1 - Income Tax Flashcards
What are the different types of Income that attract different tax rules?
Trading Income Employment Income Property Income Investment Income Other Income
If a self employed person’s accounting period year does not align with HMRC, how are they taxed in the first year of trading?
It would be based on the profits for the tax year, meaning only part of the profit would be taxed in the first year
How would a self employed person be taxed in the second year if the accounting period does not align with HMRC?
It is based on the first 12 months of profit, relief may be given if there is a period of overlap that result in a period being taxed twice
How much is the annual trading allowance and who does it apply to?
£1000
For businesses that have a trading income of less than £1000
If the trading income is over £1000 this can be claimed as against income instead of expenses, so is only relevant to very small businesses
When is income from overseas property taxable?
When the property business is carried on by a UK resident
What is the income limit for property letting businesses to use the simplified cash basis for accounting?
£150,000 - however if less, the landlord can opt to use the accruals basis
What are allowable expenses for property letting businesses?
Maintenance and repairs
Rates and Rents
Replacing furniture, furnishings, appliances and kitchenware
Any other expense wholly and exclusively incurred in the course of letting
How much can be claimed for rent a room relief?
£7,500
What does savings income consist of?
Interest
Purchased life annuity payments
Gains from life assurance contracts
What does dividend income consist of?
Stock and share dividends within the UK and overseas
What elements might be included within other income?
Receipts from intellectual property, beneficiaries income from estates in administration, income taxed under the settlements and anti-avoidance rules and all other income not otherwise charged
What are the two general factors used by the HMRC to determine self employment or employment?
Whether the arrangement is
A contract of service - employee
A contract for services - self employed
What are the two main factors that make self employment preferable to employment?
The treatment of expenses
The lower level of NIC’s
What are some of the indications of employment under the test of status?
Degree of control that the employer exercises over the worker
Contract of service or contract for services
Set hours, holiday pay, overtime pay and supervision
Master/servant or superior/subordinate relationships
Long engagement of working for the same person
Single employer
Right to suspend or dismiss
What are some of the indications of self employment under the test of status?
Agreement for a specific amount of money or commission for the work to be done
Freedom to accept or refuse work
Worker can sub-contract
Takes business risks but can profit from greater efficiency
Work without supervision
Provide own equipment/major capital items
What conditions would a person need to make if they were a salaried member of a LLP to demonstrate they are self employed?
More than 20% of the members remuneration based on profitability of the LLP as a whole
Has a significant say in the running of the business as a whole
Made a significant capital contribution to the LLP - at least 25% of their expected income in a particular year
What type of investments pay interest distributions gross?
Bank and building societies
Unit trusts
OEIC’s
Investment trusts
What type of investments and annuities pay interest/income net of 20% tax?
Investments
A company or a partnership of a company
A partnership of a non UK company
Rewards paid by banks and building societies - as they are not treated as savings income
Annuities
Where an annuity is not paid wholly out of profits or gains subject to income tax
Purchased rate annuities
What items are given tax relief by deductions from income?
Qualifying interest payments
Allowable business losses
Gifts to charities of shares and securities
Qualifying contributions to occupational pension schemes and retirement annuity plans (where there is no relief at source)
Why type of interest payments are allowable deductions from total income?
Purchase of shares in the borrowers company or to finance loans to the company
Investment in a partnership
Buy plant and machinery for use in a partnership
Payment of IHT
What is the cap for interest plus allowable business losses?
£50,000 or 25% of adjusted total income, whichever is the higher
What is the relief available for share purchase and loans to companies?
Relief is available if the borrower has more than 5% of the shares, or if they work for the greater part of their time in the management or conduct of the business
Relief if at the borrowers top rate of tax, subject to a cap of £50,000 or 25%of total income
(no relief if available if the loan is used to buy shares on which EIS relief is claimed)
In order to qualify for tax relief to pay IHT, what must the borrower be in relation to the estate?
The personal representative of the deceased
Why should non-tax payers avoid using gift aid?
As the payment increases the tax bands for contributors therefore giving them a higher amount of relief. If they do not pay tax, they will need to repay the automatic deduction given to the charity to the HMRC
What limit must a donor to charity consider on an annual basis if they are making multiple donations?
£2500 maximum per year
How would a donation of £4000 be treated by: The charity? The donor ( if he is an additional rate tax payer)
Charity - As if it were a donation of £5000 - the charity will reclaim £1000 back from the HMRC.
Donor - Would receive tax relief of an extra £5000 to his basic rate and higher rate limit, effectively meaning he would receive £1000 + £1250 (45% relief)
How are donations via payroll giving made?
