5): Taxation of a business and its stakeholders - Income Tax Flashcards
Who pays income tax?
Individuals
partners
PRs
trustees
Charities exempt.
Companies pay corporation tax instead.
What are the four categories that figures can fall into?
income receipts
capital receipts
income expenditure
capital expenditure.
What is income receipt?
receipt of money on a regular/recurring basis
salary, trading profits, income charged on loans, rental income
other forms: pension earnings, interest on savings, dividends, benefits given by employer
What are capital receipts?
These are one-off transactions not part of regular activity
examples: selling your car if you don’t sell cars as part of a business.
What is income expenditure?
expense incurred due to day-to day trading activities of a business
examples: payment of rent for business premises, paying bills, paying for repairs.
What is capital expenditure?
money spent on a new capital asset or enhancing existing asset as part of the business
one-off transaction
examples: buying large equipment, buying new business property, paying for repairs of business property
What are the relevant tax periods for individuals and companies?
individuals: tax year: 6 April - 5 April following year
Companies: financial year: 1 April - 31 March following year
How is tax collected?
HMRC collects from individuals and businesses via self-assessment system.
PAYE system collects tax at the source
Who pays income tax?
individuals:
employees
sole traders
parters in a partnership
company directors
Do deceased people have to pay income tax?
Yes.
only if the tax relates to a period when they were working prior to death
AND
on any income received on their estate
Who will pay the tax on a deceased person’s estate?
PRs will pay as part of administration
What is taxable income for income tax purposes?
income tax paid on receipt of money originating from income profits (regular income generation)
capital profits are not taken into account
What is the income tax liability in relation to foreign income?
foreign income: income originating from abroad
if Uk resident: pay tax on foreign income received in tax year
UK resident: if taxpayer has spent at least 183 days in the UK during relevant tax year
Who is required to complete a self-assessment tax return?
Directors and Self-employed people
self-employed: must register with HMRC within 3 months of starting the business
What are the deadlines for submitting tax returns?
online: 31 January
paper form: 31 October (earlier)
What must partners include in their tax return?
partner’s share in partnership profit
partnership profit: distributed in accordance with partnership agreement
What are overlap profits?
Occur when a partnership or sole trader has an accounting period different from the tax year (6 April to 5 April).
HMRC uses a basis period for tax purposes, which may result in profits being taxed twice in the first year.
The duplicated profits are called overlap profits.
Can overlap profits be returned?
Overlap relief allows the business to recover the tax paid twice when:
The business ceases trading.
OR
The business changes its accounting period to match the tax year.
The relief reduces taxable profits in the year overlap relief is claimed.
How is tax collected from employed individuals?
not required to submit self-assessment
PAYE system deducts tax at source
What are the three categories of income an individual may receive?
Savings income
Non-savings Non-Divididend income (NSNDI)
Dividend income
What is included in savings income?
interest from savings account b
interest from govt and company bonds
income from credit union accounts
What does NSNDI include?
salaries and bonuses
trading income from a business
pension earnings
rental income
what is dividend income?
dividends received on shares
What will partners and sole traders receive instead of a salary?
trading income
What are some suggestions for paying less tax through spouse transfers?
transfer the money on deposit or the shares to spouse if they have one of the following:
personal allowance: 12,570
personal savings allowance:
if the spouse would only pay tax at the basic rate.
What are some suggestions for paying less tax through applying for a marriage allowance?
ransfer £1,260 of unused personal allowance to a spouse if eligible.
How can tax-efficient savings be made?
Contribute to ISAs or other tax-efficient savings accounts.
Increase personal pension contributions to benefit from tax relief and reduce net income.
What is loss relief?
if a sole trader or partnership has made a loss in one tax year:
loss can be deducted from next year’s profit to reduce income tax payable
When is loss relief used?
before applying personal allowances so total income is reduced
excess loss relief left over can be used to reduce any capital gains made within same tax year
What are the general anti-abuse rules (GAAR)?
legislation to stop loopholes exploited by taxpayers
How do the GAARs work in relation to income tax?
HMRC can investigate tax arrangements if they fail the double reasonableness test (i.e., not regarded as a reasonable course of action by the taxpayer).
If found abusive and it is just and reasonable to do so, HMRC may adjust the taxable amount to reflect what should have been paid.
Restrictions on Gifts:
Taxpayers cannot reduce their income tax by gifting income-producing items (e.g., dividend or interest-paying shares) to children.
Income will still be treated as belonging to the original taxpayer.
What are the steps for a full income tax calculation?
- calculate total income
- less pensions and interest on qualifying loans
- less personal allowance
- split taxable income into categories
- is savings allowance available?
- apply tax bands and tax rates
- you get tax liability
What must be done in Step 1 of a full income tax calculation?
- Calculate total income:
Individual: Income: add up all sources of income
Business: Trading income: calculate gross income then subtract expenses of the business
Not income: gifts, trivial benefits max. 50 GBP, capital receipts (one-off sales)
Exempt Income: interest from ISAs, National Savings certificates, gambling/lottery wins…
What must be done in Step 2 of a full income tax calculation?
- Calculate Net income:
Total income - pension contributions - interest on qualifying loans = Net Income
- Both types of pension schemes must be deducted from total income
- Qualifying loans Are:
loans to a partnership
loans to buy shares in a close company
loans taken by PRs to pay IHT on estate
What is Step 3 in a full income tax calculation?
Calculate taxable income:
Net income - Personal Allowance (12,570) = Taxable income
If net income is above 100k:
personal allowance is tapered: reduced by 1GBP per 2GBP over 100k
Marriage allowance:
Couples may transfer max. 1260 GBP to each other of their personal allowance
What are the conditions for using the marriage allowance?
- couple must be married/ civil partners
- transferring party’s income must be below personal allowance amount
- receiving party must be a basic rate taxpayer before the transfer
What is Step 4 of a full Income tax calculation?
split taxable income into different categories:
add up all income from dividends = dividend income
add up interest from all savings = savings income
Taxable income - savings income - dividend income = non-savings income
What is Step 5 of a full income tax calculation?
is a saving allowance available?
interest on savings: personal savings allowance
basic rate taxpayers: first 1k taxed at 0%
higher rate taxpayers: first 500GBP taxed at 0%
additional rate taxpayers: no allowance
What is Step 6 of a full income tax calculation?
apply tax band and tax rates:
- non-savings income:
first 50,270 GBP taxed at 20%
between 50,270 and 125,140 GBP taxed at 40%
above 125,140 GBP taxed at 45%
- Tax savings income:
tax the savings income in the same band as non-savings income and if it spills over, tax at the next rate
- tax the dividend income
all taxpayers: first 1k taxed at 0%
basic rate taxpayers: above 1k taxed at 8.75%
higher rate taxpayers: above 1k taxed at 33.75%
additional rate taxpayers: above 1k taxed at 39.35%
- Add up all tax liabilities to find final tax liability
