Basic income tax computation Flashcards
What is the length of tax year?
year from 6 April to next year to 5 April
What is Personal allowance?
- is an amount of tax-free income that every taxpayer is entitled to each tax year
- the amount is reduced, potentially to £Nil, for high income individuals
Who is assessable persons for income tax?
- all individuals, including children
- both spouse withing a married couple and both partners in a civil partnership are treated as separate individuals
- all persons resident for tax purposes in the UK are assessed to UK tax on their worldwide income
Special rules between spouses where assets are jointly owned:
- generally, income generated from assets jointly owned is split 50:50 between spouses regardless of the actual percentage ownership
- election available if assets owned are not 50:50
Are children taxable persons?
- under the age of 18 are taxable persons
- income typically falls short of their personal allowance in any tax year and therefore no tax liability actually arises on their income
Income tax computation pro forma?
Trading income x
Employment income x
Property income x
Pension income x
Non-saving income
Saving income x
Building society interest x
Bank interest x
Dividends x
Total income x
Less: Relief (x)
Net income x
Less: Personal allowance(x)
Taxable income x
What are the different sources of income?
- income earned from employment and self-employment
- income arising from the ownership of property
- investment income (e.g. savings income and dividends)
- income from pensions
- income exempt from income tax
What compromise non-savings income?
- earned income
- property income
What earned income compromise?
- trading income : the profit of a trade, profession or vocation of a self-employed individual
- employment income: earnings including salaries, bonuses and other benefits from an office or employment are assessed as employment income
- pension income: income from an occupational or personal pension fund
What is property income?
- is typically rental income, but also includes other items such as the income element of a premium on granting a short lease
What is the investment income?
- savings income: usually bank and building society interest
- dividend income
What income is exempt?
- interest from National Savings and Investments certificates
- betting, lottery and premium bonds winnings
- income received from an individual savings account
Personal allowance
- for 22/23 £12,570
- order of deducting PA: Non-savings income
Savings income
Dividend income - cannot be set against capital gains
- in certain circumstances, part of the PA can be transferred to a spouse of civil partner
Reduction of personal allowance - high income individuals
- the PA is gradually reduced for individuals with income in excess of £100,000.
- where the taxpayer’s ANI exceeds £100,000 the PA is reduced by: 50% x (ANI - £100,000)
- a taxpayer with ANI in excess of £125,140 will therefore be entitled to no PA at all, as the excess above £100,000 is twice the PA.
Different rate of types of income
- non-saving income: 20/40/45%
- savings income: 0/20/40/45%
- dividend income: 0/8.75/33.75/39.35%
What are examples of non-saving income?
- trading income
- employment income
- pension income
- property income
Rates for non-saving income for tax year 2022/2023?
- basic rate of 20% applies to the first £37,700 of taxable income
- a higher rate of 40% applies where taxable income falls in the range £37,701 to £150,000
- an additional rate of 45% applies to taxable income in excess of £150,000
Approach to the income tax computation
- Calculate the individual’s net income
- Consider the reduction of the PA if ANI exceeds £100,000
- Deduct the appropriate amount of PA to calculate the taxable income
- Calculate the income tax liability bearing in mind the higher rate threshold of £37,700 and the additional rate threshold of £150,000
Marriage allowance (transferable amount)
- allows a spouse or civil partner to elect to transfer a fixed amount of personal allowance to to his, her or their spouse or civil partner
- may also be referred to as the transferable amount of the PA
- is available provided neither spouse is higher rate or additional rate taxpayer
What is allowed for MA transfer?
- to other spouse
-of a fixed amount of PA = 10% x the individual personal allowance = £1,260 for 2022/2023;
What is the effect of the election MA?
- the transferring spouse’s PA is reduced by the fixed amount of £1,260
- the recipient spouse’s income tax liability is reduced by a maximum of £252 (£1,260MA x 20% basic rate (BR)income tax)
How election can be made?
- in advance:
-by 5 April 2023
-the election will remain in force for future tax years, unless the lection is withdrawn - the conditions for relief are no longer met
- in arrears:
- by 5 April 2027 within 4 years of the end of tax year
- in this case the lection will only apply to the tax year 2022/23 in isolation
What is income tax liability?
