Business Taxation - Income Tax (4) Flashcards
What is income tax?
Income Tax: Income tax is a tax levied on individuals, and must be paid according to the law. See Income Tax Calculation to see how it is calculated.
Which parties are liable to pay income tax?
Liable Parties: Income tax is levied on income made by individuals. This includes:
Sole Traders
Sole Traders: Sole traders are taxed on their trading profits and any other income earned (see trading profit).
(1) Pre-24/25: Trading profits earned prior to tax year 24/25 (unless business begins in 23/24) pay income tax at the rate applied at the end of an accounting period.
(2) 24/25: Trading profits from 24/25 onwards are subject to apportioned income tax on an accounting period between the two tax rates that apply.
Natural Partners
Natural Partners: Natural partners of general and limited liability partnerships pay income tax on their partnership income and any other income earned (see trading profit).
(1) Income: Partnership income is determined by the partnership agreement.
(2) Reliefs: Partners can apply for income tax reliefs on their own shares independent of one another.
(3) Tax Return: Partners each fill out a tax return and pay income on total income. Tax is paid on the income earned, even if it is not paid out of the partnership.
(4) New Partners: New partners pay tax as applies from their first day until April 5 for the tax year.
Shareholders
Shareholders: Natural shareholders are taxed on dividends. Bought-back shares may be taxed either as income tax or capital gains tax, which will differ based on advantage. More.
Employees
Employees: Employees, including directors, pay income tax on salaries, pensions, and social security income (this is why salaries are deducted from trading profit, to avoid double taxation).
(1) Tax on Perks: Employees also pay tax on non-cash company benefits, such as cars and medical insurance. There are exceptions:
Accommodation: Free/low-cost accommodation necessary or customary for the job is untaxed.
Loans: No/low-interest loans not exceeding £10,000 are untaxed.
Pensions: Pensions contributions from business to employee are untaxed if paid into an HMRC-approved scheme (but are taxed when paid to employee in retirement).
Shares: Shares paid to the employee for low/no cost are subject to tax reliefs.
(2) Deductible Expenditure: Employees can deduct from income expenditure wholly and exclusively made as necessary to perform their role (unless reimbursed). The test is stricter than trading profit deductions.
Necessity: Performance must be otherwise impossible.
Lenders
Lenders: Natural lenders pay income tax on interest received on loans.
How is income tax paid to HMRC?
HMRC Payment: Income tax is paid to HMRC using prescribed procedures. Tax year runs from 6 April to 5 April.
(1) PAYE: Certain income tax is paid by an employer directly to HMRC.
(2) Tax Return: Other income tax is ‘self-assessed’ and paid to HMRC by tax return.
Tax Return
Tax Return: Self-assessed tax returns are issued on 5 April, and must be filed by the relevant date.
(1) Paper: Paper returns must be filed by 31 October following the relevant tax year (≈6 months).
(2) Online: Online returns must be filed by 31 January following the relevant tax year (≈9 months).
Payment
Payment: Self-assessed payments must be paid on relevant dates, and balanced where appropriate. Payments are an estimation of liability based on the previous year (capped at a certain limit).
(1) Payment 1: Paid on 31 January of the relevant tax year.
(2) Payment 2: Paid on 31 July after the relevant tax year.
(3) Balancing Payment: Outstanding balance is paid 31 January after the relevant tax year, or rebate sought.
Penalties
Penalties: HMRC will apply penalties for non-compliance.
(1) Tax Return: HMRC can penalise failure to file adequate tax returns.
(2) Payment: HMRC charges interest on late estimated and balancing payments.
Audit
Audit: HMRC can audit taxpayers and their tax returns. Appeals can be made at the First-Tier Tribunal (Tax).
