01 Income tax Flashcards
For income tax purposes, what are the types of income?
- Employment income
- Trading income
- Investment income
- Income from property
- Other income
For income tax purposes, how are pensions & State benefits classified?
Employment income
What is included in investment income?
Savings & dividend income
What legislation covers taxation on employment income?
Income Tax (Earnings & Pensions) Act 2003
What legislation covers taxation on non-employment income?
Income Tax (Trading & Other Income) Act 2005
What legislation covers income tax allowances & reliefs?
Income Tax Act 2007
Up to and including 2022/23, what was the basis of assessment?
Current-year basis
From 2024/25 onwards, what will the basis of assessment be?
Tax-year basis
What are the requirements for trading income tax deductions?
Expenditure must be
1) Incurred wholly & exclusively for business purposes
2) Of a revenue (not capital) nature
How much is the annual trading income tax allowance?
£1,000 before deductions
True or false: even if your trading income falls within the allowance, you still have to declare it
False
If your trading income exceeds the allowance…
You may choose to deduct the £1,000 from your trading income instead of deducting your actual expenses
What does PAYE stand for?
Pay as you earn
Income from UK property is taxable…
whether it is received by a UK or non-UK resident
Income from overseas property is taxable…
only when the property business is carried on by a UK resident
How do trading income accounts differ from property letting accounts?
- Trading income accounts can be drawn up to any date
- Property income accounts must be drawn up to 5th April or 31st March
When are property income accounts drawn up on a simplified cash-basis?
When total income before deducting expenses is £150k or less
What basis is used if a landlord opts out of the simplified cash-basis?
Accruals basis
When is property income assessed?
In the tax year in which it arises
How are property income and expenses pooled?
- Income & expenses from all properties pooled together
- Except overseas property
What are allowable expenses for property income?
- Maintenance & repairs
- Rates & rents
- Replacing furnishings
- Any other expense incurred wholly & exclusively in course of lettings
What is the tax relief for residential landlords’ finance costs?
Basic rate e.g. if their finance costs are £100, they get a 20% (£20) deduction from their income tax
Do finance costs count as an allowable property expense?
Only for furnished holiday or non-residential lettings
How much is the annual property income allowance?
£1,000 before deductions
True or false: even if your property income is within the allowance, you still have to declare it on your tax return
False
If your property income exceeds the annual allowance, you can choose to…
deduct the £1,000 from your property income instead of deducting actual expenses
How much is rent-a-room relief?
£7,500 per year
What are some examples of savings income?
- Interest
- Purchased life annuity payments
- Gains from life assurance contracts
What deductions are allowable against investment income?
None
Who is subject to investment income tax?
- UK residents, whether the source is within the UK or not
- Non-UK residents if the source is within the UK
When is investment income taxed?
In the tax year in which it arises
What are some examples of ‘other’ taxable income?
- Receipts from intellectual property
- Beneficiaries’ income from estates in administration
- Income taxed under the settlements anti-avoidance rules
What are the key parts of ITTOIA 2005?
- Part 2, trading & professional income
- Part 3, property income
- Part 4, investment income
- Part 5, other income
What does ITEPA stand for?
Income Tax (Earnings & Pensions) Act 2003
What is the difference between employee and self-employed?
- Contract of service = employee
- Contract for services = self-employed
What are some tax advantages of being self-employed?
- More allowable expenses
- Lower NICs
How do expenses differ for the self-employed vs employed?
- Self-employed: incurred wholly & for business (often includes travel)
- Employed: incurrent wholly, exclusively & necessarily for business (does not include travel)
What are NICs for employees?
Class 1 NICs (12%)
What are some indicators of self-employment, as opposed to employment?
- Low level of control / supervision
- No set hours, holidays etc.
- Freedom to sub-contract
- Taking on financial risk
- Providing own equipment
Who is responsible for determining employment vs self-employment?
The employer
How are salaried members of LLPs usually taxed?
As employees
What conditions might cause a salaried member of an LLP to be taxed as self-employed?
- More than 20% of remuneration is based on profitability
- Significant say in running the business
- Significant capital contribution (at least 25% of expected income)
What types of income are paid gross of tax?
