1.3 Taxation

Question 1

What is the main statute relating to taxes?

Answer 1

Income and Corporation Taxes Act 1988

Question 2

What is meant by Residence and how is it defined?

Answer 2

Residence applies to anyone who resides in the UK for at least 183 days in a given tax year. If they are here for less than 183 days the statutory residence test is applied unless they are regarded automatically as not uk resident.

Question 3

What is Domicile and why is it important?

Answer 3

Domicile is the country that an individual treats as their home even if they do not reside there. Domicile is acquired at birth, usually in line with the father but with the mother if they are unmarried.

Domicile is important as it affects liability to pay inheritance tax.

Question 4

What is the effect of Domicile on Inheritance Tax?

Answer 4

If a person is domiciled in the UK inheritance tax is chargeable on assets anywhere in the world. If a person is domiciled elsewhere IHT is only due on UK assets.

If you are a non-dom but have been resident in the UK for 15 years out of the last 20 tax years you are deemed UK domiciled for IHT purposes.

Question 5

What is Capital Gains Tax?

Answer 5

Tax payable on the gains made when certain assets are disposed of, usually by selling them.

Question 6

Explain earned and unearned income

Answer 6

Earned income comes from employment or self employment (salary, profits, etc)

Unearned income comes from outside of employment (interest, rental income, dividends)

Question 7

Give examples of taxable income

Answer 7

Salary / wages

Pensions, annuities, state pension benefits

Profits / Dividends

Copyright / patent income

Savings interest

Tips

Income from gov stocks and corporate bonds

Rental income

Value of benefits in kind

Question 8

Give Examples of non-taxable income

Answer 8

Redundancy payments up to £30k (payment in lieu of notice is taxable)

First £3600 of shares given to an employee

Interest on NS&I savings & ISAs

Covenanted / gift aid payments

Proceeds of qualifying life assurance policy

Lottery prizes / casual gambling profits

Wedding presents & other gifts from employer not given in return for service

Scholarship or educational grant

War widow pensions

Certain state benefits

Housing grants paid by local authorities

Interest on a tax rebate

Capital part of a purchased life annuity (not the interest)

Question 9

Is a child’s income taxable?

Answer 9

A child has the same personal tax allowance as an adult so income above this is considered taxable.

If the income of the child arises from a settlement or arrangement made by the parents then the income is treated as the parents income for tax purposes (to avoid parents funnelling money through children).

Question 10

What is a personal allowance?

Answer 10

The amount of income that can be received each year before income tax is charged.

The allowance reduces by £1 for every £2 they earn over the £100k limit (ie. reduces to Nil at an income of £125,140)

2022/2023 - £12,570

Question 11

What is marriage allowance and married couples allowance?

Answer 11

Marriage allowance enables married & civil partners who are not liable to income tax to transfer 10% of their personal allowance to a (basic rate) partner.

Married couples allowance is available if one partner is born prior to 6th April 1935. Min and max amounts but again limited to 10%

Question 12

What is blind persons allowance?

Answer 12

Available to those registered as blind. If cannot be used by the individual it can be passed o a spouse or civil partner.

Question 13

What is the personal savings allowance?

Answer 13

This enables savers to receive a certain amount of interest tax-free.

Basic rate - £1000
Higher rate - £500
Additional rate - £0

Question 14

What is dividend allowance?

Answer 14

No tax is payable on the first £2000 of a dividend payments. Tax is due on amounts over that based on the individuals tax band.

Question 15

What is the allowances for property and trading income?

Answer 15

Micro-entrepreneurs who supplement main income through property or small sales (eBay) have a tax free allowance of £1000 for each of the two criteria.

Question 16

What deductions are permitted to be taken from taxable income?

Answer 16

Pension contributions
Charitable contributions
Allowance expenses

Question 17

What are the 3 income tax rate bands?

Answer 17

Personal allowance - up to £12,570 - 0%

Basic rate - £12,571 - £50,270 - 20%

Higher rate £50,271 - £150,000 - 40%

Additional rate - over £150,000 - 45%

Question 18

In what order is income tax applied?

Answer 18

1) non-savings income
2) savings income
3) dividends
4) chargeable gains on a non qualifying life assurance policy

Question 19

What does the term ‘taxed at source’ mean?

Answer 19

This is where HMRC collect tax from the person who makes the payment and not the recipient. Eg. PAYE scheme

Question 20

How do self-employed pay income tax?

Answer 20

They pay directly to HMRC on the basis of a declaration (self-assessment) of net profits.

Net profits = total income of the business - allowable business expenses and capital allowances.

Tax and Class 4 NICs are paid in 2 equal parts. The first payment on 31st Jan and the 2nd payment 6 months later (31st July). Any class 2 NICs due are also paid on the January date.

Question 21

How is tax paid on savings and investment income?

Answer 21

Tax is paid through self-assessment or deducted via their tax code.

Question 22

What is the starting rate for savings income?

Answer 22

For those on low incomes a starting rate of 0% for the first £5000 applies. For every taxable £1 this reduces by £1 (ie. Once earning £5k taxable income).

Question 23

What is gift aid?

Answer 23

Gift aid enables a charity to recover the basic rate tax (20%) that is assumed to have been paid on the gift.

Question 24

Name the 4 classes of National Insurance

Answer 24

Class 1 - paid by employees and employers (except for U21s and apprentices under 25). Reduced rate above the upper limit.

Class 2 - flat rate paid by self employed if annual profits exceed the small profits threshold.

Class 3 - voluntary flat rate contributions

Class 4 - additional contributions on the self employed on their annual profits between min and max amounts with reduced rate above the upper limit.