They are deducted from the employees salary before tax and therefore no other action is needed. This gives tax relief at the highest rate to the individual.
What type of assets can be donated to charity & therefore benefit from full tax relief?
Listed shares and securities
Unlisted shares and securities on a recognised exchange such as AIM
Unit trusts/Oeic’s
Foreign collective schemes
Freehold or leasehold property (all interest given)
Pre-eminent objects of the nation
Do you need relevant earnings to be able to contribute to a pension scheme?
No
What are the types of relevant UK earnings?
Self employed/partnership profits
UK employment
Certain overseas crown employments (subject to UK tax)
How much can a person contribute to a pension if they have no relevant UK earnings?
How can they receive relief?
£3600 per year
Can only claim relief if the pension scheme operates relief at source
What is the criteria to be a UK relevant individual?
Relevant Uk earnings
Are resident at some time in the tax year
Were resident in the UK at some time during the previous 5 tax years & resident when they joined the scheme
What is the annual allowance for pension contributions?
£40,000
What are the implications for those earning over £240,000 per year?
The allowance is tapered down to a minimum amount of £4,000 by £1 for every £2 earned
What is the charge for exceeding the allowance?
A charge is made at the individuals marginal tax rate
Can any unused allowance be carried forward?
Yes, for a period of three years for any year they were a member of a pension scheme.
What are the three ways in which tax relief is given for pension contributions?
Personal Pensions - paid net, with tax bands extended by gross contributions
Occupational schemes - deducted from employment inome
Retirement annuities - deducted from total income
How are employees taxed on benefits provided by employers?
By the cash equivalent of the benefit
What is the annual rate applied to an asset given for use to an employee?
20% of the market value
In general, how is car benefit calculated?
A percentage of the list price of the car, based on the level of CO2 emissions
How do cars with low CO2 emissions change the charge for a company car?
from 6th April 2020, there is a 0% charge for those that can only be driven in a zero emission zone
For hybrid-electric cars with emissions of 1-50 g/km the range of the car determines the benefit
If an employee makes a contribution to the capital cost of the car, how much is the benefit?
Up to £5,000 is deducted from the price of the car
Are pool cars considered a taxable benefit?
No they are not
What the the mileage rates if an employee uses their own car for business purposes?
45p for the first 10,000
25p for miles thereafter
What is the taxable benefit for employees provided with a company van?
£3490 (£2472 for zero emission vans
£666 where van fuel is available for private journeys
What is the official rate for beneficial loans provided by employers used in the calculation of taxable benefit?
2.25%
In what circumstances could an employee avoid being taxed on the benefit of living accommodation?
The accommodation is necessary for the performance of duties
The accommodation helps them perform their duties better and is customary - such as a publican
There is a special threat to the employees security
If the employer provides furniture and equipment to the living accommodation, what additional benefit may be applied?
20% of the market value of the items
How are cash and non-cash vouchers treated?
Cash - as income
Non-Cash - an amount equal to the cost of the voucher less any amounts from the employee
What types of benefits are generally tax free?
Group income protection Meals Mobile phones Long service awards Suggestion schemes Training Relocation and removal expenses Home working Workplace nurseries Liability insurance Pension advice Trivial benefits
Are luncheon vouchers taxable
Yes
What is the limit for Long Service Awards?
£50 per year of service, provided no similar awards were given in the previous 10 years
When would an idea under a staff suggestion scheme be taxed?
If the award is over £5000
Over £25 and under £5000 if
The suggestion is not implemented
The award is more than 50% of the financial benefit in the first year or more than 10% over the next five
What categories of individuals can claim personal allowances against income taxable in the UK?
UK citizens
Nationals of countries in the EEA
Employees of the crown or missionary societies
Under the service of any territory under HM protection
Residents of the IOM and Channel Islands
Previous residents who are resident abroad for health reasons or a member of their family who is resident with them
Persons whose late spouse or late civil partner were in the service of the crown
Under what circumstances could someone paying tax on a remittance basis claim personal allowances?
If their un-remitted income is less than £2000 for the year
If a married person has an income over £30,200 and was born before 6th April 1935, what is the impact on their married couples allowance?
The portion over £3510 is reduced by £1 for every £2 of income
Due to the personal allowance trap, what is the effective rate of tax for earners between £100,000 and £125000?
60%, as they pay 40% on income and then an additional 20% due to the withdrawal of the personal allowance
What is the general method of calculating the income tax charge?
