1 - Income Tax

Question 1

Trading Income

What trading income is taxable for UK and non-UK residents?

Answer 1

UK residents pay UK income tax on all trades, professions and vocations world-wide (except non domiciles who elect for remittance basis).

Non-UK residents only pay UK tax on their work within the UK.

Question 2

Trading Income

What is the basis of assessment for self employed people in a typical year)?

Answer 2

You produce annual self employed accounts which can end on any day of the year.

In general you are taxed in a given tax year based on the accounting year which ends in that tax year (eg 31/12/16-31/12/17 accounts would be taxed in the 17/18 tax year).

Question 3

Trading Income

What is the basis of assessment for self employed people in their first tax year?

For example if you start trading on 1/7/16 and have a 31 Dec accounting year end.

Answer 3

In the first year you are taxed on profits occuring within the tax year.

In our example your first tax year is 16/17 and you would be taxed on everything from 1/7/16 to 5/4/17 (regardless of your 31 Dec year end).

As a result you have paid tax on all of your first accounting year (1/7/16 to 31/12/16) and part of your second accounting year (1/1/17 to 5/4/17).

Question 4

Trading Income

What is the basis of assessment for self employed people in their second tax year?

For example assume you start trading on 1/2/17 and have an accounting year end of 31 Dec.

Answer 4

You will be taxed based on the usual rule, based on the accounting year ending in the given tax year.

So in our example the second tax year is 17/18 and you would be taxed on the accounting year ending 31/12/17.

However, this is subject to a minimum of 12 months.

In our example this accounting year as 1/2/17 to 31/12/17 (only 11 months) so you would also pay tax on the first month of 2018.

Question 5

Trading Income

How do self employed people end up getting double taxed, and how do they claim relief on this double taxation?

Answer 5

Because of the peculiar year 1 and year 2 basis of assessment rules, you can end up paying tax on the same months in two different tax years. This is inevitable unless you choose to have an accounting year end of 5th April.

You only get to relieve this double taxation when you eventually wind up the business and pay your last tax bill!

Question 6

Trading Income

What is the general rule for deductions?

Answer 6

Deductions are expenses which you’ve incurred in the year which reduce how much profit you made and thus how much tax you pay.

HMRC have strict rules about what expenditure you can deduct from your trading income.

The general rule is that deductions must be “wholly and exclusively incurred for the purposes of your trade, and of revenue nature”.

Question 7

Employment Income

What is included?

Basis of assessment?

How is it paid?

Answer 7

Employment income includes salary, bonuses, fees and benefits in kind (anything your employer gives you).

You’re taxed based on what you earn within each tax year.

It’s deducted by your employer using PAYE system.

Question 8

Property Income

UK/overseas rules

Basis of assessment

Allowable expenses (deductions)

Answer 8

Just like trading income, UK residents are taxed on global property income, non-UK residents taxed only on UK property income.

Property accounts are drawn up with a 31/3 or 5/4 year end.

Deductions in line with trading rules, must be wholly and exclusively incurred for the property. But you cannot deduct improvement expenses.

So if you spend £1k on maintenance and keeping the property going that is allowable. But if you spend £100k converting the loft, that’s the same as spending £100k buying a new flat, it’s a new investment not an expense so you can’t deduct it.

Question 9

Savings and Investments

2 unusual items which are included in this income.

UK/overseas rules

Basis of assessment

Deductions

Answer 9

Purchased life annuities and gains on life assurance contracts are included here.

As usual, UK residents pay tax on global income, non-UK only on savings and investments within the UK.

You are taxed on income you receive in the tax year.

No deductions are allowed.

Question 10

Income Tax

Are interest payments gross or net?

And dividends?

If you get paid £50k net of 20% tax, what is your gross income and how much tax have you paid?

Answer 10

In the UK now dividends and most savings income is paid gross (i.e. no tax deducted) due to the £5k nil rate band on savings income.

There may be some cases such as corporate bonds, corporate bond funds or the interest element of PLAs where 20% tax is withheld. You can then claim this back from HMRC if it’s within your £5k band.

To “gross-up” you divide by 0.8, so £50k gross is £62.5k, and you’ve had £12.5k tax withheld.

Note that this is the same as multiplying by 1.25, NOT 1.20!

Question 11

Income Tax

What is the definition of:

Total income

Taxable income

Answer 11

Total income is the sum of all income you have received (gross) from all sources.

Taxable income is total income less allowable deductions (eg qualifying interest payments and allowable business losses) and less your personal allowance.

Question 12

Interest Deductions

What kind of interest can be deducted from your total income?

At what rate to you get tax relief on these deductions?

What restrictions are there on the amount of deductions?

Answer 12

Interest costs allowable if the loan is for investment in:

• A close company (at most 5 shareholders/directors);
• Partnership investment;
• Plant and machinery for a partnership;
• Payment of inheritance tax.

You get relief at your top rate of tax.

The amount of interest deduction is capped at the higher of £50k or 25% of your total income.

