains in force until withdrawn and the procedure is set out in section 50. The individual also has to make a claim for each tax year for which a transfer back is wanted.
193.This section details the procedure for making elections for the transfer of relief to a spouse or civil partner and for the re-transfer of relief back and for the withdrawal of those elections. It is based on section 257BA(4), (5), (7) and (8) of ICTA.
194.Subsection (2) concerns the making of an election. The election must be in the form specified by the Commissioners for Her Majesty’s Revenue and Customs, in accordance with paragraph 2(3) of Schedule 1A to TMA.
195.Subsection (3) sets out the two circumstances in which an election first takes effect in the year in which it is made rather than in the following year. Where “appropriate notice” is to be given, it must be in writing (see section 989).
196.This section provides for the transfer to a spouse or civil partner of so much the relief as cannot be used in calculating the primary claimant’s liability to income tax. It is based on section 257BB(1), (2) and (3A) of ICTA.
197.In looking to see whether the claimant has unused relief, subsection (1) provides for a comparison to be made between that individual’s tax reduction (including any tax reduction transferred back from the spouse or civil partner) and the individual’s “comparable tax liability”. The meaning of this new term is given in section 53. The unused part of the total tax reduction under this Chapter is the amount eligible for transfer.
198.In order for this provision to apply the spouse or civil partner must be entitled to relief and the primary claimant must give notice that the transfer is to apply. These rules are contained in subsection (4).
199.This section is effectively the reverse of section 51. It is based on section 257BB(3) and (3A) of ICTA.
200.It applies if a spouse or civil partner has claimed a tax reduction based on the whole or half of the “minimum amount”, but cannot use that relief in full. In such a case, if that spouse or civil partner gives due notice, the excess relief goes back to the primary claimant.
201.This section contains general provisions about transfers of unused relief. It is based on sections 256(2) and (3) and 257BB(1), (3) and (5) of ICTA.
202.In particular, the section explains how an individual’s “comparable tax liability” is determined in calculating whether there is excess relief eligible for transfer to a spouse or civil partner under section 51 or 52.
203.Subsection (2) makes it clear that the comparison is made before deducting any double taxation relief. This ensures that any double taxation relief is given last.
204.Certain tax liabilities are ring-fenced so that they cannot be reduced by reliefs given by tax reductions. If an individual makes gift aid donations, the tax reduction under this Chapter may have to be restricted under the gift aid rules. This means that there is a greater reduction potentially available to transfer to the spouse or civil partner. The same applies in reverse if the spouse or civil partner makes gift aid donations and there is a transfer back to the primary claimant. Subsection (3) ensures that these rules work as intended by restricting the amount that may be transferred.
205.This section provides rules that apply in the year of marriage or entry into civil partnership. It is based on sections 257A(6), 257AB(7) and 257BA(6) of ICTA.
206.Subsection (2) provides that in the year of marriage or entry into civil partnership, the allowance by reference to which the tax reduction is calculated is reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.
207.Subsection (3) makes it clear that the allowance to be reduced under this section is the allowance after it has been adjusted on account of the primary claimant’s income exceeding the threshold.
208.Subsection (4) addresses the situation where an individual has been married or in a civil partnership in the tax year and remarries or enters into a new civil partnership.
209.It may be advantageous for the claim to be made for the later marriage or civil partnership rather than the earlier one even though the later one (but not the earlier one) will usually give rise to an adjustment under subsection (2).
210.The wording here makes it clear that the individual can choose to claim for the later marriage or civil partnership but that, if the claim is made for the marriage or civil partnership which existed at the start of the tax year, the individual will not suffer the adjustment under this section.
211.Subsection (5) ensures that if tax reductions based on the minimum amount are being transferred between spouses or civil partners, the minimum amount is also reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.
212.This section contains miscellaneous rules based on several source provisions.
213.Subsection (1) provides that an individual is entitled to only one tax reduction under sections 45 to 48 in a tax year. It is based on sections 257A(6), 257AB(6) and 257BA(9) of ICTA.
214.Subsection (2) corresponds to the rule in section 41(3) in relation to allowances under Chapter 2 that the higher level of relief under this Chapter is given for the tax year in which an individual will reach 75 and is not affected if death occurs before the 75th birthday. It is based on sections 257A(4) and 257AB(3) of ICTA.
215.Subsection (3) is new, but reflects the current law. It addresses the position where an individual dies and corresponds to the rule in section 41(1). It is a clear statement that the amount of the relief is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.
216.This Chapter contains the residence requirement for personal reliefs, provides for the indexation of allowances and income thresholds and makes provision about the determination of an individual’s income in connection with the age-related allowances.
217.This section provides details of residence conditions which have to be satisfied for personal reliefs to be available. It is based on section 278 of ICTA.
Income Tax Act 2007