Basics Flashcards
Classes of NICs
Class 1 - employees and employers
Class 2 - self employed flat rate pw
Class 3 - voluntary
Class 4 - self employed on profits
The benefits which paying NICs entitles you too
- New state pension
- new style JSA
- bereavement payements
- new style contribution based employment and support allowance (ESA)
- maternity allowance
Primary contribution and secondary threshold
Primary - is the weekly earnings at which you start to pay class 1 NICs which is set at £242 PW
Secondary - the lower limit for which employers have to start paying class 1 NICs on behalf of employees over 21 which is when employee is earning £175 pw
Lower earnings and upper earnings limits
Lower earnings limit - the amount of weekly earnings for an employee to be entitled to contribution art social benefits I.E NSP or JSA this is set at £123 pw
Upper earnings limit - the max amount an employee can earn before an employee is no longer in the main rate of NICs payments which is £967 pw
NICs main rate for class 1
Employee
Over £242 pw it’s 12% up to the UEL of £967 pw, anything over this is then charged at 2%
Employers
Up to £175 is free then over this limit is 13.8% with no upper limit
Who pays class 1A NICs and at what level
1A is on employee benefits such as company cars or PMI, this is paid by the employer and payable at the rate of 13.8%
Class 2 NICs
These are for the self employed
These are paid at a flat rate by the client when earning over the lower profits limit at £12570 but are deemed to be paid when earning above the small profits threshold of £6725 but below the lower profits limit.
These are paid at a weekly flat rate of £3.45 pw
Class 4 NICs
These are payed by the self employed and are paid on adjusted profits (IE profits - losses)
These are paid on profits over lower annual limit of £12,570 and under upper annual limit of £50,270. This is paid at 9% with anything over being paid at 2%
Class 3 NICs
These are voluntary contributions made to fill in gaps in an individual’s contribution record and can only be paid when there is insufficient class 1 or 2 NICs
Can be paid up to 6 years after the tax year they relate
What is income tax paid on
Income tax is paid on the income from trades, professions and vocations by UK residents world wide or non uk residents who are in the UK
What is the trading allowance
This is £1000 exempt of income tax and NICs which is for any trading/ casual income I.E hobbies
What are the rates for gift aid and how charitable gifting effects income tax
If someone already pays tax, they can then use gift aid to provide a further 20% if paying basic or higher rate on any donations or a further 25% for those additional rate tax payers
Any charitable gifts will reduce the amount of taxable income by the charitable gift amount.
How much can you pay into a pension subject to the annual allowance
Your total income up to £60k in this tax year, £40k in previous 3
What is the personal allowance
This is the £12570 of earned income which is tax free that applies to most people (unless earning over £100k)
Each person can transfer 10% of their PSA to a spouse
What are the steps to calculate income tax
- Step 1: Calculate all the pre-tax income for the year, distinguishing all the different types of income.
- Step 2: Deduct reliefs deductible from total income.
- Step 3: Deduct the personal allowance of £ 12,570 (and, if applicable, the blind person’s allowance).
- Step 4: Calculate the amount of any payments for which higher and additional rate relief is given by extending the basic and higher rate bands.
- Step 5: Calculate the tax on the remaining income.
- Step 6: Deduct any tax reducers.
Income taxation of discretionary trusts
• Trustees have a standard rate band of £1,000 for the 2023/24 tax year, divided by the number of trusts created by the settlor that were in existence for any part of that tax year, subject to a minimum of £200 per trust.
• Trustees’ expenses are allowable in calculating any income chargeable, but the income so relieved remains chargeable.
• The beneficiaries in all cases receive trust income net of 45% tax, some or all of which they can claim back providing they are not an additional-rate taxpayer.
