Ch 3 - Introduction to tax Flashcards
Who must pay income tax?
All individuals who are residents in the UK
How is income tax calculated?
On taxable income earned in the tax year
What is the deadline for a personal tax return?
31 January following the end of the tax year
When is the online submission and payment deadline for tax returns relating to 2018/2019?
31 January 2020
When do taxpayers not need to submit a tax return?
If tax has been deducted at source under Pay As You Earn (PAYE)
What are the 2 main types of income?
Exempt
Taxable
What are the 2 ways taxable income can be taxed?
Taxed at source: received net of tax
Taxed by direct assessment: receive gross of tax
How is taxable income included in a computation?
As the gross amount
Give some examples of exempt income tax
- Income from ISAs (including Junior ISAs)
Interest from National Savings - - Certificates (sometimes referred to as NS&I Certificates) - Winnings e.g. betting, lottery & premium bond
- Some social security benefits e.g. housing benefits
- Scholarships
- Income tax repayment interest
Give examples of income received gross
Trading income
Property income
Interest income
Dividend income
Give some examples of income received net
Under PAYE employment income is received net of tax
All income must be included gross in the income tax computation
Individuals get credit for the amount of tax already paid, which is given to you in an exam
Salaries are quoted gross in questions unless you are told otherwise
Define net income
total of all income less reliefs (of which none are examinable) but before deducting the personal allowance
What are the 3 types of net income, and what order are they taxed in?
- Non-savings income: employment income (including pensions and taxable social security benefits), trading income, property income
- Savings income: interest from investments e.g. interest
- Dividend income: dividends
Describe an income tax computation
Along the top: Total icnome Non-savings income Savings income Dividend income
Down the side: Trading income Employment income Property income Savings income (interest) Dividends
Net income
Define taxable income
Net income after the deduction of the tax-free personal allowance (PA)
The PA is deducted in the order non-savings income, savings income then dividend income
Show the taxable income table
Along the top: Total income Non-savings income Savings income Dividend income
Down the side:
Net income
Less personal allowance
Total: taxable income
What is the personal income allowance for 2018/2019?
£11,850
How long is the PA available for in full?
In the year of death/birth
Only available against income, not in the calculation of other taxes e.g. capital gains tax
When is the personal allowance withdrawn?
Gradually withdrawn for individuals wit income in excess of £100,000
What is the withdrawal of personal allowance based on?
Tax payers adjusted net income (ANI)
What is the difference between adjusted net income and net income?
Technically there is a diff, but it isn’t examinable
In q’s can use the net income figure unless you are given a figure for the adjusted net income
What is the calculation for determining the restriction of personal allowance?
ANI - £100,000 x 0.5
What must be done if the personal allowance isn’t a whole number?
Must be rounded up to the nearest pound
At what amount paid does a taxpayer no longer get any personal allowance?
£123,700 as the excess is twice above the £100,000 threshold
What is the in the income tax computation?
Along the top:
- Total
- NSI
- SI
- DI
Down the side
- Trading income
- Employment income
- Bank interest
- Dividends
- Property income
Net income
Personal allowance
Taxable income
Income tax: NSI @ 20%/40%/45% SI @ 0%/20%/40%/45% DI @ 0%/7.5%/32.5%/38.1% Total Less MCA or marriage allowance = Income tax liability Less tax deducted at source total = income tax payable
What order should taxable income be taxed in?
Non-savings income
Savings income
Dividend income
What are the income tax rates for 2018/19 for non-savings income?
Basic band = £0-£34,500 @ 20%
Higher rate band = £34,501 - £150,000 40%
Additional rate band = £150,000 + 45%
Different rates apply to savings and dividend income
What are the 18/19 income tax rates for SAVINGS INCOME?
Starting rate band = £0-£5,000 0%
Basic rate band = £0-£34,500 = 20%
Higher rate band = £34,501 - £150,000 40%
Additional rate band = £150,000 + 45%
What are the 18/19 income tax rates for SAVINGS INCOME?
