9. Income Tax Flashcards
When do partners pay income tax?
Parters are responsible for tax due on their individual share of the partnership profits BUT if parter is in a corporation, they pay corporation tax rather than income tax
When does the tax year run
Tax year runs from 6 April until 5 April the following year
Steps for Calculating Income Tax
- Calculate Total Income
- Deduct Allowable Reliefs
- Deduct any personal allowances
- Separate NSNDI, savings income and dividend income and calculate tax at applicable rate
What types are income are EXEMPT from tax
- interest on damages for personal injuries or death
- interest on savings certificates
- certain state benefits
- premium bond winnings
- income from investment in an individual savings account (ISA)
Net income calculation
Total income - allowable reliefs = net income
What are allowable reliefs
Interest payable on a qualifying loan
i. loan to buy share in a partnership or to contribute capital or make a loan to a partnership
ii. loan to invest in a closed trading company
iii. loan to PRs to pay inheritance tax
OR certain trading loss reliefs
Is there a cap on the amount of allowable reliefs which can be claimed?
Cap of 50 000 (or 25% of income, if greater)
Amount of personal allowance
12 570
In what order is the personal allowance applied:
- against NSNDI
- if surplus, against savings income
- if surplus, against dividend income
Can the personal allowance be carried forward for future use?
NO, unless marriage allowance applies
When is personal allowance reduced
For individuals whose net income exceeds 100k, PA reduced by 1GBP for every 2GBP of income above this limit (1000GBP for every 2000GBP over limit etc.) = PA of 11 570
- Once income reaches 125 140, no longer have a PA
Formula for the adjusted personal allowance
Adjusted PA = 12 570 - (net income - 100 000)/2 and round up to nearest pound
Marriage Allowance
If married person does not have enough income to use their full personal allowance for that tax year, they can transfer 1260 of their PA to spouse or civil partner
When is the marriage allowance not available
If the recipient is a higher or additional rate taxpayer
Blind person’s allowance
Any taxpayer who is registered blind receives an allowance of £3,070, which is subtracted from net income just like the personal allowance
Property and trading allowances
if gross property income or gross trading income is sub 1000GBP, income not subject to income tax and taxpayers are not required to submit a tax return (or where they have other income) declare it in their tax return
- If gross income above 1000, taxpayer can take the 1000 allowance as deduction against gross income instead of deducting actual expenses (to arrive at taxable income)
When is the property and trading allowance not available?
If taxpayer has any trade or property income from company they (or someone connected to them) owns or controls, or form a partnership where they (or someone connected to them) are partners, or from their employer or their spouse or civil partners
Personal Savings Allowance
- First 1k of savings income is tax free
- Basic Rate Tax payer (0-37 700) = PSA 1000 tax free
- Higher Rate Tax payer (37 701-125 140) = PSA 500
- Additional Rate Taxpayer (>125 140) = None
Dividend Allowance
First 500 of dividend income is tax free (any tax rate)
NSNDI Rates
Basic Rate (20%): 0-37 700
Higher Rate (40%): 37 701 - 125140
Additional Rate (45%): >125 140
Savings Income Tax Rates
0%: 0 - 5000
20%: 5 001 - 37 700
40%: 37 701 - 125 140
45%: Over 125 140
Dividend Income Tax Rates
Ordinary Rate (8.75%): 0 -37 700
Upper Rate (33.75%): 37 701-125 140
Additional Rate (39.35%): 125 141+
