Exam Traps: Tax Stumbling Blocks – Income Tax

Exam Traps: Tax Stumbling Blocks – Income Tax

April 13, 2021 6:27 am

Taxation is one of the most complex and important topics that underpins much of financial planning – and it’s the topic that causes most consternation for students.

Tax is tested across multiple papers of the diploma and advanced diploma modules. It can seem complicated, but mostly it is about following a process or set of rules. Once you know the rules, you should be well on your way to exam success.

Here we examine Income tax an area that typically cause confusion or trip up students.

Income tax

Income tax also features in a number of exams. A common stumbling block is understanding how to calculate income tax.

First of all, make sure you read the question properly. If it states the person has taxable income, then this is income after considering the available allowances.

Income that falls within available allowances is not taxable. The first £12,500 of income falls within the current personal allowance (the allowance changes to £12,570 from April 2021).

Use the guide below for calculating income tax

1. Calculate gross income from all sources in this order:

  • earnings, including pensions and income from rental property;
  • savings income, but not chargeable gains from life assurance policies;
  • dividends;
  • chargeable gains.

2. Deduct any reliefs from income, such as business losses or interest on a loan to invest in a partnership.

3. Deduct the personal allowance. This is reduced for those earning more than £100,000 of adjusted net income, and lost completely at £125,000 or more. Extend the basic- and higher-rate tax bands if necessary, for example by the gross amount of pension contributions made via the relief-at-source method.

4. Work out the tax on the income, using the extended tax bands if applicable.

5. Finally, apply any tax reducers, such as a transferred personal allowance.

Tax is a subject tested across multiple papers of the diploma and advanced diploma modules and it’s a topic that causes most consternation for students. Need extra study support? Check out our range of CII courses: https://www.rmadvance.com/courses/

Are you studying for your Diploma in Financial Planning?

Try our blended study option  

As well as all the benefits of our existing digital study support, we have the option for you to join a full-day in a virtual classroom session with our expert training team. This one-day session is designed to get you in the best possible shape for your upcoming exam and allows you to discuss and explore areas of your study directly with our expert training team.

Check out our blended learning options below:

R01: http://bit.ly/2FK9qey
R02: http://bit.ly/31SfHhP
R03: http://bit.ly/2YqwNkI
R04: http://bit.ly/2MMfkly
R05: https://bit.ly/3vEmIBW

Redmill Advance is a learning provider and e-learning specialist offering CII and CISI exam support. 


Connect with Redmill
Stay up to date with the latest industry news. Connect with us on the below channels for insights, new jobs, helpful tips and more.
Latest News


    Kinrock building group of companies focused on professional education Redmill Advance is delighted to announce its acquisition by Kinrock on the 31st August 2022 for an undisclosed sum. Redmill Advance has grown to become a market leading provider of regulatory qualification training and continued professional development services to the UK wealth management industry. Its client […]

    Read more
  • What ‘why?’ tells us about clients

    What ‘why?’ tells us about clients

    There is more to asking the question why? of a client, we have also to understand the potential impact of that word on them, says Jon Dodson, Redmill Advance. As a financial advice community, the true value that we bring to clients is the peace of mind that comes with expert planning that is personal to them and […]

    Read more
  • The universal truths of cashflow modelling

    The universal truths of cashflow modelling

    There are universal ways cashflow modelling is used by financial planning firms, observes Jon Dodson of Redmill Advance. In a few short years, we’ve moved to a point where Cash Flow Modelling (CFM) is a staple in many financial planners’ toolkit. It’s truly amazing how much colour, what is essentially a big calculator, can bring to the client […]

    Read more