Income from all sources is added together
Certain reliefs and the personal allowance is deducted before charging tax - these save tax at the highest rate
Other reliefs and allowances are deducted in the course of calculating tax by:
Extending the basic and higher bands
Making a deduction from the tax liability
When would an individual be in receipt of the 0% rate for savings income?
Where savings income falls within the first £5000 of taxable income (in excess of relief and allowances)
What is step one of calculating tax charges on income?
Distinguish income from all types
- Earnings, pensions, rental income and anything else not classed as savings or dividend
- Savings income - excluding chargeable gains from life assurance policies
- Dividend Income
- Chargeable gains under life assurance policies
What is step two of calculating tax charges on income?
Deduct reliefs from total income in priority order: Earnings and pensions Savings Income Dividend Income Life assurance policies
What are steps three and four of calculating tax charges on income?
Step three - deduct personal allowance (and blind persons allowance)
Step four - Calculate the amount of any payments for which higher and additional relief is given by extending the basic and higher rate bands
What are the two final steps of calculating tax charges on income (five and six)?
- Calculate the tax on the remaining income in the order of step 1 using the applicable rates
- Deduct any tax reducers - i.e. married couples allowance/transferable amounts
Why might the HMRC be interested if a company employs spouse or children of the owner?
They may question the remuneration in relation to the work performed
What are the implications for interest from a child’s savings if it was invested by the parent?
The interest is taxed as if it were the parent’s, unless it is below £100
What is the impact on child benefit if the parent earns more than £50,000 per year?
There is a 1% charge of the amount of child benefit for every £100 of income over £50,000
How is income taxed on a Bare Trust?
As the asset is in the name of the beneficiary, they would be subject to tax charges
All allowances can be claimed - personal, savings and dividend
Why is a bare trust for a minor treated as a settlor-interested trust (tax on the parent)
When might a bare trust for a child be beneficial?
To prevent avoidance of tax, where funds have come from a parent.
Gains are treated as the child’s and they can use their annual exemption
What are the two qualifying beneficiaries, classed as vulnerable in relation to trusts?
Disabled persons
Relevant Minor Children
What are the categories that signify a disabled person for special tax treatment?
In receipt of: Attendance allowance Disability living allowance Personal Independence Payment Increased disablement pension Constant attendance allowance Armed Forces independance payment
What is a relevant minor?
Under the age of 18
At least one parent has died
what are the eligible trusts for relevant minors?
Statutory trusts under Admin of estates act 1925
Trusts established under the will of a deceased parent
Trusts established under the Criminal Injuries Compensation scheme
What is the time limit for ensure favourable tax treatment of a trust for a vulnerable person & what must they do?
Make a joint election, no more than 12 months after 31st January following the end of the tax year in which the effective date of the election falls
Once an election is made for a trust for a vulnerable person, what would need to take place for this to no longer be in force?
The person ceases to be vulnerable
The trust ceases to be qualifying
The trust is terminated
Is the personal savings and dividend allowance applicable to trustees?
No
Can a trust beneficiary use personal allowances and what can they reclaim?
Yes they can use allowances
They can reclaim any basic rate tax paid by the trustees
In what order are trust expenses set against income being paid to the beneficiary?
UK Dividends
Foreign Dividends
Savings Income
Other income
What form is required to be completed by the trustees and passed to the beneficiaries to use for their own tax return?
R185
What is a simplistic way for trust income to be paid?
Direct to the beneficiary to avoid funds being passed through the hands of the trustees
What tax rate is paid by a discretionary trust and how would the beneficiary receive it?
The trust would pay 45% on income, the beneficiary would receive an equivalent tax credit
What is accumulated income within a trust and how is it treated for tax?
If they do not distribute the income the tax they have paid is carried forward into a tax pool.
If the income is distributed in a later year, the tax paid is brought forward to frank the 45& tax credit and therefore reduces any additional tax liability the trustees may have where the 45% credit exceeds the 38.1% they have paid on distributions of dividend income
What happens if trustees accumulate income within the trust rather than pay it out?
If it has neither been paid out nor accumulated for 5 years it will be treated as part of the capital.
How is income treated within a settlor- interested trust?
As if it were the settlor’s income and they will be taxed even if they have not received it
What are the two situations were trust income is treated as settlor’s income?
Where the settlor or spouse/civil partner has retained any interest in the trust
Where the trust is for the benefit of a settlor’s minor unmarried child
How is a settlor taxed on any capital sums received from a trust?
They are chargeable as income tax up to the amount of any undistributed income
If the capital sum exceeds this level, the balance is carried forward to match against future undistributed income for max of 10 years
