C1-C2 1. Understand the UK System as relevant to the needs and circumstances of individuals and trusts Flashcards
15 marks
Where are the rules for taxing income from employment, pensions and state benefitrs contained in?
Income Tax (Earnings and Pensions) Act 2003
Where are the income from trading, property, savings and other investments, and miscellaneous sources is covered in?
Income Tax (Trading and Other Income) Act 2005
What was basis of assessment?
How has it changed?
Self-employed individuals can prepare their annual accounts to whatever date of tax year they choose.
Does not need to coincide with the tax year
Now changed for 2024/2025 tax year - it now coincides with normal tax year 6/04/2024 - 05/04/2025
What is overlap profits?
When profits are taxed more than once due to application of the opening year rules
How long is the transitional period for profits to be spread? When did it start from
These transitional period additional profits will automatically be spread over a period of five years starting from 2023/24
When are transitional period additional profits not taken into account
- Calculating income for pension annual allowance
- High income child benefit charge
What is the trading allowance
Annual £1,000 that does need to be declared on tax return (before deducting expenses)
How can is income from property taxed differently from UK domcile and non-UK domicle
Income from UK property is taxable whether received by UK or non-UK resident.
However, overseas property is taxable only when property business is carried out by UK RESIDENT
What is the criteria for accounts in property to be drawn up on simplified cash basis?
If income before deducting expenses is £150,000 or less (unless landlord drops out)
What is the tax relief for finance cost in respect to residential property restricted to
Generally mortgage interest - restricted to basic tax deduction from landlord income tax liability (20%)
What is the property allowance
£1,000 (before deducting expenses)
What is rent a room relief
£7,500
What does the restriction of financce cost not apply to?
Furnished holiday lettings or non-residential proeprty (office,warehouse)
How is investment income taxed to UK domicle and non-domicile
UK resident: Regardless whether source within or outside UK
Non-UK resident: Taxable only if its source within UK
No deductions are allowable against investment income
Who is responsible for assessing taxes on other income?
Person entitled to the income
What is a summary of taxation provisions
ITTOIA 2005 part 2 - Trading and professional income
ITTOIA 2005 part 3 - Property income
ITTOIA 2005 part 4 - Investment income
ITTOIA 2005 part 5- All income not covered elsewhere
ITEPA 2003 - Employment, pension and state income
What is the difference between HMRC definition of self-employed and employee
What are some benefits of being self-employed
Contract of service (employee)
Contractor for services (self-employed)
Advantages:
Treatment of expenses: Crietria is less strict on self-employed (within reason)
Less NI costs: Class 4 (self-employed) + Class 2 (negligble) , Class 1 on employee (higher than class 4 %)
Whos duty is it to correctly deterimine if an individual is an employee or self-employedr?
The Employer
How is a salaried member of LLP taxed?
If they aren’t taxed this way, then what are the criterion that must be met?
Taxed as an employee of LLP unless
20%+ of members remuneration is based on profitability of LLP as a whole
Member has significant say in running business
Member has made significant capital contribution to LLP - member has invested at least 25% of expected income from LLP for particular tax yeear
Which financial infrastructures do not pay tax on interest at source?
- Banks, building socieities
- Unit trusts
- OEICs
- Investment Trusts
Interests are all paid gross and not deducted at source (so has to be done on self-assessment basis of owner)
How are corporate bonds interest paid out?
Interest is paid gross and not deducted at source
How is interest paid out from a company,** partnership** (which company is a member), pays interest to indivdual or a non-UK company)
Tax is deducted from the interest
Who can claim back the tax from interest?
Non-taxpayer if the interests fall wtihin psa or is taxed a t starting rate of 0% applicoable to savings income
How are rewards treated by banks (such as £5 pm to maintain balance)
Paid net of basic rate tax do not benefit from PSA
How are annutiies taxed?
(If not wholly paid out of profits/gains)
Payer deducts 20% if annuity is not wholly paid out of profits or gains subject to income tax
Payer must inform HMRC and pay over tax
Example:
Trust has income of £3,000 - which is subject to tax
**Pays annuity of £5,000 **per month
As £5,000 > £3,000 - not wholly out of profits as income is less than annuity being paid out tax man taxes 20%
Taxman takes 20% - £1,000 per month
Beneficiary receiveds 80% - £4,000 per month
How are annutiies taxed?
(If wholly paid out of profits/gains)
If the annuity is paid out of profits or gains that are subject to income tax, the payer is allowed, if they wish, to deduct and retain the tax. This is a means of giving basic rate tax relief to the payer where the payment is made from taxed income.