Question 13

Charity

How does gift aid work?

Worked example if you earn £200k and make a £100 gift aid donation.

Answer 13

Only taxpayers can make gift aid donations.

The charity can recover the basic rate tax on your donation from HMRC.

You get to increase your basic rate and additional rate bands by the gross amount of the donation (i.e. the amount you gave / 0.80) to recover any higher or additional rate tax on that amount.

Eg, you make £100 donation and earn £200k per year. Net donation is £100/0.8 = £125 and charity claims £25 from HMRC. You increase your basic and additional rate bands by £125 which will save you 20% and 5% (from the 40% and 45% bands) on £125 (comes to £31.25 saving).

Question 14

Charity

How does payroll giving work?

Answer 14

Your employer deducts the donation from your income before calculating your PAYE tax and paying you, so you effectively get tax relief at your highest rate.

Question 15

Charity

What tax benefits do you get if you give away assets?

Answer 15

You get income tax relief on the market value of the assets when you give them away.

You also get a CGT exemption on assets given to charity (so even if the market value is greater than when you bought it, you don’t pay CGT, but you would if you gave it to a non-charity).

Question 16

Pension Contributions

What is the maximum contribution you can make?

Consider all rules relating to pension contributions.

Answer 16

Firstly your maximum contribution is the larger of £3,600 and your UK relevant earnings (so can’t contribute more than you earned in general, but everybody can do £3,600 regardless).

There is also an annual limit (£40k - in tax tables).

If you earn over £150k this £40k limit is reduced by £1 for every £2 you earn above £150k down to a minimum annual limit of £10k (numbers in tax tables).

Question 17

Pension Contributions

How do the following three contribution methods work for tax:

• Relief at source;
• Net pay arrangement;
• Relief by making a claim.

Answer 17

• Relief at source: You make a contribution to the pension scheme and the scheme administrator gross it up (divide by 0.80). They claim the basic rate tax back from HMRC. You get higher/additional rate relief via self assessment (i.e. the extra 20%/25% if you’re entitled to it).
• Net pay arrangement: Employee contributions to an occupational scheme are made before your PAYE tax is calculated, so you get immediate relief at your highest rate of tax.
• Relief by making a claim: You have to pay the full gross amount into the scheme, then get tax back by deducing this amount from your total income when tax is calculated.

Question 18

Employee Benefits

What are the general rules for valuing an employee benefit (i.e. unless any more specific rules apply, such as company cars)?

What if you make a contribution to the benefit?

Answer 18

You get taxed on “cash equivalent value”, which is typically the cost to the employer.
Any contribution paid by the employee is deducted.

Question 19

Employee Benefits

How are you taxed if your employer gives you an asset

Answer 19

If it’s something produced by the employer then it’s the marginal cost.

If it’s a new asset that they purchased then it’s the amount they paid.

If it’s an existing asset then it’s the market value when they give it to you.

Question 20

Employee Benefits

How are you taxed if you are allowed the use of an asset?

What if they eventually give it to you after you’ve used it for a few years?

Answer 20

If the employer owns the asset you’re taxed on the “annual value”, which is 20% of the market value when they first lend it to you.

If they rented it then it’s the maximum of the annual value and the rental amount they pay.

You must add on to this any amounts they pay to maintain the asset.

If they eventually give it to you tax is based on the higher of the market value at the time of the gift, and the market value when they originally lent it to you less any amounts you were taxed on since they lent it to you.

Question 21

Employee Benefits

How is the taxable amount calculated for a company car?

Answer 21

It is a percentage of the list price of the car, with the percentage used based on the carbon dioxide emissions.

Maximum % is 37%.

Qualifying level is 95g/km which results in 18%

There’s no cap on the list price.

Diesel cars get charged an extra 3% (but still capped at 37%).

Question 22

Employee Benefits

What impact do contributions to company car costs have?

What about if you only use the car for part of the year?

Any cars not included in these rules?

Answer 22

If you contribute to the running costs those amounts are all deducted from the taxable amount.

If you contribute to the capital cost of the car then up to £5k maximum can be deducted from the list price.

It doesn’t matter how much you use the car, but if the car is only available to you for part of the year, the benefit is reduced accordingly.

Pool cars are not taxed as a benefit.

Question 23

Employee Benefits

What is the taxable amount for free fuel provided by employer?

Answer 23

Apply the same percentage as the company car calculation to a fixed value (£22,600 for 17/18).

This gets reduced for proportionate use.

Question 24

Employee Benefits

What is the tax impact if you use your own car for work?

How are you taxed if your employer gives you cash for using your own car (i.e. a mileage allowance)?

Answer 24

There’s no tax or NI impact for using your own car.

If you’re given a mileage allowance there is a statutory amount which won’t get taxed or NI’d.

For tax this is 45p per mile for the first 10k miles, then 25p per mile.

For NI it’s a flat 45 per mile rate.

Question 25

Employee Benefits

How are you taxed on a loan from your employer?

