Chapter 1 - Income Tax Flashcards
Trading income - how are self-employed taxed first year, second year and may result in and how reclaimed. What is the trading allowance
Self employed taxed as follows;
- First tax year based on profits for that tax year (i.e. company start date until tax year end) therefore may be less than a whole year
- Tax for second tax year based on accounting period of business (year to year)
- this may result in same periods profits taxed twice due to overlap and this can be reclaimed when either changing accounting period or business ceases.
E.g. Oct 2020 and accounts in June21 -
First year = profit * months to TYE / months to accounting end = £60k
2nd year = 1st year + (AE Y2* months between accounting end and year end/accounting period) = £165k
= 60k + 75k taxed twice
Trading allowance of £1k which isn’t taxed
Income from property - when accounts drawn up on simplified basis, what is included in allowable expenses (4), finance costs tax relief amount and expense + does not apply for what (2)
Annual property allowance?
If income is £150k or less, accounts can be drawn up on simplified basis otherwise have to be on accrual basis.
Allowable expenses include - maintenance, rates and rents, replacing furniture and other expenditure wholly for letting purposes.
Tax relief for finance costs restricted to 20% and cannot be deducted as an expense. This does not apply for holiday letting or non-resi.
Annual property allowance = £1k
Self employed vs employed - what type of NICs at what % for each?, what is test of status and what falls into this?
LLPs - taxed as employee unless (3)
SE pay class 4 NICs at 9% on profits between £9,568 and £50,270 whereas employed pay 12% on earnings in same band.
Test of status (to determine if employed or self)
- degree of control, contract to provide service or contract of service, superior/subordinate relationship, flexibility of pay/work, risk, length of service and single employer.
LLPs -salaried member taxed as employee unless meet any of the following;
- > 20% of renumeration based on profits
- significant say in running of the business
- invested at least 25% of expected income
Tax deduction - interest distributions from what are paid gross
When is tax deducted net and who can reclaim this (taxpayer and allowance)
Interest distributions from UTs, OEICs, ITs and banks are paid gross.
Tax deducted at 20% net for some payments interest and annuities. When interest paid to someone or company this happens - a non-taxpayer or if within the savings allowance can reclaim this.
Interest payments - allowable deductions from total income if loan is taken out for qualifying purposes which are;
- shares and loans, investment, machinery and what tax
- what is this capped at?
ATI formula
Shares and loans - need what to qualify for relief (shares and time), used for what, relief at what rate and cap and EIS
Tax expanded - relief restriction, rate and who receives
Interest payments are allowable deductions from total income if loan taken out for qualifying purposes which are;
- purchase of shares in borrowers company or finance loans to company
- investment in partnership
- to buy machinery for use in partnership
- payment of IHT
- relief capped at higher of £50k or 25% of adjusted total income
- ATI = total income + charity donations - all pension contributions
Share purchase and loans;
- Must have more than 5% shares when paying the interest or less if invest more time into company to receive relief
- must be used for business to qualify
- relief is at top rate subject to cap of £50k or 25% of ATI
- no relief if EIS relief is claimed
IHT;
- relief restricted to period of one year from making of the loan
- at top rate
- must be personal rep of deceased to receive
Pension - relief at source - what is it, who claims relief from who and how higher and additional rate given
Net pay - what type of scheme deducts and what is it
Relief by making a claim - what is it (gross)
- Pension contribution made after tax and grossed up. Scheme admin claims tax relief from HMRC
- higher and additional rate tax relief given by extending individuals basic and higher rate bands by amount of gross pension payment.
Net pay;
- occ schemes deduct contribution from pay prior to tax deduction and therefore does not have to reclaim tax from HMRC.
Relief by making a claim;
- payments made gross and tax relief given by deducting them from total income
Employee benefits that are exempt from income tax - protection, meal, phone, awards and cap, suggestions and cap, training, relocation, home, nursery, insurance, advice, COVID and other
- Group income protection
- staff meals
- one phone
- long service awards (no more than £50 per year served and min 20 years)
- suggestion schemes (max £5k, must be implemented and not 50% of net benefit in first year or 10% in first five years)
- work related training
- relocation expenses
- home-working
- workplace nurseries
- liability insurance
- pension advice
- coronavirus antigen test
- trivial benefits
Personal allowance — how calculated, remittance
Marriage allowance - transfer what as what, what rate must they be, full amount, election and married couple allowance
Blind persons allowance
- deducted after calculating individuals income - reliefs given
- if paying on remittance basis, not entitled unless under £2k
Marriage allowance - possible to transfer 10% of personal allowance to spouse as a tax reducer.