Trust has income of £10,000
Beneficiary an annuity of £5,000,
Trust may deduct tax of £1,000 (20% of £5,000) and pay the beneficiary £4,000.
The trust does not have to pay the £1,000 to HMRC as such – it is accounted for as part of its normal tax liability on the £10,000 of income.
Most purchased life annuities are paid net of basic rate tax.
How are dividends received from UK company
As gross income (no tax deducted at source)
How is total income calculated
By Rules of ITTOIA 2005 or ITEPA 2003
Then deduct those amounts for whcih tax relief is given by deduction from income (result is net income)
Deduct personal allowance
What are some examples for tax relief
Tax relief is given by deduction from income:
Qualifying interest payments
Allowable business losses
Gifts to charities of shares and securities
Qualifying contributions to registered occupation pensions plan, retirement annuity plans (pension provider does noit give tax relief at source0
What are examples of tax reducers?
Tax relief is given at specified rate and is deducted from taxpayers tax liability
Basic rate tax from property finance cost (20%)
Enterprise investment schemes
Seed enterprise investment schemes
Venture capital trusts
EIS and VCT - 30%
SEIS - 50%
Also payments made net of tax
See pensions
When is interest payments allowable deductions?
If loan is taken out for qualifying purposes.
The loan must fit this criteria:
- Purchase of shares in the borrowers comapny or to finance loans to company
- Investment in a partnership
- Purchase of plant and machinery for use in partnership
- Payment of IHT
What is the cap of interest plus allowable business losses ?
Higher of £50,000 or 25% of person’s adjusted income
What is adjusted total income
Adjusted total income = Total income + Payroll giving - Pension contribution
How is interest on a loan to purchase property calculated?
Non-residential and let - interest is allowable deduction in property-letting account
Residential and let - tax relief given at basic rate deduction from tax payable
Property is not let - No tax for interest
What type of company can gain relief from interest paid on loan?
Purpose of acquiring shares in, or making a loan to, a close trading company.
Relief at £50,000 or 25% of adjusted income
No relief for interest is given if loan is used to buy shares which EIS is given (30%)
Is tax relief avaiable to aprtnership investments?
Tax relief is available to a partner who pays interest on a loan.
How is interest allowable on IHT?
What are the conditions
Relief is restricted to a period of one year from the making of the loan.
Relief is at the borrower’s top rate, but is subject to the cap of £50,000 or 25% of adjusted total income
The borrower must be a personal representative of the deceased.
What is gift aid?
A form of tax relief - to encourage charity giving
Donation is treated net of tax (donor has paid their tax)
Then donations is boosed to gross which is net amount divided by 0.8.
Charity claims back the 20% from HMRC.
Donor receives full tax relief of the “gross boosted amount - which is net(amount they donated)/0.8)
How is payroll giving beneficial for tax
Gives employee tax relief at highest rate under “net pay”
Gifts of assets
Qualify for full relief of CGT and Income tax on gifts
Listed shares and securiities
Unlisted shares (AIM)
Units in unit trusts
Shares in OEICs
Foreign investment schemes
Freehold, leasehold buildings (provided whole interest is given)
What are the tax relief on pensions
Relief at source
Net pay arrangement
Relief by making a claim
What is the limit an individual can contribute to a pension if they have non-relevant UK earnings
£3,600 gross
What is the annual allowance for pension in 2023/2024 tax year
£60,000
What is the taper on annual allowance
For 2023/24, the annual allowance is tapered down to a minimum amount of £10,000 if an individual’s income (including the value of any pension contributions) for the year exceeds £260,000. The rate of reduction is £1 for every £2 that income exceeds £260,000.
How many years can you bring forward for annual allowance
3 years in whcih indivdual was a member of pension scheme
How does relief at source work pension?
Relief at source operates by allowing an individual to make a relievable pension contribution after deducting a sum equal to the basic rate of income tax (20%).
The scheme administrator may then claim from HMRC a repayment of the sum deducted
They will pay a net amount
And scheme operator will net/0.8 and claim back from HMRC to put in pension
Net pay arrangement
Employee payments deducted before tax so employee does not have to claim tax relief.
What is retiremnt annuities tax relief
Deducted from total income
What form must employers complete for each employee provided with benefits
HMRC from P11D
How are employees taxed on a benefit?
