7. TC - Income tax computation Flashcards
Describe the income tax pro forma
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
Is income on tax comp shown gross or net?
Gross
What are the main types of exempt income?
- 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
What is net income?
Total of all income less reliefs, but before deducting the personal allowance
What is taxable income?
When the personal allowance has been deducted
What is the difference between net income and taxable income?
Net income is before deducting PA
Taxable income is after deducting PA
What is the basic personal allowance for 19/20?
£12,500
But this is reduced if adjusted net income exceeds £100k
When is the personal allowance restricted?
Restricted if adjusted net income (ANI) exceeds £100k
What is adjusted net income?
Net income less gross gift aid donations and gross personal pension contributions
What does ANI stand for?
Annual net income
How is the personal allowance reduced?
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
What is the abatement income ceiling?
£125,000
i.e. the amount where no personal allowance is received
TYU1: Gaby has adjusted net income for 19/20 of £114,500
Calculate Gaby’s personal allowance for TY 19/20
Basic PA £12,500 Less restriction (50% x (£114,500 - £100,0000)) = £(7,250)
Adjusted PA = £5,250
What is the blind persons allowance?
Blind persons allowance for 19/20 TY increases the PA by £2,450
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
Taxable income = AFTER PA
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
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
What order is taxable income taxed in
Non-savings income
Savings income
Dividend income
What is the income tax rate for NSI?
basic rate band £1- £37,500 = 20%
Higher rate band £37,501 - £150,000 40%
Additional rate band £150k+ 45%
What is the income tax rate for SI?
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
What is the income tax rate for DI?
Basic rate band £1- £37,500 = 7.5%
Higher rate band £37,501 - £150,000 32.5%
Additional rate band £150k+ 38.1%
How do you calc income tax payable/repayable from income tax liability?
Deduct any tax suffered at source
When is the starting rate band available?
Its available if taxable savings income falls into the first £5k of taxable income
When is the savings income nil rate band available?
Available for tax payers with taxable income below £150k whose savings income isn’t covered by the starting rate band
What is the savings income nil rate band?
£1k for basic rate taxpayers
£500 for higher rate taxpayers
Savings income covered by the savings income nil rate band is taxed at 0%
How is relief given for Gift Aid and how does this affect the tax calculation?
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
How do you adjust the tax calculation for Gift Aid?
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
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
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
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
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
What is the deduction calculation for gifts of assets to charity?
Deduction is as follows Market value X Incidental costs of disposal X Amount paid by charity (X) Total deduction X
Give some examples of qualifying shares for gifts to charity
Qualifying shares include:
- Shares and securities listed on a recognised exchange (such as AIM)
- Units in a unit trust
What is payroll giving/?
Charitable donations under an approved scheme that are deductible from employment income
How is qualifying interest payments taxed?
If an individual takes out a loan for a qualifying purpose, then the interest paid during TY is DEDUCTED from total income
Give some examples of qualifying purposes for taking out a loan to be able to deduct the interest from total income
- 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
What is the cap on qualifying interest payments?
£50,000 and 25% of adjusted total income
Define adjusted total income
Total income
Plus payroll giving
Less gross personal pension contributions
If a property is owned jointly between partners, how is income from that asset taxed?
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
When considering jointly owned assets, what does property include?
- Shares (from which dividend income is received)
- Buildings (from which rental income is received)
- Bank accounts (from which interest income is received)
What is the marriage allowance?
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)
How does the marriage allowance reduce tax?
The recipients income tax liability is reduced at the basic rate
Is the marriage allowance transfer automatic?
NO
The transferor must make an election
What is the child benefit tax charge?
An income tax charge that applies if a taxpayer or their partner receives child benefit and one of them has ANI of over £50k
How is a child benefit tax charge added to an individuals tax charge?
The charge is calculated using the ANI of the partner with the higher ANI and is added to their income tax liability
How is the child benefit tax charge calculateD?
The charge is 1% (rounded down to nearest whole %) of child benefit received for every £100 of ANI over £50k
What is the rate of child benefit?
Child benefit = £20.70/week for eldest qualifying child and £13.70/week for each other qualifying child
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?
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
Do all parents have to have child benefit?
NO, to avoid being levied with a child benefit related charge, the recipient can opt out to not receive the child benefit
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?
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 ..
