Income tax computations are the single most-tested topic in the CII R03 exam, and the area where candidates most often lose easy marks. The rules themselves are not complicated — what trips people up is the order in which different types of income are taxed and which allowances apply where. Work through this example carefully and the pattern will stick.
The client
Sarah earns £55,000 from employment in 2025/26. She also receives £2,500 of bank interest and £4,000 of UK dividends. She makes no pension contributions and has no other income. Calculate her income tax liability.
Step 1: Identify each type of income separately
R03 questions are deliberately mixed because the tax bands work differently for each:
- Non-savings income (employment, pensions, rental): £55,000
- Savings income (interest): £2,500
- Dividend income: £4,000
Total income: £61,500
Step 2: Deduct the personal allowance
The 2025/26 personal allowance is £12,570 and is set against non-savings income first.
£55,000 − £12,570 = £42,430 taxable non-savings income
(The allowance is unaffected because Sarah's adjusted net income is below £100,000.)
Step 3: Apply tax to non-savings income
The basic-rate band is £37,700, then higher rate to £125,140.
- £37,700 at 20% = £7,540
- £4,730 (£42,430 − £37,700) at 40% = £1,892
Non-savings tax: £9,432
Step 4: Apply tax to savings income
Sarah is a higher-rate taxpayer, so her personal savings allowance is £500 (it would be £1,000 for a basic-rate payer and £0 for additional rate). The starting rate band of £5,000 at 0% does not apply because non-savings income already exceeds £17,570.
- £500 at 0% (PSA)
- £2,000 at 40% = £800
Savings tax: £800
Step 5: Apply tax to dividends
Everyone gets a £500 dividend allowance in 2025/26.
- £500 at 0% (dividend allowance)
- £3,500 at 33.75% (higher dividend rate) = £1,181.25
Dividend tax: £1,181.25
Step 6: Total it up
| Income type | Tax |
|---|---|
| Non-savings | £9,432.00 |
| Savings | £800.00 |
| Dividends | £1,181.25 |
| Total | £11,413.25 |
Where candidates lose marks
- Forgetting the order: non-savings → savings → dividends, every time
- Mis-applying the PSA: it's £1,000 / £500 / £0 depending on whether the taxpayer is basic / higher / additional rate
- Using last year's bands: the personal allowance and dividend allowance change frequently — always check what the question says applies
- Tapering the personal allowance when adjusted net income exceeds £100,000 (£1 lost for every £2 above)
- Confusing the dividend allowance with the dividend nil-rate band — they're the same thing, but the wording in questions can be misleading
Practise the variations
Once the basic structure clicks, the examiner can throw almost any combination at you and the method stays identical. Common variations include:
- Adding gift-aid or pension contributions (extends the basic-rate band)
- Adding a chargeable event gain on a bond (sliced into the bands)
- Adding rental income with finance-cost relief
- Triggering the high-income child benefit charge
The mechanics of an income tax computation will appear in some form on virtually every R03 paper. Once you can run through the six steps above without thinking, calculation questions become some of the most reliable marks on the exam — far easier than the trickier IHT or trust questions later in the paper.