1. Income Tax

Question 1

What is income?

Answer 1

Money received on a recurring basis

Question 2

What three groups of people pay income tax?

Answer 2

1. Individuals
2. Personal representatives on behalf of deceased persons
3. Trustees on behalf of trusts

Question 3

What is the weekly earning threshold for employees, above which the employer must make deductions within the PAYE system?

Answer 3

£184

Question 4

What are the three categories of income in the order they are collected?

Answer 4

1. Non-savings income
2. Savings income
3. Dividend income

Question 5

What are the the three categories of non-savings income?

Answer 5

1. Earnings and pensions
2. Trading income
3. Property income

Question 6

What is the difference between tax exempt and zero-rated?

Answer 6

Tax exempt means the income is fully exempt from tax calculations and does not form part of income for the purposes of determining tax brackets.

Zero-rated means the income is not exempt from tax and still forms part of the income to determine tax bracket, but it is taxed at 0%.

Question 7

What are five examples of income which are exempt from income tax?

Answer 7

1. Interest from National Savings
2. Interest or dividends from an ISA
3. Winnings on Premium Bonds or any gambling
4. Most social security benefits
5. Child benefits and tax credits

Question 8

If an expense is incurred for both personal and business purposes, how is it dealt with in the context of deducting from trading profits?

Answer 8

Proportionate to amount of the expense which was for business purposes

Question 9

What is the annual investment allowance in the context of capital assets?

Answer 9

If a taxpayer buys a capital asset for their business, they may deduct all of the costs if it is plant or machinery, e.g. tools, machines, and computers, but not cars, land, or buildings.

100% relief yearly with cap of £1 million.

Question 10

In what situation is a Writing Down Allowance available, and what are the percentage allowances which can be deducted per year for (1) life-long assets, and (2) other assets?

Answer 10

If the capital asset purchase exceeds the annual investment allowance.

Life-long assets: 6% per year
Other assets: 18% per year

Question 11

In the context of the Writing Down Allowance, how are assets aggregated into pools and if pooled, what is the deduction based on?

Answer 11

Life-long assets at 6% and other assets at 18% are pooled separately.

The deduction is based on the value of all the assets in the relevant pool.

Question 12

In the case of a partnership, how are partnership profits split for income tax purposes where one of the partners also receives either (1) a salary or (2) interest on capital contributions?

Answer 12

The salary and/or interest are allocated to the partner first, and then the net amount is distributed as partnership profits.

Question 13

In the context of the overlap profit problem, what is a taxpaying business’s basis period?

Answer 13

Where a business has an accounting period which is different to the tax year of April 6 to April 5, the period of their accounting period which overlaps with a relevant tax period is the basis period

E.g.:

• Accounting period: Jan 1, 2023 - Dec 31, 2023;
• Basis period is Jan 1, 2023 - April 5, 2023 as part of the 2022/23 tax year.

Question 14

What are overlap profits?

Answer 14

Where a business has an accounting period which is different to the tax year of April 6 to April 5, and does not make up accounts to April 5 of that year, some profits made in the business’s first and second year of trading will be taxed twice

Question 15

Only when are overlap profits usually recoverable?

Answer 15

Not until trade ceases, or if the business moves their accounting date closer to April 5

Question 16

On what three qualifying loans can a taxpayer offset the interest paid against income?

Answer 16

Loans used to fund:

1. Capital contributions or loans to a partnership
2. Investments in a closed trading company
3. Payments of inheritance tax for personal representatives

Question 17

To what degree is the income tax personal allowance (currently £12,570) tapered for income above £100,000, and therefore at what level of income is the personal allowance reduced to £0?

Answer 17

The income tax personal allowance is reduced by £1 for every £2 above £100,000. Therefore, the allowance is reduced to £0 for incomes of £125,140 and above.

Question 18

What does the Marriage Allowance allow?

Answer 18

It allows a person to transfer part of their personal allowance to their spouse or civil partner

Question 19

In addition to being married/in a civil partnership, what two conditions must be met to transfer under the Marriage Allowance?

Answer 19

1. Transferring spouse’s income must be less than the personal allowance, i.e. they have allowance to transfer
2. Recipient spouse must be a basic rate taxpayer

Question 20

How does the Marriage Allowance actually operate in practice? Does the recipient spouse get an additional amount on their personal allowance?

Answer 20

No. They simply get an income tax reduction for 20% of the amount transferred, directly applied to their tax liability.

