B - Income Tax & NIC Liabilities Flashcards
What is income tax?
This is a tax payable by all individuals in the UK on their income.
All individuals are assessed separately
Persons in a married or civil partnership income is split either 50/50 or by actual owner ship.
What income is exempt from income tax?
Income from Individual savings accounts (ISA)
Interest from NS&I Certificates
Winnings - Note interest /Income subsequently earned will likely be taxable .
How is the basic income tax proforma laid out?
1 column for each type of income
End column totals each row
Rows for each specific income
Total for gross income then reliefs applied to give net income.
Personal allowance (tax code) - this is deducted against NSI, SI then DI in order. And may be reduced if adjusted net income is higher than £100k
Taxable income - income on which tax liability will be calculated.
What is Adjusted Net income?
ANI - Net income less gross gift aid donations and gross pension contributions.
How is a reduction to personal allowance calculated?
Basic personal allowance
Less (ANI-100,000)*50%
To give allowable personal allowance.
What are the income tax rates?
Basic rate - <= £37,500 20%
Higher rate - £37501 - £150,000 40%
Additional Rate - >150,001 45%
What is marriage allowance?
One partner/spouse and transfer 1/10th of full personal allowance for the year.
This reduces the transferring spouses personal allowance
And reduces the receiving spouses tax liability at the basic rate.
For PA of 12,500 the reduction in liability is £250.
What reliefs are there against total income?
Qualifying interest payments, where loan is to buy:
P&M for use in a partnership
Shares in an employee owned trading company.
To invest in a partnership.
The relief is deduction of interest paid from total income.
How does charitable giving affect income tax?
Gift aid Scheme.
The gross gift aid amount is taken in to account when adjusting personal allowance as part of ANI.
It is not deducted from Net income.
The donation is assumed to be net of 20% tax so will serve to adjust the tax band threshold for higher rate tax payers by the amount of the gift.
What is the child benefit tax charge?
Child Benefit is a tax free payment from the Government.
If a taxpayer or partner has ANI of >£100k a charge will apply.
Charge is 1% of benefit for each £100 of ANI over £50K.
How is the tax status of an individual determined?
There are there types of test which must be applied in chronological order to assess an individuals tax status:
Automatic overseas Test
Automatic UK Test
Sufficient ties test.
What are the different types of Savings (Investment) income?
Bank & Building society income
Interest from NS&I investments
Interest from Gilt edged stock
Interest from quoted company loan stock.
Interest received from ISA’s and NS&I certificates is exempt.
What are the tax rates applied to savings income?
Taxed after NSI, band applied is based on total taxable income.
Starting rate 0% - £1 - £5000 (inc taxable NSI)
Basic Rate 20% - £1-£37,500
Higher rate 40% - £37501 - 150,000
Additional rate 45% - over £150,001
What is the savings income nil rate band?
This is an amount of savings income that is taxed at 0%
£1000 for basic rate tax payers
£500 for higher rate tax payers
Not available for additional rate tax payers.
Use of the Nil rate band reduces the remaining basic or higher rate band.
How is dividend income taxed?
After NSI and SI, bands are applied based on total income
Basic rate £1-£37,500 7.5%
Higher rate £37,500-£150,00 32.5%
Additional rate > £150,001 38.1%
What is the dividend nil rate band?
Available to all tax payers
0% on the first £2000 for all tax payers.
As with SNRB will reduce the remaining basic and higher rate band.
What is an individual savings account?
Also known as an ISA
All interest income from this is tax exempt
Disposals of the investment are exempt from CGT.
20/21 investment limit is £20,000
What is the accrued income scheme?
Overrides interest being taxed on receipt (standard)
Used to avoid converting taxable interest income to non taxable Capital gains.
Is only applied if the nominal value is >£5000
The interest accrued (but not received) up to the disposal date is calculated, this is recognised as taxable income, sales proceeds are reduced by the same amount.
What may be taken in to account for married couples with tax planning?
Use of marriage allowance
Transfer of income generating assets.
Joint ownership of shares to maximise nil rate
Joint ownership of deposit accounts
Split joint income according to actual ownership.
What is property income?
Income arising from the letting of commercial and residential property.
Calculated on a cash basis by default.
Income less expenses actually arising.
Income and expenses from different properties are pooled for calculations.
Watch out for holiday lets.
What expenses can be claimed against property income?
Expenses must relate wholly and exclusively to the letting of the property.
If property is occupied by the land lord these expenses cannot be claimed.
How is interest in relation to property income dealt with?
Where this is an individuals income (not a company)
Not deducted from income
Relief given as basic rate on income tax
Basic rate restriction applies to 100%of costs.
This applies to Interest and incidental costs on loans to finance
Acquisition of Equipment of Lets and improvements/repairs to properties.
How is capital expenditure dealt with
Where income is dealt with on a cash basis there is generally deemed to be no distinction between RevEx and CapEx.