- Interest from banks & building societies
- Interest from investment trusts, unit trusts & OEICs
- Interest from corporate bonds
When is tax deducted from interest payments, and how much?
20% when a company (or partnership w/ a company for a member) pays interest to an individual, non-UK partnership, or non-UK company
If you receive interest net of tax, when can you reclaim the tax?
- If you’re a non-taxpayer
- If the income falls within your PSA
- If it’s subject to the 0% starting rate for savings income
What is the tax treatment of rewards from banks (e.g. for maintaining a certain balance)?
- They are not treated as savings income
- They are paid net of basic rate tax
- They do not benefit from the PSA
What happens if an annuity payment exceeds profits subject to income tax?
The payer must deduct 20% of the payment and pay it to HMRC
What happens if an annuity payment does not exceed profits subject to income tax?
The payer may optionally deduct & retain 20% of the payment
True or false: most purchased life annuities are paid net of basic rate tax
True
What is ‘grossing up’ net payments?
If you receive income with 20% deducted at source, you must use the gross amount to calculate your tax liability
Are UK company dividends received net or gross?
Gross
How do you reach the amount on which tax is calculated?
- Add up total income
- Deduct tax reliefs given as deduction from income (= net income)
- Deduct personal allowances
What tax reliefs are given as deduction from income?
- Qualifying interest payments
- Allowable business losses
- Gifts of securities to charities
- Qualifying contributions to occupational pensions/retirement annuities
What is a tax reducer?
A tax relief given as a specified % reduction in tax liability
What are examples of tax reducers?
- 20% for property income finance costs
- 30% for VCTs and EIS
- 50% for SEIS
Are interest payments an allowable deduction from total income?
Yes, if you took the loan out for qualifying purposes
What are the main loan purposes for which interest payments are qualifying deductions from total income?
- Buying shares in loaning money to your own company
- Investing in a partnership
- Buying plant/machinery for partnership
- Paying IHT
What is the annual cap for deducting interest + business losses from total income?
£50k OR 25% of adjusted total income, whichever is higher
What is adjusted total income?
total income + any payroll giving - any pension contribution
If you pay interest on a loan to purchase/develop let non-residential property…
the interest is an allowable deduction from the property-letting accounts
If you pay interest on a loan to purchase/develop let residential property…
20% of the interest is deducted from your tax liability
If you pay interest on a loan to purchase/develop non-let property…
there is no tax relief
When is a company ‘close’?
If it is controlled by its directors, or by up to 5 shareholders
Who gets relief for interest paid on loans to invest in a close company?
Those who own more than 5% of the shares OR work significantly in company’s management / business
To qualify for relief when loaning money to a close company, the loan must be used…
for the purpose of its business
What is the rate of relief for interest paid on loans to invest in close companies?
The borrower’s top tax rate
What is the cap on interest relief?
£50k or 25% of adjusted total income, whichever is higher
True or false: you can get relief for interest paid on loans to buy EIS shares
False, no interest relief is available if you also claim EIS relief
If you borrow money to pay IHT, how long can you claim interest relief?
For one year after taking out the loan
Who can claim interest relief for IHT loans?
Personal representatives of the deceased
Can non-UK residents use gift aid?
Only if the donation is made up of income/gains subject to UK tax
To use gift aid on donations up to £100, any reciprocal benefit must not exceed…
25% of the donation
To use gift aid on donations over £100, any reciprocal benefit must not exceed…
- £25 + 5% of the excess over £100
- £2,500
How does the charity benefit from gift aid?
Multiply the donation by 1.25 and reclaim the difference from HMRC
How does the donor benefit from gift aid?
Their income tax bracket thresholds are increased by the grossed-up amount
With payroll giving, is the donation deducted before or after calculating PAYE?
Before
What are the maximum + minimum payments under payroll giving?
None
When donating qualifying assets to charity, what % of the market value is deductible from your income?
100%
What assets are qualifying deductions when donated to charity?
