2.1 Taxation - Income Tax

Question 1

How may sole traders be taxed?

Answer 1

Profits

Question 2

How may partnerships be taxed?

Answer 2

Allocation of profits > Each partner

• Profit
• Salary
• Interest received on capital contributions

NOT deductible expenses

• Rent
• Partner’s loans

Question 3

How may employees be taxed?

Answer 3

Income > PAYE deducts

• Salary/Wages
• Benefit of money
• Emolument of employment (cars, accommodation)

Payment for reward for services

NOT damages for contract breach

Question 4

What main reliefs and exemptions are available?

Answer 4

Personal allowance

• £12,570 (2020-21)
• £12,500 (2021-22)

Married couple’s allowance (MCA)

• Taxpayer married before/after 5 Dec 2005 (claimed by person with higher income) > Married, living together, +1 spouse born before 6 April 1935
• HMRC to reduce tax bill by 10%

Marriage allowance
1) Couple born on/after 6 April 1935
2) Person’s income < PA
3) Spouse/Civil partner pays income tax at basic rate
=> 10% remaining PA => Spouse/Civil partner

Blind person’s allowance
1) Certified blind 
2) Scotland/NI
3) Cannot work bc eyesight is essential
=> BPA towards PA (tax free)

Maintenance payment relief

1) Taxpayer/Ex-spouse born before 6 April 1935
2) Court order payments maintain ex-spouse/children U21

Personal savings allowance (£1,000 tax free)

• Interest distributions from unit trusts
• Open-ended investment Cos
• Income from bonds
• Purchase life annuity payments

Dividend allowance

• No dividends
• Dividends (first exempt amount - £2,000)

Pension contributions

Business expenses

• Employee
• Self-employed
• Director

Interest on qualifying loans

• Purchase shares
• Purchase plant and machinery
• Pay IHT

Trading income allowance

1) Sell goods/services
2) Trading income < X

Property allowance

1) Earn income from property
2) Property income < X

Gift aid donations
- Reclaim 20% deduction reduction

NI

• Until retirement
• Must pay w income tax

Question 5

How is income tax calculated?

Answer 5

Taxable income

• Earnings
• Pension income
• Interest > Savings, bank, building society account
• Rent income
• Income (investment, shares, lodger, secured property, trust)
• State benefits (job seekers’ allowance)

Non-taxable income

• State benefits (disability, living, housing benefits)
• Tax exempt income
• Working tax credit
• Premium bonds
• Maternity allowance
• War widow’s pension

Question 6

How is income tax collected?

Answer 6

PAYE

• Employer will deduct income tax + NI > Employee will receive salary
• Tax year (6 April to 5 April)

Self-assessment
- Deadline depends on payment method

Budget payment plans

Choose payment method > Extra income