7. TC - Income tax computation

Question 1

Describe the income tax pro forma

Answer 1

Along the LHS 
Trading income
E'ment income 
Bank Interest
Dividends 
Property Income 
Total income 

Reliefs

Net income
Personal allowance
Taxable income

Along top 
Total 
NSI 
SI 
DI 

Income tax
NSI @ 20%/40%/45%
SI 0%/20%/40%/45%
DI 0%/7.5%/32.5%/38.1%
Total
Less marriage allowance  (X)
Income tax liability
Tax deducted at source (X) 
Income tax payable X

Question 2

Is income on tax comp shown gross or net?

Answer 2

Gross

Question 3

What are the main types of exempt income?

Answer 3

• Interest on National Savings Certificates
• Income from ISA
• Winnings
• Some social security benefits
• First £7.5k of gross annual rents from letting under a rent-a-room scheme
• Scholarships
• Income tax repayment interest

Question 4

What is net income?

Answer 4

Total of all income less reliefs, but before deducting the personal allowance

Question 5

What is taxable income?

Answer 5

When the personal allowance has been deducted

Question 6

What is the difference between net income and taxable income?

Answer 6

Net income is before deducting PA

Taxable income is after deducting PA

Question 7

What is the basic personal allowance for 19/20?

Answer 7

£12,500

But this is reduced if adjusted net income exceeds £100k

Question 8

When is the personal allowance restricted?

Answer 8

Restricted if adjusted net income (ANI) exceeds £100k

Question 9

What is adjusted net income?

Answer 9

Net income less gross gift aid donations and gross personal pension contributions

Question 10

What does ANI stand for?

Answer 10

Annual net income

Question 11

How is the personal allowance reduced?

Answer 11

For each £2 of ANI in excess of £100k, reduce the PA by £1 until it is completely removed

Therefore, if ANI exceeds £125k then the PA is reduced to nil

Question 12

What is the abatement income ceiling?

Answer 12

£125,000

i.e. the amount where no personal allowance is received

Question 13

TYU1: Gaby has adjusted net income for 19/20 of £114,500

Calculate Gaby’s personal allowance for TY 19/20

Answer 13

Basic PA £12,500 
Less restriction (50% x (£114,500 - £100,0000)) = £(7,250) 

Adjusted PA = £5,250

Question 14

What is the blind persons allowance?

Answer 14

Blind persons allowance for 19/20 TY increases the PA by £2,450

Question 15

TYU2: Anne is registered blind with her local authority. She receives the following income in the TY 19/20

Salary £16,630
Interest on National Savings Certificates £460

Calculate Anne’s taxable income for the TY 19/20

Answer 15

Taxable income = AFTER PA

Question 16

TYU2: Anne is registered blind with her local authority. She receives the following income in the TY 19/20

Salary £16,630
Interest on National Savings Certificates £460

Calculate Anne’s taxable income for the TY 19/20

Answer 16

Taxable income = AFTER PA

All in NSI column 
Salary  = £16,630
NSC interest (Exempt) £0
Net income = £16,630 
PA (£12,500 + £2,450) = £(14,950) 

Taxable income = £1,680

Question 17

What order is taxable income taxed in

Answer 17

Non-savings income
Savings income
Dividend income

Question 18

What is the income tax rate for NSI?

Answer 18

basic rate band £1- £37,500 = 20%
Higher rate band £37,501 - £150,000 40%
Additional rate band £150k+ 45%

Question 19

What is the income tax rate for SI?

Answer 19

Starting rate band £1- £5k 0%
Basic rate band £1- £37,500 = 20%
Higher rate band £37,501 - £150,000 40%
Additional rate band £150k+ 45%

Note: some of the basic rate band may be utilised by the starting rate band for savings

Question 20

What is the income tax rate for DI?

Answer 20

Basic rate band £1- £37,500 = 7.5%
Higher rate band £37,501 - £150,000 32.5%
Additional rate band £150k+ 38.1%

Question 21

How do you calc income tax payable/repayable from income tax liability?

Answer 21

Deduct any tax suffered at source

Question 22

When is the starting rate band available?

Answer 22

Its available if taxable savings income falls into the first £5k of taxable income

Question 23

When is the savings income nil rate band available?

Answer 23

Available for tax payers with taxable income below £150k whose savings income isn’t covered by the starting rate band

Question 24

What is the savings income nil rate band?

Answer 24

£1k for basic rate taxpayers
£500 for higher rate taxpayers
Savings income covered by the savings income nil rate band is taxed at 0%

Question 25

How is relief given for Gift Aid and how does this affect the tax calculation?

Answer 25

Relief is given at the time of payment by only paying 80% of the total donation Therefore no adjustment is needed in the tax calc

Question 26

How do you adjust the tax calculation for Gift Aid?