- Must be basic rate payer.
- Therefore recipient can save 20% of this amount and given as a tax deduction. - Must be a full transfer i.e. 10% of 12570.
- Election remains in force for future tax years.
- cannot claim if claimed married couple allowance
Blind person allowance is £2,520 in addition to PA
Application of tax rates - how can basic and higher rate bands be extended (2)
Personal savings allowance for basic, higher and additional rate tax payers.
What does savings interest include (3)
When does 0% on what amount apply (think pension and savings income example)
Basic and higher rate bands can be extended by the gross payments into pension scheme (not RAS) and gift aid.
Personal savings allowance of £1k for basic, £500 for higher and nil for additional rate. Savings income includes interest, interest from PLA and gains from life assurance contracts.
Starting rate of 0% applies to first £5k of savings income (income solely from savings) and is taken second. If non-savings income (i.e. employment etc) is higher than £5k, this does not apply.
Tax charges step by step - step 1 - do what?, order taxed in Step 2 - deduct what Step 3 - deduct what Step 4 - add what from where Step 5 - calc what Step 6 - deduct what
Step 1 - calc pre tax income. Order income taxed in;
- earnings, pension, rental and other income not classified as savings or dividends
- savings income
- dividends
- chargeable gains for life assurance policies
Step 2 - Deduct reliefs and taken from income as per the above order
Step 3 - Deduct personal allowance
Step 4 - Add higher or additional rate reliefs from pension contributions of gift aids
Step 5 - Calculate tax as per the bands, followed by personal savings allowance and savings allowance
Step 6 - deduct tax reducers such as marriage allowance.
Bare trusts - income taxed how on ben, when does settlor-interested trust apply and taxed how + must exceed what amount and not taxed as parents when
- income taxed as beneficiary’s income and must include trust income on tax return.
- if gifted income to unmarried minor child, it is treated as settlor-interested trust and taxed as parents income. Must exceed £100 per year otherwise treated as childs
- not taxed as parents income if comes from grandparents etc
Trusts for vulnerable beneficiaries - two categories, how classed as one, mental health, relevant minor definition, trustees can dish out how much without proof of what, when is a trust created for a bereaved minor
Election - when does the trust need to be elected and why
- irrevocable unless (3)
- two categories -disabled and relevant minor
- to be classed as disabled must be eligible for disabled benefit
- does not take into account mental health yet
- relevant minor = not 18 and one parent has died
- trustees may apply lower of £3k or 3% of t he trust fund each year without having to prove its for the benefit for child (anything else they do)
- where they are a bereaved minor, trust can only be qualifying if created on the death of a parent and minor takes absolute interest in the trust no later than 18.
Election;
- to get favourable tax treatment, must elect trust no more than 12 months after jan31st following end of tax year in which the election falls.
- once made, irrevocable unless stop being vulnerable, trust ceases to be qualifying or trust is terminated
Tax relief on vulnerable trusts - who gets deduction of what, how calculated and difference represents what
Trustees get deduction from income tax that they would pay
- calculated by deducting tax payable by vul - tax trustees pay
- the difference represents measure of the relief trustees income tax liability reduced
Life interest and interest in possession trusts - tax on trustees;
- liable for what rate on income received, tax on savings income and allowance, tax on dividends and allowance, who pays interest gross, other income tax at what rate, trustees not liable for what, bens and tax credit, allowances and expenses
- trustees liable to pay basic rate tax on income they receive
- tax on savings income is 20% and no savings allowance applicable
- as above for dividends (7.5%)
- banks and building society interest paid gross
- other income taxed at 20%
- trustees not liable to higher rate tax
- ben entitled to tax credit for tax paid by trustees
- trustees cannot claim any allowances
- trustees not entitled to expenses for managing the trust
Life interest and interest in possession - tax on beneficiary;
- non tax payers can reclaim (3) and taxation if basic rate
- if non-tax payer, may be able to reclaim tax paid from rental, savings and dividend income (as no allowances for trustees therefore paid already)
- no further tax to pay if basic rate tax payer
