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ATX ACCA - Finance Act 2023 > Basic income tax calculation > Flashcards

Basic income tax calculation Flashcards

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1
Q

What are the 3 heads of income for income tax calculation purposes?

A
  1. Non-saving income
  2. Saving income
  3. Dividend income
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2
Q

What falls under Non-saving incomes?

A
  1. Employment income
  2. Trading income
  3. Property income
  4. REIT income
  5. Trust income
  6. Pension income
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3
Q

What falls under Saving income?

A

Interest Income

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4
Q

What falls under Dividend income?

A
  1. Trust income
  2. Dividend income
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5
Q

What is the personal allowance available to every individual?

A

£12,570

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6
Q

What are the tax rates and bands for Non-saving income?

A
  1. Basic rate band (£1-£37,700): 20%
  2. Higher rate band (£37,701-£125,140): 40%
  3. Additional rate band (£125,141+): 45%
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7
Q

What is the tax year for UK?

A

6th April 2023 to 5th April 2024

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8
Q

What is REIT?

A

Real Estate Investment Trust; a mutual fund investing public money in real estate/property market.

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9
Q

How does REIT earn?

A

Through rental income and capital gains on invested properties, distributing income to investors.

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10
Q

What benefits do investors gain from REITs?

A
  1. Expert management reduces risk.
  2. Diversified portfolio (multiple properties).
  3. Access to real estate market without direct property purchase.
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11
Q

What are the tax implications of REIT dividends?

A
  1. 20% withholding tax deducted.
  2. Taxed on receipt basis.
  3. Treated as non-saving income.
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12
Q

What is dividend income, and how is it classified for tax purposes?

A

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

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13
Q

What are the tax bands and rates for dividend income?

A
  1. Basic rate band (£1-£37,700): 8.75%
  2. Higher rate band (£37,701-£125,140): 33.75%
  3. Additional rate band (£125,141+): 39.35%
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14
Q

What reliefs are available for dividend income?

A
  1. First £1,000 taxed at 0%
  2. No withholding tax
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15
Q

Why are dividend income tax rates lower?

A

Because dividend income is already taxed at the corporate level, reducing the tax burden on individual shareholders.

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16
Q

What is a trust?

A

A legal arrangement where a donor’s assets are managed by trustees on the behalf of beneficiaries.

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17
Q

Why is a trust created?

A
  1. Income management for those unable to manage themselves.
  2. Systematic income distribution.
  3. Income tax planning.
  4. Inheritance tax planning.
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18
Q

When can a trust be created?

A

During lifetime or at death through a will.

19
Q

What are the two main types of trusts?

A
  1. Discretionary Trust
  2. Interest in Possession Trust
20
Q

What is a Discretionary Trust?

A

Trustees have discretion; beneficiaries have no fixed rights, created for income tax planning.

21
Q

How is income from a Discretionary Trust taxed? Basis, head, WHT?

A
  1. Taxed on receipt basis.
  2. Treated as non-saving income.
  3. 45% withholding tax.
22
Q

What is an Interest in Possession Trust?

A

Operates according to donor’s instructions; trustees follow constitution/will; beneficiaries have defined rights.

23
Q

How is income from an Interest in Possession Trust taxed? Basis, head, WHT?

A
  1. Taxed on an accrual basis.
  2. May be saving or non saving income depending on source
  3. Withholding tax:
    • 20% (non-saving/saving sources)
    • 8.75% (dividend source)
24
Q

What is saving income?

A

Interest income earned by an individual during a tax year.

25
Q

What are the tax rates for saving income?

A

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%

26
Q

What is the zero percent tax rate band for saving income?

A
  1. Basic rate taxpayers: £1,000
  2. Higher rate taxpayers: £500
  3. Additional rate taxpayers: £0

Bands are decided on TAXABLE income (after deducting PA)

27
Q

What is the additional zero percent band for saving income?

A

First £5,000 of taxable income (if related to saving income)

28
Q

How is interest income taxed?
What basis and any withholding tax?

A

On receipt basis

Normally, no withholding tax. However, 20% withholding tax applies if interest income is from unlisted company loan notes.

29
Q

National Savings Certificate
Individual Savings Account (ISA)

A

Exempt from income tax

30
Q

Limits for exemption in

National Savings Certificate
Individual Savings Account (ISA)

A
  1. National Savings Certificate: No limit
  2. Individual Savings Account (ISA): £20,000
31
Q

What is qualifying loan interest expense?

A

Interest expense on a loan taken for a qualifying purpose, deductible from total income.

32
Q

What happens if a loan is not qualifying?

A

Interest expense is only deductible against income from the related activity.

33
Q

What are qualifying purposes for loan interest expense?

A
  1. Loan for plant/machinery for unincorporated business (sole trader/partnership)
  2. Loan for plant/machinery for employment purposes
  3. Loan to invest in a close company (e.g., friends and family company)
  4. Loan to invest in a cooperative society
  5. Loan to pay inheritance tax
34
Q

How is personal allowance utilized for tax planning?

A
  1. Used against non-saving income (highest tax rate) first.
  2. Then against saving income (middle tax rate).
  3. Lastly against dividend income (lowest tax rate).
35
Q

Can personal allowance be allocated differently?

A

Yes, taxpayer can choose to leave some/all saving income uncovered and use personal allowance against dividend income.

36
Q

Why might a taxpayer allocate personal allowance differently?

A

When saving income is covered by the 0% tax band, to optimize tax efficiency.

37
Q

Can personal allowance be claimed partially against income heads?

A

Yes

38
Q

Can unused personal allowance be carried forward?

A

No, it cannot be carried forward to the next tax year.

39
Q

What is a qualifying donation?

A

Donation to a UK-registered charity.

40
Q

What tax reliefs are available for qualifying donations?

A
  1. 20% contribution from tax department.
  2. Basic rate band extension by GROSS donation amount.(donation*100/80)
  3. Reduction of Adjusted Net Income (ANI) by gross donation amount.
41
Q

What is Adjusted Net Income (ANI)?

A

Net income (taxable income before deducting personal allowance)
less: gross qualifying donations
less: gross personal pension contributions.

42
Q

How does ANI affect Personal Allowance?

A
  1. If ANI > £100,000, Personal Allowance diminishes.
  2. Diminishment: £1 for every £2 excess.
43
Q

How to calculate diminished Personal Allowance?

A
  1. ANI - £100,000 = excess
  2. Excess / 2 = reduction
  3. £12,570 (Personal Allowance) - reduction= diminished amount
44
Q

What happens to Personal Allowance when ANI exceeds £125,140?

A

Personal Allowance diminishes to £0.

ATX ACCA - Finance Act 2023 (18 decks)

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