Income tax brackets
PA - up to £12570 = 0%
Basic rate - £12571 - £50270 = 20%
Higher rate - £50271 - £125,140 = 40%
Additional rate - £125,141+ = 45%
Due to the income over £100k rule any taxable income between £100k and £125,140 is taxed at an effective rate of 60%. This is due to the personal allowance going down by £1 for every £2 over £100,000
What is capital gains tax liable on
The disposal of certain capital assets minus the acquisition cost of the asset
Annual exemption amount for CGT
£6000 PA per client
The steps to figure out a CGT calculation
- Determine the disposal proceeds (actual sale price or market value).
- Deduct the acquisition cost.
- Deduct any costs incurred in arranging the purchase and sale and any enhancement costs.
- Set off any allowable capital losses, allocating them against gains in the way that minimises the tax due, namely by setting them against gains taxable at the highest rate first.
- Deduct the annual exempt amount in the way that minimises the tax due.
- Calculate the tax at the appropriate rate.
The rule of 5/3s
This relates to the CGT on the disposal of chattels which exceed £6000
This means that the chargeable gain on a chattel cannot exceed 5/3s the value of the sold chattel I.E
Ring sold for £7,800 which initially cost £1000 could not have a chargeable gain over £3000 because the gain over £6000 (in this instance £1800) times by 5 but divided by 3 equals £3000
so instead of the chargeable gain just being the standard of the sold value minus the acquisition cost, which would be £6800, it is instead £3000 due to the rule of 5/3s
Is CGT liable on death?
No this is IHT
How is CGT taxed on non property related revenue
• The taxable gain after deducting the annual exempt amount is treated as if it sat on top of the income of the tax year. Any part of the gain that falls within the basic rate band is taxable at 10% and the rest is taxed at 20%.
How is CGT taxed on residential property
However, higher rates are charged on gains arising from the disposal of residential property (where the disposal is not fully exempt as a private residence). The rate is 18% for residential property gains falling within the basic rate band, and 28% on gains above this.
What is business asset disposal relief and how is CGT taxed that qualifies for business asset disposal relief
Business asset disposal relief can be claimed when an individual disposes of a business or a part of a business. The relief covers the first & 1m of qualifying gains that a person makes during their lifetime. Gains that qualify for business asset disposal relief are taxed at a reduced rate of 10%. Where the £1m lifetime limit is exceeded, those gains in excess of the limit will be subject to the normal rates of CGT.
Gains qualifying for business asset disposal relief are always taxed at 10% whether or not they fall within the basic rate band.
How are the capital gains arising from a trust taxed?
Trustees are liable to CGT at 20% (28% for gains on residential property) subject to any available annual exemption - £3,000 for 2023/24.
• The trust annual exemption is split by the number of trusts created by the same settlor subject to a minimum of one-fifth, i.e. £600 for 2023/24.
What is the nil rate band & residence nil rate band
IHT is payable on transfers in excess of a nil rate band, currently £325,000 (2023/24).
The nil rate band will remain unchanged at £325,000 until 5 April 2028.
• The residence nil rate band (RNRB) is in addition to the normal £325,000 nil rate band, and is intended to protect, at least partially, the family home from IHT. It is £175,000 in 2023/24 and will remain unchanged until 5 April 2028.
Spouses can share their NRB & RNRB equalling £1m of IHT free assets
What are the two types of life time transfer and how do they differ?
Potentially exempt transfer
• A PET is a lifetime transfer by an individual to another individual, a bare trust or a disabled trust.
The consequences of making a PET are that no tax is charged at the date of the gift, the gift does not have to be reported to HMRC, and if the donor then survives for seven years, the gift becomes fully exempt and escapes tax entirely.
Chargeable life time transfer
• The most common chargeable transfers occur on lifetime gifts to trusts other than trusts for a disabled person. A CLT results in a tax charge if it takes the donor’s seven-year cumulation over the nil rate band. Tax is payable at 20% on the excess over the nil rate band and there will be no further IHT to pay if the donor survives for the next seven years.
What is the rule for charitable donations regarding IHT
A reduced IHT rate of 36% applies to an estate where at least 10% of the net estate is left to charity.