Starting rate band = £0-£5,000 0%
Basic rate band = £0-£34,500 = 20%
Higher rate band = £34,501 - £150,000 40%
Additional rate band = £150,000 + 45%
Starting rate of 0% only applies if savings income falls into the first 5,000 of taxable income. This band may be reduced/fully eliminated by non-savings income since this is taxed first
What is the savings income nil rate band?
It is available to tax payers with taxable income below £150,000 whose savings income isn’t covered by the SRB
Savings income covered by nil band uses up part of the basic or higher rate bad
£1,000 for basic rate taxpayers and £500 for higher rate taxpayers
Savings income covered by the nil rate band is taxed at 0%
What are the income tax rates for 18/19 for DIVIDEND INCOME
Basic rate = £0-£34,500 7.5%
Higher rate band £34,501 - £150,000 32.5%
Additional rate band £150,000+ 38.1%
First £2k of div income for all taxpayers is taxed at 0% dividend nil rate but uses the basic and higher rate bands. Any remaining dividends is taxed at the above rates
How is it ensured that employed income isn’t taxed twice?
PATE is deducted at source and is deducted from the income tax liability to give income tax payable
If he income tax already paid exceeds the income tax liability, a repayment is generated
How is an income tax repayment generated?
If the income tax already charged using PAYE is higher than the income tax liability
What is the tax benefit of GiftAid
It is a tax efficient way of giving to charity
How does Gift Aid work?
Donor gives a donation to charity and makes a GiftAid declaration
Amount paid to charity is deemed to have been made net of 20% tax
So the indiv is deemed to have paid 80% of the ultimate donation to charity, so clarity can claim the remaining 20% from HMRC
The way in which tax relief is obtained depends on the donoor
How is Gift Aid claimed for basic rate tax payers?
Relief is given at the time of donation by only giving 80% to the charity
No adjustment is needed in the income tax computation as the apporpriate amount of tax relief has been given at source
How is Gift Aid paid to higher rate tax payers?
20% tax relief is granted at the time the payment is made
A maximum of 20% (40%-20% extra tax relief is given by increasing the higher rate threshold by the gross amount of the gift. The total tax relief given is therefore 40%
How is Gift Aid paid for additional rate payers?
20% tax relief is granted at the time the payment is made
A maximum of 25% (45% - 20%) extra tax relief is given by increasing the higher and additional rate thresholds by the gross amount of the gift; the total tax relief given is therefore 45%
Can Gift Aid donations be carried back?
Gift Aid made in 1 tax year can be treated as paid in the previous tax year
Beneficial if the taxpayer was paying a higher rate of tax in the previous year
Elect by the earlier of:
- the filing date for the prev tax year (31 Jan following the end of that tax year)
- when the tax return for the previous tax year is actually filed
What is the married couple allowance?
Additional allowance if at least one spouse or civil partner was born before 6 April 1935.
When can married couples allowance be claimed?
If the couple married/formed a civil partnership on or after 5 Deember 2006, the spouse with the higher net income claims the MCA
What is the marriage couple allowance amount for 18-19?
£8,695 and is given as a tax reducer at 10%
How is the MCA affected in the year of marriage?
The MCA rate is time apportioned in the year of marriage by reference to the number of complete tax months before mirage
When does tax month run?
6th of one month to 5th of the next
When is the MCA abated? (abatement of MCA)
If the net income of the taxpayer claiming the MCA exceeds £28,900, the MCA is reduced by £1 for every £2 that the taxpayer is over that limit
What is the minimum the MCA can be reduced to?
Can’t be reduced to below the minimum allowance of £3,360
What is transferable marriage allowance?
