9. Income Tax

Question 1

When do partners pay income tax?

Answer 1

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

Question 2

When does the tax year run

Answer 2

Tax year runs from 6 April until 5 April the following year

Question 3

Steps for Calculating Income Tax

Answer 3

1. Calculate Total Income
2. Deduct Allowable Reliefs
3. Deduct any personal allowances
4. Separate NSNDI, savings income and dividend income and calculate tax at applicable rate

Question 4

What types are income are EXEMPT from tax

Answer 4

1. interest on damages for personal injuries or death
2. interest on savings certificates
3. certain state benefits
4. premium bond winnings
5. income from investment in an individual savings account (ISA)

Question 5

Net income calculation

Answer 5

Total income - allowable reliefs = net income

Question 6

What are allowable reliefs

Answer 6

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

Question 7

Is there a cap on the amount of allowable reliefs which can be claimed?

Answer 7

Cap of 50 000 (or 25% of income, if greater)

Question 8

Amount of personal allowance

Answer 8

12 570

Question 9

In what order is the personal allowance applied:

Answer 9

1. against NSNDI
2. if surplus, against savings income
3. if surplus, against dividend income

Question 10

Can the personal allowance be carried forward for future use?

Answer 10

NO, unless marriage allowance applies

Question 11

When is personal allowance reduced

Answer 11

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

Question 12

Formula for the adjusted personal allowance

Answer 12

Adjusted PA = 12 570 - (net income - 100 000)/2 and round up to nearest pound

Question 13

Marriage Allowance

Answer 13

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

Question 14

When is the marriage allowance not available

Answer 14

If the recipient is a higher or additional rate taxpayer

Question 15

Blind person’s allowance

Answer 15

Any taxpayer who is registered blind receives an allowance of £3,070, which is subtracted from net income just like the personal allowance

Question 16

Property and trading allowances

Answer 16

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)

Question 17

When is the property and trading allowance not available?

Answer 17

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

Question 18

Personal Savings Allowance

Answer 18

• 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

Question 19

Dividend Allowance

Answer 19

First 500 of dividend income is tax free (any tax rate)

Question 20

NSNDI Rates

Answer 20

Basic Rate (20%): 0-37 700
Higher Rate (40%): 37 701 - 125140
Additional Rate (45%): >125 140

Question 21

Savings Income Tax Rates

Answer 21

0%: 0 - 5000
20%: 5 001 - 37 700
40%: 37 701 - 125 140
45%: Over 125 140

Question 22

Dividend Income Tax Rates

Answer 22

Ordinary Rate (8.75%): 0 -37 700
Upper Rate (33.75%): 37 701-125 140
Additional Rate (39.35%): 125 141+