Net estate means after the use of NRB, RNRB and any other reducers
What is business relief
Business relief is a relief for transfers of business property. The property has to be owned for two years to qualify for relief. Relief is available for lifetime transfers and on death.
A relief reduces the value of a transfer in certain circumstances, In theory, it does not remove the transfer from the tax regime. However, if relief is at 100%, the practical effect is to make the transaction exempt. The main reliefs are:
How soon would the tax be due after someone dies within seven years of a PET or CLT
6 months to pay the tax
What is the IHT tax rate for trusts n excess over NRB
20% after the deduction of NRB
IHT is charged at what rate over the NRB?
40% for excess over the NRB+RNRB, 20% on Life time transfers
Difference between residence and domicile
Residence is the status of an individual in any one tax year whereas domicile refers to the country that an individual regards as their permanent home.
When is someone deemed UK domicile
If it is not acquired through birth, one can become UK domicile through being ‘domicile of choice’
This is if they are resident (according to the usual income tax rules) in the UK for at least 15 out of the previous 20 tax years;
- they are born in the UK with a UK domicile of origin and return to the UK (becoming resident) having obtained a domicile of choice elsewhere. However, for inheritance tax (IHT) purposes, an individual will only be deemed domiciled under this provision if they have also been resident in the UK in at least one out of the two previous tax years.
How does self tax assessment work
Taxpayers within self assessment have to complete a tax return showing all their income and gains. They must also pay their tax to HMRC on the set payment dates.
Anyone who has tax to pay, but has not received notification to submit a tax return, must notify HMRC of their chargeability by 5 October following the end of the tax year in question.
Individuals pay
- income tax on all types of income;
- class 2 and class 4 NICs; and
- capital gains tax (CGT).
Penalties and interest for those not paying their self assessment tax
A 5% penalty is levied on any tax remaining unpaid more than 30 days after the balancing payment is due. If tax remains unpaid after a further five months, then another 5% penalty is charged, and again when tax remains unpaid after a further six months (i.e. eleven months after the initial penalty date).
• There is a fixed penalty of £100 for any return not submitted by 31 January.
• If a return is more than three months late, a £10 daily penalty will be charged for a maximum of 90 days.
• If a return is more than six months late, there will be a penalty of the higher of £300 and 5% of the tax outstanding, with another similar penalty where a return is more than twelve months late.
•At the twelve-month date, a higher percentage will be charged if the failure to submit the return is deliberate. Typically, where a return is more than twelve months late, the total minimum penalties will amount to: [£100 + (£10 × 90) + £300 + £300] = £1,600.
SDLT for first time buyers
SDLT relief for first-time buyers
Up to £425,000 = 0%
£425,001 to £625,000 = 5%
Anything above £625,000 is then treated as normal rates so goes back to the standard
• Residential
Up to £250.000 = 0%
£250,001 to £925,000 = 5%
£925,001 to £1,500,000 = 10%
Above £1,500,000 = 12%
SDLT for residential property
Up to £250.000 = 0%
£250,001 to £925,000 = 5%
£925,001 to £1,500,000 = 10%
Above £1,500,000 = 12%
SDLT for non residential property
£0 - £150,000 = 0%
£150,001 - £250,000 = 2%
£250,001+ = 5%
What is Stamp duty and stamp duty reserve tax
Stamp duty is payable on documents (such as stock transfer forms) that transfer ownership of shares, stock and unit trusts.
An equivalent tax called stamp duty reserve tax (SDRT) is charged on the agreement to transfer shares.
• The rate of stamp duty and SDRT is 0.5% of the consideration paid for the shares, whatever their value.
• Stamp duty is rounded up to the nearest £5 while SDRT is rounded to the nearest penny.
