1. Income Tax

Question 1

On the SQE, in conjunction with what subjects will tax law be tested?

Answer 1

Business law, property law, and estates

Question 2

On the SQE in conjunction with what subjects will income tax law be tested?

Answer 2

Business law only

Question 3

What is income?

Answer 3

Money received on a recurring basis

Question 4

What three groups of people pay income tax?

Answer 4

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

Question 5

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

Answer 5

£184

Question 6

When does a balancing payment for the previous tax year need to be paid?

Answer 6

By the self-assessment deadline of the year after the year to which the balancing payment relates

Question 7

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

Answer 7

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

Question 8

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

Answer 8

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

Question 9

Does a UK tax resident pay UK income tax on foreign income?

Answer 9

Yes

Question 10

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

Answer 10

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 11

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

Answer 11

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 12

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 12

Proportionate to amount of the expense which was for business purposes

Question 13

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

Answer 13

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

Question 14

Similar to the annual investment allowance is the Structures and Buildings Allowance. What is the date after which construction of a structure qualifies, and what is the percentage allowance per year which can be deducted?

Answer 14

29 October 2018. 3% per year.

Question 15

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 15

If the capital asset purchase exceeds the annual investment allowance.

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

Question 16

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

Answer 16

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 17

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 17

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

Question 18

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

Answer 18

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 19

What are overlap profits?

Answer 19

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 20

Only when are overlap profits usually recoverable?

Answer 20

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

Question 21

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

Answer 21

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 22

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 22

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 23

What does the Marriage Allowance allow?

Answer 23

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

Question 24

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

Answer 24

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 25

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

Answer 25

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

Question 26

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

Answer 26

• Personal allowance: Up to £12,570 – 0%
• Basic rate: £12,571 - £50,270 (next £37,700) – 20%
• Higher rate: £50,271 - £125,140 (next £74,869) – 40%
• Additional rate: £125,140 and above – 45%

Question 27

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

Answer 27

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

Question 28

Are the personal allowance and personal savings allowance considered exemptions or zero-rated?

What is the effect of this?

Answer 28

Zero-rated

The amounts are counted as income for the purposes of determining the applicable tax band, but are taxed at 0%

Question 29

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

Answer 29

£2,000. Available to all taxpayers, irrespective of band.

Question 30

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

Answer 30

Zero-rated

Question 31

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

Answer 31

1. Basic rate band: 7.5%
2. Higher rate band: 32.5%
3. Additional rate band: 38.1%

Question 32

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

Answer 32

Only the taxpayer. Losses cannot be transferred.

Question 33

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

Answer 33

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 34

How is current year/prior year loss relief achieved?

Answer 34

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

Question 35

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 35

They can use the balance to offset any capital gains tax

Question 36

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 36

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

Question 37

How is carry forward of loss relief achieved?

Answer 37

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

Question 38

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

Answer 38

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 39

What does terminal loss relief allow?

Answer 39

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 40

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

Answer 40

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