Exceptions:-
CArs - Can claim capital allowances or approved mileage allowance.
Replacement Domestic items relief - Can claim cost of replacing items less any proceeds from sale of item. Only available with like for like replacements.
Can income be dealt with on an accruals basis?
Only if specified.
usually an opt in or if property income receipts exceed £150,000.
In this case:-
Rental income and expenses are assessed on an accruals basis.
Unpaid rent is a deductible expenses - Impairment loss.
CapEx is dealt with through capital allowances.
Treatment for finance costs and Replacement domestic items relief remains the same.
What is rent a room relief?
Where a landlord lets a room(s) in their main residence property income up to the annual limit is exempt.
2020/21 limit = £7,500.
Gross rent <= £7,500 Income is exempt unless the tax payer elects not to take the relief to take credit for a loss.
Gross rent > £7,500, choose the lower of rent a room relief or std cash based calculation.
Where 2+ rooms are being rented the relief is split to £3,750 per person.
What is meant by furnished holiday lettings?
To qualify as a FHL a property must:
Be let furnished.
Let on a commercial basis - intention to make profits.
Available to the public generally for not less than 210 days per year.
Actually let for at least 105 days per year.
Not let for long term occupation >155 days.
How is income from Furnished holiday lets deal with?
Assessed as property income on a cash basis.
Any losses can only be offset against the same FHA business.
What benefits and reliefs are available on FHL’s
Profits are deemed relevant earnings for personal pension scheme contributions.
Plant and machinery can be dealt with on a cash or accruals basis.
Treated as a business asset for capital gains tax relief.
What is Premium on Grant of a Short lease?
For a lease of less than 51 years part of the premium is considered property income.
Property income element is calculated as:
Premium x (51-length of lease granted)/50
How is income recognised as being from Employment not self Employed?
An employee will generally have a contract of service where a self employed person would be contracted to provide a service.
How do we recognise if an employment contract exists
HIS CHORES
Hours - specific hours at fixed times or places
Integration - carry out activities that are integral to the business
Source of work - typically receive a single source of income
Control - Employer controls how work is carried out
Holidays - entitled to paid leave & sickness
Obligation - employer to offer work & employee to carry it out
Risk\reward - employees don’t suffer risk or reward
Equipment - Provided by employer
Substitutes - Employees must perform work them selves.
How is the calculation of employment income pro forma laid out
This is assessed on a receipts basis Salary bonus/commission benefits reimbursed ezpemses cash vouchers Less; allowable deductions expenses pension contributions professional subs charitable donations travel allowance use of own car
When are payments deemed to have been received
On the earlier of;
actual payment date
date individual became entitled to the payment
Unless director then this is the earliest of;
actual paument date
date director became entitled to payment
date earnings are credited to accounts
if the earnings are determined before the end of the period - last day of period
after the period - date earnings ate determined.
what are allowable expenses for employment income?
professional subscriptions - relating to the job charitable donations - payroll giving contributions to occupational pension capital allowances travel expenses
when is travel between home and work place an allowable expense;
when the employee has no normal place of work
or normally works from home
or has a temporary work place - only if for less than 24 months.
What are approved mileage allowance payments
HMRC statutory rates - 45p a mile for 1st 10,000, then 25p per mile.
if mileage allowance payments are received from the employer;
to AMA no benefit or deduction
over AMA excess is taxable benefit
under AMA short fall is an allowable deduction
Are there any benefits which are exempt from income tax
Trivial benefits - less than £50 and not cash or vouchers provided in recognition of services
employers pension contributions
use of free or subsidised canteen - available to all employees
provision of parking
1 mobile phone per employee
up to £150 per head for social events
non cash gifts from third parties
work place nurseries or child care
buses and use of bikes
relocation and removal expenses up to £8000
work related training
personal expenses when working away from home
payment towards cost of working from home
up to £500 pa for return to work medical
loans with a beneficial interest rate provided loan is less than £10,000.
provision of work related accommodation
What are the general rules for benefits
value of a benefit for tax purposes is the cost of providing the benefit
normally reduced by any contribution employee makes to cost
will be time apportioned if only available for part of the year
NB benefits provided to each employee are notified on P11D after end of tax year
How is company car benefit calculated
value of Car = list price + cost of any optional extras less maximum £5000 employee contribution.
benefit = value of car x CO2 emissions %
what is the CO2 emissions % for diesel and petrol cars
51-54 g/km - 13%
55 g/km - 14 %
over 55 g/km - 14% plus 1% for ever 5g/km over 55 to a maximum value of 37%
additionally for diesels that don’t meet RED2 there is a 4% supplement.
what are the CO2 emission % for hybrids?
this is based on the electric range of the vehicle and will be between 0 and 12%
fully electric cars will be 0%
what is private fuel benefit
nominal rate of £24500 x CO2% for the vehicle.
there is no reduction given for employee contributions.