What is value added tax and when must traders register for it
VAT the tax on goods, this is registered for if the taxable supplies in previous 12 months or likely coming 30 days exceeds £85k
The value of input VAT (the VAT on products bought by a company) can be off set against the value of VAT output by company (VAT on profits of goods sold). The excess VAT is then paid to HMRC
Is VAT paid on imported and exported goods?
VAT is paid on imported goods however is not paid on exported goods as they are zero rated
How often is VAT returns due
Every 3 months
What is the flat rate scheme
This is the method small business pays its VAT, to qualify for this they must have annual taxable turn over of no more than £150k
The scheme allows small business to account for VAT at a 11% of taxable turn over instead of based off input-output VAT
The main benefit is the ease of administration apparently
What is corporation tax
Companies earning £250k profits per annum or more pay main rate of corporation tax which is 25%, a small profits rate is charged on those earning £50k or less and the amount between is tapered based on amount
Earnings Tax
£50k < x 19%
£50k > x < £250k ≈%
£250k > x. 25%
Trading losses can be relieved against other income and chargeable gains of same accounting period
This is self assessed and is due within 12 months of the end of accounting period, with some larger companies paying quarterly
Are dividends and loans taxable by corporation tax
Dividends are not taxable under corporation tax as it is made out of post tax profits
Loans can be taxable under the condition that they are made by closed companies to participators
What are the main direct investments
- Cash deposits
- gilts and other fixed interest investments
- individual properties
- individual shares and equities
What are the main indirect investments
These are things held through a ‘wrapper’
- ISA
- collectives
- life assurance policies
- pensions
What are NS&I products
Government investments that can be bought easily online, telephone or post. They have several types of product and all have different tax treatments
How are the capital gains arising from the disposal of a GILT, qualifying corporate bond and other fixed interest securities taxed?
They do not incur CGT generally, and losses are not allowable
What is a corporate bond and local authority bond
Products like debentures and loan stocks
These are effectively loans to a company with fixed interest rates over a fixed term, at which the loaned amount is then paid back at the end.
So they get the interest and capital sum returned
Local authority bonds are the same just generally with a shorter term
How are direct investments taxed
Income and capital gains of direct investments are taxed in the same way as collectives and mutual like UTs and OEICs
Firstly everyone gets a £1000 dividend allowance no matter their tax bracket
After that they fall in the regular income tax brackets, on top of any earned income I.e 8.75% basic, 33.75% higher and 39.35% additional
How is property income taxed
In principle the same as income tax, however it has a few differences due to its business like nature
Income received is liable to income tax, expenses incurred can be offset against income, losses in year of assessment is also carried forward and set against the gains of the following year
Disposal of asset may be liable to CGT however there is business asset disposal relief, hold over relief and rollover relief which may help this
What is holdover relief
This is also known as gift hold over relief. This relief is available when you give away business assets or shares at less than market value for the benefit of the buyer.
This relief means that you do not pay CGT on the assets given depending on
Business assets:
•being a sole trader or having at least 5% voting rights in the company
• the assets are being used in the business
Shares:
•shares must be from a company that either isn’t listen on the stock exchange or is your own personal company
Essentially the relief gets rid of CGT on these exchanges
• If holdover relief is claimed, no CGT is payable at the time of the gift, but the acquisition cost to the done is reduced by the amount of the held-over gain. This increases the amount of any gain made by the done on a subsequent disposal.
• Relief is given only if donor and done jointly claim it (except where the transfer is to a trust, when only the donor makes the claim).
Question
Adrian transferred assets worth £150,000 into a trust, in which he has no interest. If he had sold the assets, he would have made a gain of £40,000. If holdover relief was claimed what effect would it have on the trust?
Answer - There is no Capital Gains Tax at the time of the transfer, but the acquisition cost of the trust is reduced to £110,000.
Rationale
Incorrect. Where holdover relief is claimed, no CGT is payable at the time of the gift, but the acquisition cost to the recipient is reduced by the amount of the held-over gain. The acquisition cost to the trust is therefore £110,000 (£150,000
- £40,000). - Chapter 3, Section F2, Learning Outcome 3.2
What is roll over relief
This is the relief given to a business who sells an asset used in business, then purchases a new asset for the business.