- Listed securities
- Unlisted securities on recognised exchanges like AIM
- Collective investment schemes
- Freehold / leasehold property
What is the tax relief for donating pre-eminent objects to the nation?
30% of the object’s value, deducted from your tax liability (can be spread up to 5 years in a pre-arranged way)
Tax relief for relievable pension contributions is given through:
- Relief at source
- Net pay arrangement
- Relief by making a claim
Can UK individuals with no relevant UK earnings contribute to registered pensions?
Yes, up to £3,600 gross p.a., but can only get tax relief if the pension scheme operates the ‘relief at source’ scheme
WRT relievable pension contributions, who is a ‘relevant UK individual’?
- Has relevant UK earnings
- Was UK-resident at some point in the tax year
- Was UK-resident when they joined the pension scheme, within the last 5 years
What is the annual limit for pension contribution tax relief?
£3,600 or amount of relevant UK earnings chargeable to income tax, whichever is higher (up to £60k (formerly £40k))
Do employer contributions count as pension savings for tax purposes?
Yes
If you don’t use your full annual allowance for pension contribution tax relief, what happens to the remainder?
Provided you’re a member of a pension scheme, you can carry it forward for up to 3 years
How does ‘relief at source’ work?
You keep 20% of your pension contribution, then the scheme administrator claims it back from HMRC
How do you get higher- and additional-rate ‘relief at source’?
Increase your tax bracket thresholds by the amount of the gross contribition
If you have a personal pension scheme, you probably get tax relief via…
Relief at source
If you have an occupational pension, you probably get tax relief via…
Net pay arrangement
What is ‘net pay arrangement’?
Your pension contributions are deducted from your salary before tax
If you have a retirement annuity, you probably get tax relief via…
Making a claim
What happens under a retirement annuity scheme?
You make payments gross, then deduct them from total income
What is the annual contribution limit for retirement annuities?
100% of relevant UK earnings
For each employee who receives benefits or expense payments…
employers must fill out HMRC form P11D
How are employee benefits treated for tax purposes?
As earned, taxable income
How much are employee benefits worth for tax purposes?
Cash equivalent minus any contribution from employee
How do you calculate the cash equivalent of employee benefits?
Cost to employer (marginal cost if provided in-house)
If an employee is outright given an asset they previously had use of, what is its cash equivalent?
The market value at time of gift or first use, whichever is higher
If an employee benefit is the use of an asset (besides a car or accommodation), what is the cash equivalent?
‘Annual value’ (20% of market value), or rent paid if employer rents the asset
What are some examples of in-house benefits ruled to have no marginal cost & therefore no cash equivalent?
- Discounted goods (provided employee pays at least wholesale price)
- School places (provided employee pays at least 15% usual fee)
If a car is provided to an employee (or member of their family) for private use, what is the taxable benefit?
0–37% of the list price of the car, based on the CO₂ emissions (list price includes accessories but not car phones or disability adaptations)
What happens if an employee makes a capital contribution towards their company car?
Contributions up to £5,000 are deducted from the list price
When is a company car regarded as ‘not for private use’?
When private use is specifically prohibited
When can a company car tax charge be reduced?
If it’s unavailable for 30 days or more, the charge is reduced proportionately
What is the tax charge when an employer provides fuel for private use?
0–37% (the same as for car benefit purposes) of a set figure (£10,286 in 2023/4)
What is the tax charge for employee benefits aimed at discouraging car use (e.g. railcards, bikes)?
None
How much can employers reimburse employees for business travel as passengers without incurring tax?
5p per mile
How much can employers reimburse employees for business mileage without incurring income tax?
- 45p per mile for the first 10k miles
- 25p per mile thereafter
How much can employers reimburse employees for business mileage without incurring NICs?
45p per mile
How much can employers reimburse employees for private travel without incurring tax?
Nil
How much can employers reimburse employees for business travel by bike/motorbike without incurring tax?
- 24p per mile for the first 10k miles
- 20p per mile thereafter
What is the tax on employers providing charging for electric/hybrid cars?
None
What is the taxable benefit of a company van for private use?
- £3,960
- £757 for fuel
- Nil for a zero-emissions van