Question 21

What are the three tax bands called, what are the monetary thresholds, and what are the percentage rates applying to each?

Answer 21

1. Basic rate band: £1 - £37,700 – 20%
2. Higher rate band: £37,701 - £125,140 – 40%
3. Additional rate band: £125,140 and above – 45%

Question 22

What is the personal savings allowance amount for each tax band which must be deducted from savings income before tax?

Answer 22

1. Basic rate band: £1,000
2. Higher rate band: £500
3. Additional rate band: No savings allowance at all

Question 23

Is the personal allowance considered an exemption or zero-rated?

Answer 23

Zero-rated

Question 24

What is the dividend allowance amount and what tax bands is it available to?

Answer 24

£1,000. Available to all taxpayers, irrespective of band.

Question 25

Is the dividend allowance considered an exemption or zero-rated?

Answer 25

Zero-rated

Question 26

What are the dividend tax rates for each tax band which must be deducted from dividend income before tax?

Answer 26

1. Basic rate band: 8.75%
2. Higher rate band: 33.75%
3. Additional rate band: 39.35%

Question 27

Who can claim a trading loss? Can they be transferred to a spouse or civil partner?

Answer 27

Only the taxpayer. Losses cannot be transferred.

Question 28

How is tax liability for dividends received calculated?

Answer 28

By applying the appropriate dividend tax rates to the proportion of the dividend that exceeds the annual dividend allowance.
* first you deduct the dividend allowance

Question 29

What are the four ways with which a taxpayer may be able deal with a loss?

Answer 29

1. Current year/prior year loss relief
2. Carry forward of loss relief
3. Carry forward relief on incorporation of a business
4. Terminal loss relief

Question 30

How is current year/prior year loss relief achieved?

Answer 30

Setting off all of the loss against total income in the current year or previous year. No partial claims are allowed.

Question 31

Although partial claims are not allowed in a current year/prior year loss relief situation, what option is available to a taxpayer who does not offset all of their trading loss against total income?

Answer 31

They can use the balance to offset any capital gains tax

Question 32

In order to prevent artificially increasing the amount of loss that may be carried back or applied to CGT in a current year/prior year loss relief situation, what is the order in which losses and the personal allowance are applied to income?

Answer 32

The loss to be offset is applied to the fullest extent possible, before the personal allowance

Question 33

How is carry forward of loss relief achieved?

Answer 33

Losses are carried forward and offset against the next available profits in the same trade

Question 34

How is carry forward relief on incorporation of a business achieved?

Answer 34

If a sole trader or partner transfers their business to a company and receives shares in return, they can offset any unused trading losses against salary or dividends they receive whilst they own the shares

Question 35

What does terminal loss relief allow?

Answer 35

When a trader ceases trading, it allows a loss to be deducted in the tax year of cessation and then to be carried back to the three preceding tax years on a last in first out basis

Question 36

What is the double reasonableness test in the context of anti-avoidance?

Answer 36

HMRC can set aside a transaction if they can prove the arrangement cannot reasonably be regarded as a reasonable course of action

Question 37

What is the open year rule, and when is it relevant?

Answer 37

relevant for sole traders and partnerships.
- In the** first year of trading**, tax due on profits must be accounted to HMRC on the upcoming 5th of April.

• Even if the company just started trading in January w/ 12 month accounting calendar, and only has several months’ of taxable profits.in first year of trading,

Question 38

What is the current year basis (CYB), and how does the closing year rule relate to it?

Answer 38

in second year of trading, may be inevitable overlap in taxed profits, but company will follow its usual 12-months calendar.

Only take into account the effect of the ‘overlapped’ taxed amount during the closing-year.
- taxable profits from end of last accounting period up to date that business stops trading is offset against the past overlap in profits.

Question 39

When is income tax payable to the HMRC?

Answer 39

every year either on 31st of January (online) or 31st of October (on paper)
- notify HMRC within 6 months of self-asssement

Question 40

In the context of partnerships, what is two key points to keep in mind about CYR and OYR?

Answer 40

Open year rule - applies only to the new partner.
Closing year rule - applies only to exiting partner.

Question 41

Are partners jointly liable for tax of income profits of the partnership?

Answer 41

No

Question 42

In a partnership, what is the liability for tax on its income profits?

Answer 42

Each partner will be liable to pay tax on their portion of partnership profits, at the rate applicable to their personal taxable income.