- the total income tax due on the taxpayer’s taxable income (i.e. total income, after deducting available personal allowance)
What is income tax payable?
- the final tax bill to be paid via self-assessment after deducting tax already paid on employment income (PAYE).
Reliefs against total income
Tax relief is available for certain payments made by an individual and for trading losses
Relief is available by deducting the payments/losses from total income, subject to a maximum amount of relief.
What qualifying purposes must loan be applied for relief?
Employees:
- the purchase of plant or machinery by an employed person for use in his, her or their employment
- the purchase of shares in an employee-controlled trading company by a full-time employee
Partners:
- the purchase of share in a partnership, or the contribution to a partnership of capital or a loan. The borrower must be a partner in the partnership
- the purchase of plant or machinery for use in the partnership, by a partner
Relief is given by deducting the amount of interest paid in a tax year from total income.
What are two ways of charitable giving of tax relief?
- donations under the gift aid scheme
- payroll giving under the payroll deduction scheme
Donations under the gift aid scheme
- donations made under the scheme attract relief at the donor’s highest rate of tax
- there are no minimum or maximum contribution limits, and gifts can either be one-off or a series of donations
- the payments are made with basic rate tax deducted at source. Effectively providing basic rate relief (20%) at the time of payment
- the basic rate tax is then claimed by the charity from HMRC
-example: individual wants charity to receive £100, then the individual pays the charity £80, charity claims £20 from HMRC
What means donation for basic taxpayer?
- obtain the tax relief at the time of payment, by only paying 80% of the amount of the donation
What means donation for higher and additional rate taxpayers?
-it comes in two parts:
- 20% tax relief is granted at the time the payment is made
- higher and additional rate relief is obtained by adding the gross amount of the donation to the basic and higher rate bands in the income tax liability calculation
- the gross amount of the donation is calculated as:
(amount paid by the individual to the charity x 100/80)
- the effect of extending the basic and higher rate bands is that income equivalent to the value of the gross donation is taxed at:
- 20%, rather than 40% for a higher rate taxpayer or
- if an additional rate taxpayer, at 20% rather than 45%
What is the child benefit?
- is a tax-free payment from the Government that can be claimed in respect of children
When child benefit income tax arises?
- an individual receives child benefit or
- that individual ,or the individual’s spouse or civil partner, or the individual’s partner, whom he, she or they are living with as if they were married or in a civil partnership, has ‘adjusted net income’ of £50,000 or more
How is calculated adjusted net income for child benefit tax charge?
- is calculated in the same way as for the restriction of the personal allowance for high income individuals
- tax charge are rounded down to the nearest whole number
What is tax charge for child benefit tax charge?
- Income between £50,000 and £60,000 - tax charge is 1% of child benefit for each £100 of income over £50,000
- Income over £60,000 - tax charge is the amount of child benefit received
What if both partners have adjusted net income over £50,000 regarding child benefit tax charge?
- the charge is levied on the person with the higher income
Definition of residence
- does not meet one of the automatic non-UK residence test
- meets one of the automatic UK residence tests
- meets one or more of the sufficient ties tests
Procedure to determine residence
Step 1:
Check automatic non-UK residence tests
- if satisfy one test = non-UK resident
- if not = go to Step 2
Step 2:
Check automatic UK residence tests
- if satisfy one test = UK resident
- if not = go to Step 3
Step 3:
- determine how many sufficient ties wit the UK exist
- how many days are spent in the UK in the tax year
- use tax tables to decide status
What are automatic non-UK residency tests?
- an individual is automatically not UK resident if the individual is ‘in the UK’ in the tax year for less than:
-16 days - 46 days, and has not been UK resident in any of previous three tax years
-91 days, and works full-time overseas
What are automatic UK residency tests?
- an individual is automatically UK resident if:
- the individual is in the UK for at least 183 days in the tax year or
- the individual’s only home is the UK or
- the individual works full-time in the UK
What if the individual does not satisfy any of the automatic tests?
- residency status is determined by:
- how many of the five ‘sufficient ties tests’ are satisfied, and
- the number of days spent in the UK
What are the sufficient ties tests?
- Close - spouse/civil partner/ minor child
- Accommodation in UK - used in tax year
- Substantive work in UK
- Days in UK in last two tax years - >90 days in either year
- Country tie - most time spent in UK
