How to Calculate Income Tax: SQE 2027 Guide

Most income tax questions on SQE1 come down to a calculation you can do in three steps: total income, net income, then taxable income and tax. This free guide is a worksheet: fill in each table and you have the answer. It is updated for the 2027 sittings, with the 2026/27 rates and a fully worked example.

2027 edition · checked against the SRA’s SQE1 assessment specification and HMRC’s rates on 2 October 2026.

What the SQE tests in 2027

Income tax is examined in SQE1 FLK1, Business Law and Practice, for employees, sole traders, partners, shareholders, lenders and debenture holders, and in FLK2 for personal representatives during the administration of an estate. From January 2027 both sit in Session 1 of their paper.

Two rules from the SRA decide how to revise. First, where a question needs the value of a relief, exemption, rate or threshold, the SRA says it will be provided: you are tested on the method and on when each relief or exemption applies, not on memorising figures. Second, the law examined is the law as it stands four calendar months before the first day of the assessment window.

Step 1: total income

Add up the gross income of the tax year (6 April to 5 April), leaving out capital receipts such as the sale of a house or shares, which belong to capital gains tax. Sort it into three types, because each has its own rates and they are taxed in a fixed order:

On the accruals basis, a sole trader’s or partner’s trading profit is chargeable receipts, less expenses incurred wholly and exclusively for the trade, less capital allowances. Since 2024/25 the cash basis is the default for sole traders and for partnerships whose partners are all individuals (never LLPs): receipts less payments, with equipment other than cars deducted as an expense instead of capital allowances. A trader can opt out to the accruals basis shown here. A partner is taxed on their own share of the firm’s profit. A company paying yearly interest to an individual (for example on a loan or an unlisted debenture) deducts 20% first: use the gross amount, and deduct the tax at the end.

Step 2: net income

Deduct any reliefs the scenario gives you. The two to know for the SQE:

Qualifying loan interest and loss relief set against total income (s64, s72) share one cap: the greater of £50,000 and 25% of adjusted total income. Any part of a loss set against profits of the same trade is not capped (always the case for s83 and s89).

Step 3: taxable income and tax

Deduct the personal allowance of £12,570 to find taxable income. Where adjusted net income is over £100,000, the allowance falls by £1 for every £2 over, to nil at £125,140. The law sets it where it saves the most tax: normally against non-savings income first, then savings, then dividends. Then tax each type in order, filling the bands from the bottom:

Welsh taxpayers pay the Welsh rates on non-savings income. For 2026/27 the Senedd kept 10p in each band, so the totals are the same 20%, 40% and 45%. Savings and dividends are taxed at UK rates. Add up the tax on each slice for the liability, then deduct any tax already paid, such as PAYE.

Worked example

Amir is a partner in a firm in England. In 2026/27 his share of the trading profit is £56,000; he also has £1,400 of bank interest and £2,600 of dividends, and pays £1,500 of interest on the loan he took out to buy into the partnership. Total income is £60,000; net income, after the qualifying loan interest, is £58,500; taxable income, after the £12,570 personal allowance, is £45,930.

His taxable income is above £37,700, so he is a higher rate taxpayer with a £500 personal savings allowance. His taxable non-savings income is over £5,000, so the starting rate for savings does not apply, and his dividends, taxed last, fall in the higher rate band.

Five exam traps

• Start from gross income; tax already paid comes off at the end.
• Keep the order: non-savings, then savings, then dividends.
• Income taxed at 0% still uses up the bands.
• Match the personal savings allowance to the taxpayer’s top band.
• Adjusted net income over £100,000? Reduce the personal allowance first.

Collection and anti-avoidance

Employees pay through PAYE, deducted by the employer. Sole traders and partners use Self Assessment: the online return and the balancing payment are due by 31 January after the tax year. They also make payments on account on 31 January and 31 July, each half of last year’s Self Assessment tax (none if that was under £1,000, or if more than 80% of last year’s tax was deducted at source).

The SRA also lists the scope of anti-avoidance provisions: the general anti-abuse rule (Finance Act 2013) lets HMRC counteract tax advantages from abusive arrangements, and the settlements rules tax a parent on income from capital they gave their minor, unmarried child, unless it is £100 or less a year.

Estates: personal representatives

Personal representatives pay income tax on estate income received during the administration: 20% on non-savings and savings income and 10.75% on dividends, with no personal allowance, personal savings allowance, starting rate or dividend allowance. If the estate’s income for a tax year is £500 or less, none is due; over £500, all of it is taxable. Beneficiaries are taxed on the grossed-up income they receive, with a credit for the tax the PRs paid (form R185).

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