Business Law And Practice : Income Tax Flashcards
Who is required to pay income tax in the UK?
Individuals earning above the personal allowance (£12,570 for most taxpayers), including employees, self-employed individuals, and certain pensioners, must pay income tax. As well as partners, personal representatives trustees
How do sole traders calculate how much income tax they owe?
Sole traders typically calculate income tax by subtracting allowable expenses from their total income to determine taxable profit, then applying the income tax bands and rates set by HMRC. They report this through a Self Assessment tax return.
When does the tax year run in the UK?
The UK tax year starts from 6 April and runs till 5 April of the following year.
What are the three main categories of income for tax purposes?
- non savings (all earnings apart from those from from savings and dividends)
- savings income (interest earned on savings)
- dividend income (dividends paid by company to it shareholder)
How is income tax calculated?
- Calculate total income
- Deducts allowable reliefs = net income
- Deduct personal allowances = taxable income
- Separate the relevant tax categories
- Add the amounts together this gives you the figure owed
Example:
1. Total Income: £50,000 (e.g., self-employment + rental income).
2. Deduct Allowable Reliefs: £2,000 (e.g., pension contributions) → Net Income: £48,000.
3. Deduct Personal Allowance: £12,570 → Taxable Income: £35,430.
4. Apply Tax Bands:
• £12,570–£50,270 taxed at 20% (£35,430 × 20% = £7,086).
5. Total Tax Owed: £7,086.
In reference to allowable reliefs, for what types of interest paid can tax relief be claimed?
- Loans to buy a share in a partnership
- Loans to invest in a close trading company
- Loans to personal representatives to pay inheritance tax
What is the order in which personal allowances are applied to different types of income for income tax purposes?
- NSNDI stands for Non-Savings, Non-Dividend Income.
- savings incoming
- surplus would be applied to dividend income
How is the income tax allowance worked out if your net income exceeds £100,000?
If your net income exceeds £100,000, your personal allowance is reduced by £1 for every £2 of income above £100,000, meaning it is completely removed once income reaches £125,140.
How much is the blind person’s tax allowance?
The blind person’s allowance is £2,620 in addition to the standard personal allowance, for individuals who are registered as blind or severely sight-impaired.
How much is the marriage tax allowance?
he marriage tax allowance allows one spouse or civil partner to transfer £1,260 of their personal allowance to the other, reducing their tax by up to £252 per year, does not apply to higher rate taxpayers
What is the dividend tax allowance?
-The dividend tax allowance is £1,000 (as of the 2023/24 tax year). This means you can receive up to £1,000 in dividend income without paying tax on it. Any dividend income above this amount is taxed at the applicable dividend tax rates.
How is the Non-Savings, Non-Dividend Income (NSNDI) figure calculated?
- Total Income (all earnings)
- Minus Savings Income (e.g., bank interest)
- Minus Dividend Income (e.g., company share dividends)
- = NSNDI (Non-Savings, Non-Dividend Income)
How is a sole trader taxed in the UK?
A sole trader is taxed on their business profits through Income Tax and National Insurance Contributions (NICs) via Self-Assessment.
When must a sole trader register with HMRC when starting a business?
A sole trader must register with HMRC within three months of starting the business.
How are partnerships taxed in the UK?
A partnership itself isn’t taxed as an entity. Instead, each partner is taxed individually on their share of the profits, which must be reported on their Self Assessment tax return.
How do partners calculate the tax they owe?
- Determine profit share: If a partnership makes £60,000 and two partners share profits equally, each gets £30,000.
- Deduct personal allowance: (£30,000 - £12,570) = £17,430 taxable income.
- Apply income tax rates:
• Basic rate (20%) on £17,430 = £3,486 tax owed.
Each partner also pays National Insurance Contributions (NICs) based on their profit share.
When can an individual claim income tax relief on borrowings?
An individual can claim tax relief on interest paid for qualifying loans, such as:
• Buying into a partnership
• Investing in a close company
• Purchasing shares in an employee-controlled company
• Lending money to their own business
For example, if an individual pays £1,000 in interest on a qualifying loan and is taxed at 40%, they can claim £400 in tax relief.
When does income tax have to be paid in the UK?
- Self-Assessment Tax Returns:
- Online submissions: By 31 January following the end of the tax year (5 April).
- Paper submissions: By 31 October following the end of the tax year.
- Payments on Account:
- First payment: 31 January.
- Second payment: 31 July.
What are the implications if an individual is in breach of the General Anti-Abuse Rule (GAAR)?
- Tax Advantage Counteracted: HMRC can adjust the taxpayer’s position to eliminate the tax advantage gained from the abusive arrangement.
GAAR applies to abusive arrangements that are deemed to be artificial or lack genuine commercial purpose.
What are the three tax rates for income tax?
- 20% basic rate
- 40% higher rate
- 45% additional rate
is a deceased person required to pay income tax?
- Yes if the income relates to a period in which they were working or income generated by the estate E.G rental income this will be paid by estate representative as part of the administration of their estate