Employees are taxed on the cash equivalent of a benefit rather than on its second-hand value. The cash equivalent is broadly defined as the cost to the employer of providing the benefit.
What is the amount that can reduce the list price of a employee car
Contributions of up to £5,000
What is fuel benefit charge
when fuel is provided by the employer for a company car that is used by an employee for private mileage.
2023/2024 - £27,800.
What is the taxable benefit amount for employees and company vans
£3,960 + £757 when van fuel is avaiable for private jouneys
When is fuel benefit not provided?
When no fuel is provided
When fuel is provided for business use
Cost of private fuel is fully reimbursed by the employee
What is the tax on mileage allowance
For income tax purposes, the rate is 45p per business mile for the first 10,000 miles in the tax year, then 25p for each mile thereafter. For NIC purposes, there is a flat rate of 45p for all business miles.
If travelling to a temporary place of work, is this classed as personal or business travel?
Business
If travelling to a usual place of work, is this classed as personal or business travel?
Personal
What is the official rate of interest for taxation of beneficial loans?
2.25%
When is the benefit of interest free or ‘cheap loans’ from an employer, not taxable?
When it does not exceed £10,000
Where an employee occupies rent-free accommodation or pays only a very low rent, there is
generally a tax charge on the benefit.
How is the taxable benefit assessed and would an additional charge be incurred?
How is the additional charge calculated?
First assesed on the annual value (annual rent expected from a normal market), or rent actually paid by employer, if higher
Additional charge is applied if the property value is over £75,000 and owned by the employer.
The value is then multipled by deducting it from £100,000 and multiplying it by 2.25% which is the 2023/24 official rate of interest.
i.e., if property cost is £100,000, then £100,000 - £75,000 = A. Then A x 2.25%.
In which 3 circumstances can an employee avoid being taxed on the benefit of living accommodation? And which 2 can directors who own more than a 5% share in the company, NOT claim?
- Necessary for the employees duties i.e., caretaker
- Helps the employee perform their duties better i,e., publican
- Special threat to employees security
Directors cannot claim 1 and 2
If an employer provides furnishing and equipment in living accommodation, what is the tax benefit charge?
20% market value
What type of income are cash vouchers treated as for tax purposes?
Earnings
When is an employee assessed for tax upon use of a company credit card (company token)?
The date they use the card
What is the annual exemption amount per employee for recommended medical treatment paid by the employer, to help employees return to work?
£500
Are medical examinations and screening costs, funded by the employer, taxable?
No
Name as many potentially tax free “benefits” (12)
group income protection (IP);
the provision of meals;
mobile phones;
long service awards;
suggestion schemes;
work-related training;
relocation and removal expenses;
home-working;
workplace nurseries;
liability insurance;
pension advice; and
trivial benefits.
An employee is not taxed on the provision of a Christmas party, or similar annual event, provided the cost is not more than how much?
£150
When do mobile phones given to employees become a taxable benefit?
More than 1
When do long service awards become taxable?
Award more than £50 per year they have worked (20 years for long service), and the employee has not received a similar award in the last 10 years.
When does a suggestion scheme become a taxable benefit?
When the employee is paid over £25, if the suggestion has some merit and is outside of the employees usual duties.
When is a large award of up to £5,000 under a suggestion scheme, not taxable to the employee
When the suggestion is implemented and;
The award is not more than 50% of the net financial benefit of the suggestion to the employer in the first year, or 10% of the net benefit over five years.
What type of workplace training is generally classed as a tax free benefit? (2)
H&S and first aid
What is the tax free amount of benefit for relocating an employee or funding their removal expenses, where the employer makes this necessary for them to perform their duties?
£8,000
How much tax relief can you claim as an employee working from home and for what?
£6 a week
Business calls, gas and electricity
Not for broadband
What is the tax exemption amount for pension advice to employees?
£500
Is the personal allowance deducted from taxable income, before or after calculating tax liability?
Before
What is the income tax personal allowance?
£12,570
What is the marriage allowance/marriage tax allowance and how does it work?
A transfer of 10% of the £12,570 personal allowance to a spouse or civil partner = £1,260 rounded from £1,257.
When is a transfer of the marriage allowance/marriage tax allowance not allowed? Name 2 circumstances.
When receiving spouse already earns in excess of the basic rate.
When either spouse has claimed married couples allowance (which is different to marriage allowance)
What is the minimum amount that can be transferred to a spouse when using the marriage allowance/marriage tax allowance?
£1,260
In other words, it must be 10%, all or nothing
