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Principles of Tax > Ch 3 - Introduction to tax > Flashcards

Ch 3 - Introduction to tax Flashcards

1
Q

Who must pay income tax?

A

All individuals who are residents in the UK

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2
Q

How is income tax calculated?

A

On taxable income earned in the tax year

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3
Q

What is the deadline for a personal tax return?

A

31 January following the end of the tax year

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4
Q

When is the online submission and payment deadline for tax returns relating to 2018/2019?

A

31 January 2020

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5
Q

When do taxpayers not need to submit a tax return?

A

If tax has been deducted at source under Pay As You Earn (PAYE)

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6
Q

What are the 2 main types of income?

A

Exempt

Taxable

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7
Q

What are the 2 ways taxable income can be taxed?

A

Taxed at source: received net of tax

Taxed by direct assessment: receive gross of tax

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8
Q

How is taxable income included in a computation?

A

As the gross amount

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9
Q

Give some examples of exempt income tax

A
  • 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
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10
Q

Give examples of income received gross

A

Trading income
Property income
Interest income
Dividend income

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11
Q

Give some examples of income received net

A

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

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12
Q

Define net income

A

total of all income less reliefs (of which none are examinable) but before deducting the personal allowance

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13
Q

What are the 3 types of net income, and what order are they taxed in?

A
  • 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
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14
Q

Describe an income tax computation

A 
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

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15
Q

Define taxable income

A

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

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16
Q

Show the taxable income table

A 
Along the top: 
Total income
Non-savings income
Savings income
Dividend income

Down the side:
Net income
Less personal allowance

Total: taxable income

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17
Q

What is the personal income allowance for 2018/2019?

A

£11,850

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18
Q

How long is the PA available for in full?

A

In the year of death/birth

Only available against income, not in the calculation of other taxes e.g. capital gains tax

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19
Q

When is the personal allowance withdrawn?

A

Gradually withdrawn for individuals wit income in excess of £100,000

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20
Q

What is the withdrawal of personal allowance based on?

A

Tax payers adjusted net income (ANI)

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21
Q

What is the difference between adjusted net income and net income?

A

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

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22
Q

What is the calculation for determining the restriction of personal allowance?

A

ANI - £100,000 x 0.5

23
Q

What must be done if the personal allowance isn’t a whole number?

A

Must be rounded up to the nearest pound

24
Q

At what amount paid does a taxpayer no longer get any personal allowance?

A

£123,700 as the excess is twice above the £100,000 threshold

25
Q

What is the in the income tax computation?

A

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
26
Q

What order should taxable income be taxed in?

A

Non-savings income
Savings income
Dividend income

27
Q

What are the income tax rates for 2018/19 for non-savings income?

A

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

28
Q

What are the 18/19 income tax rates for SAVINGS INCOME?

A

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%

29
Q

What are the 18/19 income tax rates for SAVINGS INCOME?

A

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

30
Q

What is the savings income nil rate band?

A

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%

31
Q

What are the income tax rates for 18/19 for DIVIDEND INCOME

A

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

32
Q

How is it ensured that employed income isn’t taxed twice?

A

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

33
Q

How is an income tax repayment generated?

A

If the income tax already charged using PAYE is higher than the income tax liability

34
Q

What is the tax benefit of GiftAid

A

It is a tax efficient way of giving to charity

35
Q

How does Gift Aid work?

A

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

36
Q

How is Gift Aid claimed for basic rate tax payers?

A

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

37
Q

How is Gift Aid paid to higher rate tax payers?

A

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%

38
Q

How is Gift Aid paid for additional rate payers?

A

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%

39
Q

Can Gift Aid donations be carried back?

A

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

40
Q

What is the married couple allowance?

A

Additional allowance if at least one spouse or civil partner was born before 6 April 1935.

41
Q

When can married couples allowance be claimed?

A

If the couple married/formed a civil partnership on or after 5 Deember 2006, the spouse with the higher net income claims the MCA

42
Q

What is the marriage couple allowance amount for 18-19?

A

£8,695 and is given as a tax reducer at 10%

43
Q

How is the MCA affected in the year of marriage?

A

The MCA rate is time apportioned in the year of marriage by reference to the number of complete tax months before mirage

44
Q

When does tax month run?

A

6th of one month to 5th of the next

45
Q

When is the MCA abated? (abatement of MCA)

A

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

46
Q

What is the minimum the MCA can be reduced to?

A

Can’t be reduced to below the minimum allowance of £3,360

47
Q

What is transferable marriage allowance?

A

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

48
Q

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

A

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

49
Q

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

A

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
50
Q

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

A 
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

51
Q

Is the transfer of MCA automatic?

A

No, must make an election

52
Q

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

A 
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

53
Q

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

A 
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

Principles of Tax (11 decks)

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