Answer 25

You only get taxed on loans above £10k (but then get taxed on the whole amount, not the amount above £10k).

Get taxed on the difference between the rate you pay and the official rate (2.5%). So if it’s interest free you pay 2.5% of the loan amount, if you pay 2.5% or above then there’s no taxable benefit.

Question 26

Employee Benefits

When is living accomodation chargeable or exempt (3 exemptions)?

Answer 26

If your employer provides your living accomodation you pay tax on the value unless it’s exempt.

Exemptions are:

• It’s necessary to do your job (eg caretaker);
• It helps you do your job better (eg publican); or
• There is a special threat to your security.

Question 27

Employee Benefits

How is the value of living accomodation calculated?

What about furnished accomodation?

Answer 27

Usually the annual rent that could otherwise be achieved (or the rental paid by the employer if they rent it and this amount is bigger).

There is a surcharge if the employer owns it and it cost over £75k, being the excess over £75k multiplyed by the official interest rate (2.5%).

If it was acquired over 6 years ago however the market value when first used by the employee is used instead of the original cost.

If the accomodation is furnished there is an additional 20% charge.

Question 28

Employee Benefits

What are the specific tax exempt benefits?

Answer 28

• Group income protection - The premiums aren’t taxed as a benefit but if it pays out NI and tax will be due on whatever your employee pays to you;
• Low cost or free canteens;
• One mobile phone;
• Long service awards (over 20 years, up to £50 per year of service);
• Suggestion schemes (up to £25);
• Work training;
• Relocation expenses (up to £8k);
• Home-working (£4 per week);
• Workplace nurseries/childcare - Childcare vouchers up to £55 pw;
• Liabilites insurance;
• Trivial benefits (no charge if it costs less than £50 per employee).

Question 29

Married Couples

What are the two personal allowance related items for married couples and how do they interact?

Answer 29

• Married couples allowance is only available if at least one of the couple was born before 6/4/1935. Then one of the couple gets a tax deduction of 10% of the MCA allowance (more details in later card);
• Transfer of 10% of the unused personal allowance is allowed where one partner doesn’t use their allowance, as long as the other is only a BR payer.

A couple cannot claim both, so usually if one is born before 6/4/1935 they’ll elect for MCA and give up the transfer.

Question 30

Income Tax

When does your personal allowance change from the standard amount (which is in the tax tables)?

What big problem does this cause and what can you do about it?

Answer 30

• If you earn over £100k it’s withdrawn by £1 for every £2 you earn over £100k (so zero at £123k or above);
• If you’re married (or civil partner) and they don’t use their allowance, they can transfer 10% of it to you (NOT if you’re a higher/additional taxpayer);

The big problem caused by the first issue is that you have a 60% marginal tax rate on income between £100k and £123k. As a result if you fall in that bracket you should try to reduce income by making pension contributions (etc.).

Question 31

Income Tax

Other than personal allowance, what other tax allowances are available?

Any concerns arising from these?

Answer 31

• Married couples allowance - if one of you was born before 6/5/1935;
• Blind persons allowance of £2,320.

Question 32

Married Couples Allowance

Who is entitled to this?

What is the tax benefit given.

Which partner uses it?

What transfers are available between the partners?

Answer 32

Couples entitled if one of them was born before 6/4/1935.

It is a tax reduction effect (like EIS), tax is reduced by 10% of the allowance - which has a standard amount of £8,445 (TT) but is withdrawn by £2 for every £1 earned over £28k (TT), down to £3,260 minimum (TT).

If married before 5/12/2005 the husband gets it as standard, post 5/12/2005 the higher earner gets it. Pre-2005 couples can jointly elect to use the new rules.

• It can be transferred in full with a joint election;
• Half can be transferred on the election of the non-receiver (i.e. wife or lower earner);
• Pre 2005 marriages can transfer the basic allowance on joint election;
• Post 2005 marriages can transfer any unused allowance.

Question 33

Income Tax

What allowances are there for savings and dividends?

Answer 33

These numbers are all in the tax tables!

You can get up to £5k of savings income free, but only if it is in the first £5k of your total taxable income. So if you get over £5k salary this is irrelevant for you.

Otherwise everybody gets £1k (basic rate payers) or £500 (higher rate payers) savings allowance.

Everybody gets a £5k tax free dividend allowance.

Question 34

Income Tax

What effect might child benefit have on the tax calculation?

Answer 34

If either partner has adjusted net income over £50k their tax will be increased to recover the child benefit amount gradually.

At £60k net income all of the child benefit will be fully recovered by them paying extra tax.

Question 35

Employee Benefits

What is the taxable value of a company car provided to an employee (based on level of CO2 emmissions)?

Answer 35

Taxable value is a percentage of the new car list price.

• 0-50g: 9%
• 51-75g: 13%
• 76-94g: 17%
• 95-99g: 18%
• Then another 1% for every 5g up to max 37%

Diesel cars add 3% to the above (but still can’t be higher than 37%).