Answer 26

For basic rate payers: You don't need to, the relief received is given at the time of payment by only paying 80% For higher and additional rate tax payers: 20% tax relief is granted at the time the payment is made as above Additional relief is given by extending the basic rate band and the higher rate band by the gross amount of the gift

Question 27

TYU5: Philip earns £20k per annum, Natalie earns £60k per annum nd Mary earns £180k per annum All make donations of £2k declaring them to be under the gift aid scheme Calc the income tax liability for each of them for the tax year 19/20

Answer 27

Phillip Net income = £20k Less PA £(12,500) Taxable income = £7,500 Income tax: NSI Basic rate £7.5k x 20% = £1,500 Income tax liability = £1,500 Nat Net income £60k Less: PA £(12,500) Taxable income £47,500 Income tax NSI - basic = 40k x 20% = £8k NSI - higher = £7.5k x 40% = £3k Income tax liability = £11k Higher threshold = £37.5k + £2k x 100/80 = £40k

Question 28

TYU5: Philip earns £20k per annum and Natalie earns £60k per annum All make donations of £2k declaring them to be under the gift aid scheme Calc the income tax liability for each of them for the tax year 19/20

Answer 28

Phillip Net income = £20k Less PA £(12,500) Taxable income = £7,500 Income tax: NSI Basic rate £7.5k x 20% = £1,500 Income tax liability = £1,500 Nat Net income £60k Less: PA £(12,500) Taxable income £47,500 Income tax NSI - basic = 40k x 20% = £8k NSI - higher = £7.5k x 40% = £3k Income tax liability = £11k Higher threshold = £37.5k + £2k x 100/80 = £40k

Question 29

What is the deduction calculation for gifts of assets to charity?

Answer 29

``` Deduction is as follows Market value X Incidental costs of disposal X Amount paid by charity (X) Total deduction X ```

Question 30

Give some examples of qualifying shares for gifts to charity

Answer 30

Qualifying shares include: - Shares and securities listed on a recognised exchange (such as AIM) - Units in a unit trust

Question 31

What is payroll giving/?

Answer 31

Charitable donations under an approved scheme that are deductible from employment income

Question 32

How is qualifying interest payments taxed?

Answer 32

If an individual takes out a loan for a qualifying purpose, then the interest paid during TY is DEDUCTED from total income

Question 33

Give some examples of qualifying purposes for taking out a loan to be able to deduct the interest from total income

Answer 33

- Loans to buy plant and machinery for use in a partnership/employment (interest deductible for 3 years) - Loans to buy an interest in a close company/e;ee controlled company/cooperative - Loans to invest in a partnership or make a loan to a partnership - Loans to pay inheritance tax

Question 34

What is the cap on qualifying interest payments?

Answer 34

£50,000 and 25% of adjusted total income

Question 35

Define adjusted total income

Answer 35

Total income Plus payroll giving Less gross personal pension contributions

Question 36

If a property is owned jointly between partners, how is income from that asset taxed?

Answer 36

It is split equally and taxed separately Apart from the case of joint bank accounts, the couple can elect to split assets and therefore the related income in accordance with actual ownership

Question 37

When considering jointly owned assets, what does property include?

Answer 37

- Shares (from which dividend income is received) - Buildings (from which rental income is received) - Bank accounts (from which interest income is received)

Question 38

What is the marriage allowance?

Answer 38

A spouse/civil partner has transfer £1,250 of their personal allowance to their spouse IF - The transferor has no tax liability (or will be a basic rate taxpayer after the transfer) - The recipient is a basic rate tax payer - Both individuals were born on or after 6 April 1935 (otherwise would claim MCA but not examinable in TC)

Question 39

How does the marriage allowance reduce tax?

Answer 39

The recipients income tax liability is reduced at the basic rate

Question 40

Is the marriage allowance transfer automatic?

Answer 40

NO | The transferor must make an election

Question 41

What is the child benefit tax charge?

Answer 41

An income tax charge that applies if a taxpayer or their partner receives child benefit and one of them has ANI of over £50k

Question 42

How is a child benefit tax charge added to an individuals tax charge?

Answer 42

The charge is calculated using the ANI of the partner with the higher ANI and is added to their income tax liability

Question 43

How is the child benefit tax charge calculateD?

Answer 43

The charge is 1% (rounded down to nearest whole %) of child benefit received for every £100 of ANI over £50k

Question 44

What is the rate of child benefit?

Answer 44

Child benefit = £20.70/week for eldest qualifying child and £13.70/week for each other qualifying child

Question 45

When is the full amount of child benefit received? (how much do parents have to earn not to be charged), and when are parents charged?

Answer 45

If both parents have ANI below £50k theres no charge If the higher earner has ANI over £60k the charge is the full amount of child benefit received in the tax year But to avoid the charge being levied, the recipient can opt not to receive child benefit

Question 46

Do all parents have to have child benefit?

Answer 46

NO, to avoid being levied with a child benefit related charge, the recipient can opt out to not receive the child benefit

Question 47

TYU8: K and A have 3 children and receive child benefit of £2,501 A is a stay at home husband with no income K runs her own events org business generating net income of £58k for 19/20. She made gross gifted donations of £800 in the year What is the child benefit tax charge on Katrina for the TY 19/20?

Answer 47

Child benefit received £2,501 ANI (£58,000 - £800) = £57,200 Less: threshold £(50,000) Excess = £7,200 (net) Charge is 1% per £100 of £7,200 = 72% Child benefit charge is 72% x £2,501 = £1,800 Note: at every stage of the calc, the figures are rounded down to the nearest whole number ..