Basic income tax calculation Flashcards
What are the 3 heads of income for income tax calculation purposes?
- Non-saving income
- Saving income
- Dividend income
What falls under Non-saving incomes?
- Employment income
- Trading income
- Property income
- REIT income
- Trust income
- Pension income
What falls under Saving income?
Interest Income
What falls under Dividend income?
- Trust income
- Dividend income
What is the personal allowance available to every individual?
£12,570
What are the tax rates and bands for Non-saving income?
- Basic rate band (£1-£37,700): 20%
- Higher rate band (£37,701-£125,140): 40%
- Additional rate band (£125,141+): 45%
What is the tax year for UK?
6th April 2023 to 5th April 2024
What is REIT?
Real Estate Investment Trust; a mutual fund investing public money in real estate/property market.
How does REIT earn?
Through rental income and capital gains on invested properties, distributing income to investors.
What benefits do investors gain from REITs?
- Expert management reduces risk.
- Diversified portfolio (multiple properties).
- Access to real estate market without direct property purchase.
What are the tax implications of REIT dividends?
- 20% withholding tax deducted.
- Taxed on receipt basis.
- Treated as non-saving income.
What is dividend income, and how is it classified for tax purposes?
Dividend income is profit distribution by a company to its shareholders, it’s classified as a separate head of income because it has different tax rates
What are the tax bands and rates for dividend income?
- Basic rate band (£1-£37,700): 8.75%
- Higher rate band (£37,701-£125,140): 33.75%
- Additional rate band (£125,141+): 39.35%
What reliefs are available for dividend income?
- First £1,000 taxed at 0%
- No withholding tax
Why are dividend income tax rates lower?
Because dividend income is already taxed at the corporate level, reducing the tax burden on individual shareholders.
What is a trust?
A legal arrangement where a donor’s assets are managed by trustees on the behalf of beneficiaries.
Why is a trust created?
- Income management for those unable to manage themselves.
- Systematic income distribution.
- Income tax planning.
- Inheritance tax planning.
When can a trust be created?
During lifetime or at death through a will.
What are the two main types of trusts?
- Discretionary Trust
- Interest in Possession Trust
What is a Discretionary Trust?
Trustees have discretion; beneficiaries have no fixed rights, created for income tax planning.
How is income from a Discretionary Trust taxed? Basis, head, WHT?
- Taxed on receipt basis.
- Treated as non-saving income.
- 45% withholding tax.
What is an Interest in Possession Trust?
Operates according to donor’s instructions; trustees follow constitution/will; beneficiaries have defined rights.
How is income from an Interest in Possession Trust taxed? Basis, head, WHT?
- Taxed on an accrual basis.
- May be saving or non saving income depending on source
- Withholding tax:
- 20% (non-saving/saving sources)
- 8.75% (dividend source)
What is saving income?
Interest income earned by an individual during a tax year.
What are the tax rates for saving income?
Same as non saving
1. Basic rate band (£1-£37,700): 20%
2. Higher rate band (£37,701-£125,140): 40%
3. Additional rate band (£125,141+): 45%
What is the zero percent tax rate band for saving income?
- Basic rate taxpayers: £1,000
- Higher rate taxpayers: £500
- Additional rate taxpayers: £0
Bands are decided on TAXABLE income (after deducting PA)
What is the additional zero percent band for saving income?
First £5,000 of taxable income (if related to saving income)
How is interest income taxed?
What basis and any withholding tax?
On receipt basis
Normally, no withholding tax. However, 20% withholding tax applies if interest income is from unlisted company loan notes.
National Savings Certificate
Individual Savings Account (ISA)
Exempt from income tax
Limits for exemption in
National Savings Certificate
Individual Savings Account (ISA)
- National Savings Certificate: No limit
- Individual Savings Account (ISA): £20,000
What is qualifying loan interest expense?
Interest expense on a loan taken for a qualifying purpose, deductible from total income.
What happens if a loan is not qualifying?
Interest expense is only deductible against income from the related activity.
What are qualifying purposes for loan interest expense?
- Loan for plant/machinery for unincorporated business (sole trader/partnership)
- Loan for plant/machinery for employment purposes
- Loan to invest in a close company (e.g., friends and family company)
- Loan to invest in a cooperative society
- Loan to pay inheritance tax
How is personal allowance utilized for tax planning?
- Used against non-saving income (highest tax rate) first.
- Then against saving income (middle tax rate).
- Lastly against dividend income (lowest tax rate).
Can personal allowance be allocated differently?
Yes, taxpayer can choose to leave some/all saving income uncovered and use personal allowance against dividend income.
Why might a taxpayer allocate personal allowance differently?
When saving income is covered by the 0% tax band, to optimize tax efficiency.
Can personal allowance be claimed partially against income heads?
Yes
Can unused personal allowance be carried forward?
No, it cannot be carried forward to the next tax year.
What is a qualifying donation?
Donation to a UK-registered charity.
What tax reliefs are available for qualifying donations?
- 20% contribution from tax department.
- Basic rate band extension by GROSS donation amount.(donation*100/80)
- Reduction of Adjusted Net Income (ANI) by gross donation amount.
What is Adjusted Net Income (ANI)?
Net income (taxable income before deducting personal allowance)
less: gross qualifying donations
less: gross personal pension contributions.
How does ANI affect Personal Allowance?
- If ANI > £100,000, Personal Allowance diminishes.
- Diminishment: £1 for every £2 excess.
How to calculate diminished Personal Allowance?
- ANI - £100,000 = excess
- Excess / 2 = reduction
- £12,570 (Personal Allowance) - reduction= diminished amount
What happens to Personal Allowance when ANI exceeds £125,140?
Personal Allowance diminishes to £0.