A spouse/civil partner can transfer £1,190 of their personal allowance to their spouse if
- the transferor has no tax liability or will only be a basic rate taxpayer after the transfer
- the recipient is a basic rate tax payer
- Both endives were born on/a/after 6 April 1935
It reduces the recipients income tax liability at the basic rate
Transferor must make an election
TYU14: H and M married on 8 Dec 2018, and their details are as follows:
H: DoB 28 Sept 1936 Net income £19,850
M: DoB 15 June 1934 Net income £13,860
Calc the MCA available and state who claims it
Mary was born before 5 April 1935, therefore MCA is available at £8,695
Marriage is before 5 Dec 2006, so Harold claims MCA as he has higher net income
8 complete tax months between 6 April 2018 and 8 Dec 2018, so 4 months of MCA is available in the year of marriage
MCA is therefore 8,695 x 4/12 = £2,898
Harold receives a relief of £2,898 at 10% = £290
TYU15: H and A married on 23 Dec 2011. Details as follows:
A: 15 March 1937 and £27,600 net income
H: 20 Aug 1928 and £36,900 net income
Calc the MCA available and state who claims it
Henry was born before 6 April 1935, so MCA is available
Marriage was before 5 Dec 2005, so Henry claims MCA as he has higher net income
MCA = £8,695
Less abatement (3,500)
Revised MCA = £5,195
Abatement calc Net income £35,900 Less: limit £(28,900) Excess = 7,000 Abatement = 7,000 x 0.5 = £3,500
TYU16: Rita is on a career break to care for her young children full time. Husband Ricky is a sole trader and has assessable trading profits in 18/19 TY. Rita makes an election to transfer her marriage allowance to Ricky. Calc the tax liabilities for Ricky and Rita, assuming they have the following amounts of income:
a. Ricky £28,350 and Rita Nil
Ricky: Trading income 28,350 Property income Nil Net income = £28,350 Less PA (11,850) Taxable income 16,500
Income tax:
NSI - basic rate £16,500 x 20% = 3,300
Less: Marriage allowance reduction £1,190 x 20% (238)
Income tax liability = 3,062
Rita = all Nil
All of Rita’s PA is unused therefore maximum benefit of election = £238
Is the transfer of MCA automatic?
No, must make an election
TYU16: Rita is on a career break to care for her young children full time. Husband Ricky is a sole trader and has assessable trading profits in 18/19 TY. Rita makes an election to transfer her marriage allowance to Ricky. Calc the tax liabilities for Ricky and Rita, assuming they have the following amounts of income:
b. Ricky £12,550 & rita £Nil
Ricky: Trading income = £12,550 property income 0 Net income = £12,550 Less PA (11,850) Taxable income = 700
Income tax:
NSI - basic rate £700 x 20% = £140
Less marriage allowance reduction (restricted) (140)
Income tax liability = £0
Rita - All Nil
All of Rita’s PA is unused but the max benefit of the election is restricted since Ricky doesn’t have sufficient income tax to offset the full benefit
TYU16: Rita is on a career break to care for her young children full time. Husband Ricky is a sole trader and has assessable trading profits in 18/19 TY. Rita makes an election to transfer her marriage allowance to Ricky. Calc the tax liabilities for Ricky and Rita, assuming they have the following amounts of income:
c. Ricky £28,350
Rita £10,715 from a property which is let out
Ricky: Trading income £28,350 Property income £Nil Net income = £28,350 Less PA (Note) (11,850) Taxable income = £16,500
Income tax:
NSI income- basic rate (£16,500 x 20%) 3,300
Less marriage allowance deduction (£1,190 x 20%) (238)
Income tax liability = £3,062
Rita Trading income £Nil Property income £10,715 Net income = £10,715 Less PA (Note) (10,660) Taxable income = £55
Income tax:
NSI income- basic rate (£16,500 x 20%) 3,300
Less marriage allowance deduction (£1,190 x 20%) (238)
Income tax liability = £3,062
Note: Only £1,135 (£11,850 - £10,815) of Rita’s PA is unused, however if the election is made, the fixed amount of £1,190 must be transferred