Relief is only allowable up to the amount sold for up until the full cost of the new item I.E if you sell an asset for £4K but buy one for £3k only £3k of the amount of the sold item is relivable, the item must be bought up to one year before or three years after the disposal of the asset.
Main tax privileges of a registered pension scheme
- Tax relief on input
- No tax on gains/ investment income accruing in funds
- 25% PCLS (max of £268,275)
- tax free death benefit under age 75
Employed people can contribute up to 100% of their earning to a pension scheme within £60k
What are the benefits of ISAs, JOSAs and CTFs
The only investment policies on which income and gains are exempt from tax
CTFs had a max contribution of up to £9k while ISAs are £20k PA
CTFs can be transferred to ISAs with no issue at age 18
What is reporting status
Funds can apply to HMRC to have the reporting status, this is given when the fund can show details of all its income to HMRC. Any fund that hasn’t received this status is a non-reporting fund
- Equity distributions are taxable at the dividend rates (8.75% basic rate, 33.75% higher rate and 39.35% additional rate and are eligible for the £1,000 dividend allowance.
- Interest distributions are taxed at 0% starting rate, 20% basic rate, 40% higher rate and 45% additional rate. The personal savings allowance (£500 or £1,000 as appropriate) is available.
• Any profit on the eventual encashment is subject to the normal CGT rules and will be taxed at a rate of 10% and/or 20%.
To all intents and purposes, as far as the individual investor is concerned, reporting funds are taxed in the same way as UK collectives.
Advantage and disadvantage of offshore funds
The perceived advantage of offshore funds is that the funds should grow faster in a low-tax environment.
- The disadvantages of offshore funds are that:
• in the case of a reporting fund, a UK investor will have to pay income tax on income even if it is rolled up and not distributed; and
- in the case of a non-reporting fund, a UK investor will have to pay income tax on the whole of the eventual profit, i.e. income plus capital appreciation.
Qualifying vs non qualifying life policies
Qualifying life policies are broadly life policies with regular level premiums payable at least annually for at least ten years.
• Non-qualifying policies are broadly single premium policies that are usually taken out primarily as investments rather than for life cover.
How are Uk offshore life policyholders taxed on the gains of their product
Liable to income tax at the highest rates on the whole gain, with relief for time spent outside UK
Who is chargeable upon a chargeable event occurring on a life policy in trust
The settlor given they are alive and UK tax resident
What is the benefit of an EIS
The enterprise investment scheme (EIS) provides tax advantages for investment in unlisted companies. Income tax relief is given at 30% on qualifying investments of up to £ 1m in a tax year (£2m if investments in excess of £ 1m are made in knowledge-intensive companies).
CGT gains can be deferred if put into an EIS
AIM shares often qualify for business relief meaning they don’t pay IHT
Dividends are taxable
Disposals on assets can be reinvested into a EIS can differed tax liability if the reinvestment takes place between the year prior and 3 years after
What is the benefit of a SEIS
The seed enterprise investment scheme (SEIS) operates in a similar way to the ElS, but is targeted at smaller, start-up companies. Income tax relief is given at 50% on qualifying investments of up to £200,000 in a tax year.
What is the benefit of VCT
Venture capital trusts
• Venture capital trusts (VCTs) are companies broadly similar to investment trusts.
• They must invest mainly in unlisted trading companies.
• Individuals who are aged at least 18 can obtain income tax relief at 30% on investments of up to £200,000 per tax year in newly issued ordinary shares in VCTs. However this relief is withdrawn if shares are disposed of within 5 years
•VCTs have to be approved by HMRC and must satisfy a number of conditions.
