Study Surgery

A: I am not sure what you mean by ‘income charges’; there may be some confusion. Charges on income are payments made by the taxpayer that are deductible for income tax purposes. Charges on income are deducted in the tax computation when computing the taxpayer’s statutory total income. They are deducted first from non-savings income, then savings income, and, finally, dividend income (as necessary). The three main examples are: eligible interest, copyright royalties, and patent royalties.

Eligible interest is interest paid on loan for qualifying business purposes. For example, someone purchases an interest in a partnership or a partner contributes to the partnership’s capital. Eligible interest and copyright royalties are both paid gross. So the amount that the taxpayer has paid is the amount that is deductible as a charge on income.

Patent royalties are paid net of basic rate tax (22 per cent for Finance Act 2006), so the amount paid is the net figure. This net figure must be grossed up, to be deducted as a charge on income in the tax computation. The taxpayer is said to have ‘retained’ the tax element in these circumstances and so this has to be added to their tax liability to be paid to HM Revenue & Customs.