How to Pass the CII R03 | Income Tax Calculation Questions

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How to Pass the CII R03 | Income Tax Calculation Questions

In this article, Jeff Scholes director from BTS explains how to use a process approach to an R03 Personal Taxation exam question

The R03 Personal Taxation exam can be a really challenging paper, not least because candidates are faced with 50 exam questions to complete in 60 minutes. For an exam that often features many calculation-based questions, this time pressure can feel quite stressful.

One of the reasons that calculation questions cause R03 candidates so much stress is candidates tend to feel the need to dive straight into the detail and very quickly find themselves lost in all the figures.

The best approach with this type of exam is to have a process for dealing with calculation questions, starting with taking a deep breath before attempting each one! Having a process that you have practised in advance will help to reduce calculation errors caused by missing out key steps and will help you to feel more in control of the exam.

Each of the tax calculations has a logical process that you can follow to arrive at the right answer. For income tax it’s an eight-step process, for CGT it’s a six-step version.

The points are in the PROCESS

If we look at the steps for an Income Tax calculation, these are:

Gather all the incomes that are taxable, ignore the ones that are not, and group the taxable incomes into Non-savings, Savings, Dividends and Chargeable gains.
Make sure you are dealing with Gross figures. If any income has already paid tax, turn it back into the gross equivalent before you start the tax calculation. In R03, this is usually PID income from a REIT or Trust income from either an Interest In Possession or Discretionary Trust.
Deduct any reliefs that are available from the taxable income, such as pension contributions made gross via the Net Pay arrangements or to S226 schemes (Retirement Annuity Contracts) or interest on qualifying loans.
Check to see if the Personal Allowance can be left at £12,570, or should it be reduced due to the individual’s Adjusted Net Income being over £100,000.
Check to see if any of the tax bands need to be expanded due to payment of personal pensions or charity donations using Gift Aid.
Carry out the tax calculation (remembering to check if any 0% savings starter rate is available).
Apply any tax reducers such as the Married Couple’s Allowance, the Married Tax Allowance or investments into EIS, SEIS or VCTs.
Deduct any tax already paid (the amounts that you grossed up in step 2).

Let’s apply these steps to a specimen question:

Bella is an employed structural engineer who has received income from various sources in the current tax year. Her incomes are:

Salary of £56,040, Benefits in kind £5,000, Rental income from buy to let (after expenses) £38,000, Dividends £2,100, Interest £400, and net PID income £160.

What is her income tax liability for the current year?

First, gross up the PID income as it is received net of 20%; £160 ÷ 0.8 = £200
Then, work out her Adjusted Net Earnings:
- Salary £56,040 + BIKs £5,000 + Rent £38,000 + Dividends £2,100 + Interest £400 + PID income £200 = £101,740 ANI.
- This is £1,740 over £100,000, so Personal Allowance will be reduced by £1,740 ÷ 2 = £870
£12,570 – £870 gives her a Personal Allowance of £11,700
Then calculate the tax in order:
- 1st £11,700 of salary at 0% (PA) = £0
- Next £37,700 of salary at 20% (basic rate band) = £7,540
- Remaining salary £6,640 x 40% = £2,656
- Benefits in Kind £5,000 x 40% = £2,000
- Rent £38,000 at 40% = £15,200
- Interest is within her Personal Savings Allowance, so no tax to pay
- Dividends can use £2,000 DA, so £100 x 32.5% = £32.50
Total £27,428.50
But tax has already been paid on PID income, so this can be deducted from tax bill: -£40
Total £27,388.50

BTS tip:

The CII examiners have a good idea of the mistakes that candidates are likely to make along the way with calculation questions. Watch out for incorrect distractors in the answer options, it’s very easy to miss out one part of the calculation process but still arrive at an answer that is listed in the possible answers!

Learning and practising all the steps for each of the calculation types and knowing which steps should be considered BEFORE you pick up the calculator, are skills that will serve you well to pass the CII R03. The more exam-standard calculation questions you can practise in advance, the stronger the brain muscle-memory for applying the process.

WHERE CAN I FIND OUT MORE?

View Our R03 Exam overview/toolkit to purchase any R03 Study support including Study Guides, e-Learning modules, online workshops and study buddy.

Find out more in depth help and advise to structure your R03 studies by viewing our R03 Study Plan.

Chat with other R03 candidates in the dedicated BTS R03 online forum room to help keep up to date , find out any new information and gain help and advise from others.