•VCTs pay dividends tax free
• exempt from CGT when disposing of VCT shares
• no IHT relief
• dividends up to £200k are tax free
What does GAAR do
The general anti-abuse rule (GAAR) is a special statutory rule that targets tax avoidance schemes that are outside the general tax legislation because they are complex or novel.
How is income to children taxed
Children have their own personal allowances and so, can have tax-free income of up to £12,570 in 2023/24. However, income of more than £100 gross in a tax year derived from a gift from a parent is taxed as that parent’s income if the child is under 18 and unmarried and not in a civil partnership.
How can one attempt to minimise the amount of NICs they pay
- taking dividends instead of salary from a company in which they have shares and for which they work; and
- increasing the amount the employer contributes to company pension schemes by salary sacrifice.
they should bear in mind the possible impact on their State benefit entitlements and overall tax position:
What level of IHT is taxed on AIM companies
These will be completely void of IHT if held for 2 years
So this means that EIS, SEIS and VCTs are all exempt from IHT if held for over 2 years
What is the personal savings allowance
This is the tax free amount that you can have on investment gains and interest. It is at £1000 for basic rate tax payers, £500 for higher and £0 for additional
How do you calculate top sliced relief
Step 1
Calculate the taxable income for the year and identify how much of the gain falls within:
- the starting rate for savings income; - - the personal savings allowance; and
- the basic-, higher- or additional-rate tax bands, as appropriate.
Any gift aid donations are ignored
Step 2
Calculate the tax due on the gain across all tax bands.
Deduct 20% basic rate tax (treated as paid for both UK and offshore policies) to find the individual’s liability for the tax year.
Step 3
Calculate the annual equivalent of the gain. The annual equivalent is calculated by dividing the gain by N.
Full surrender
For full surrender, N is the number of full policy years between the date the policy was taken out and the date of the chargeable event.
Part surrender
The general rule for UK policies is that if the gain arises from a part surrender, N is the number of full years back to the last chargeable event. So, if no chargeable events have occurred, N is the number of full years back to the start of the policy.
Offshore policies
For offshore policies, N depends on the policy date:
• For pre-6 April 2013 policies, N is measured from the start of the policy.
• For policies made on or after 6 April 2013 (or earlier policies that have been varied after that date):
- For those individuals who have been UK resident throughout the policy period, N is based on the number of years back to the last chargeable event.
- For those individuals who have not been UK resident throughout the policy period, N is measured from the start of the policy (although it will be reduced to reflect the period of overseas residence).
Step 4
Calculate the individual’s liability to tax on the annual equivalent.
Deduct 20% basic rate tax (treated as paid for both UK and offshore policies) on the annual equivalent and multiply the result by N. This gives the individual’s relieved liability.
Step 5
Deduct the individual’s relieved liability at step 4 from the individual’s liability at step 2 to give the amount of top-slicing relief due.
How to figure out the amount of VAT when it’s included in the total I.E
Jen owns a VAT-registered business that has a total turnover of £90,000 (inclusive of 20% VAT).
How would you find the value of that 20%
Total amount X (VAT amount/100+VAT amount)
£90,000 x (20/100+20) = £15k
What is the name of the system an employer uses where by the employees P60 shows her remuneration after the deduction of her pension contribution
Net pay arrangement
When is the latest after a CGT gain is the liability due to be paid
CGT is due on investments gains on the 31 January following the end of the tax year in which the gain occurs
Ie gain occurs 4 May 2023 so it’s the tax year January 31 following the 23/24 tax year which would be Jan 31 2025
When using the allowances remember how it actually works
I.E dividend allowance doesn’t just get rid of £1000 from the amount it’s just at 0% so it’s still added to the income
So if someone earns £42,800 PA and got dividends of £8600, the total earns income is still £51400 not £51400, this is crucial because of the amount now being taxed at the higher rate
Married couples allowance
10% up to £10,375 for married couples aged over 88
This is reduced by £1 for ever £2 for the net income of couple over £34,600
This is given as a reduction of the individual’s tax liability
