Chapter 1 Income Tax

Question 1

The tax return

Answer 1

Annual tax-returns, self-assessment:
 Single tax-return – all sources of income and capital gains.
 Choose if you or HMRC calculates tax.
 If no tax-return completed, HMRC can decide the tax due and serve an assessment.
 Must be filed by 31 January following tax year to which it relates, or 3 months after its issue, if later.
 If HMRC to calculate tax - must be submitted by 31st October following tax year to which it relates, or 3 months after its issue if later.
 Taxpayers with income taxed under PAYE can have underpayment of (usually) up to £3,000 collected with PAYE tax for a later year instead of paying it on usual payment dates. To do this tax return must be filed by 31st October (paper returns) or 30 December (online returns).
 Income tax and Class 4 NIC normally paid in 3 instalments:
- 2 payments on account plus
- 1 balancing payment.

Question 2

Payments on account

Answer 2

 Tax payers do not have to make payments on account if income tax payable for preceding year less than £1,000 in total.
 Do not have to make payments on account if more than 80% of taxpayer’s full or gross income tax liability for preceding year was met by deduction of tax at source (PAYE or tax credits on dividends).
 Payments on account include Class 4 NIC.

Question 3

Balancing payment

Answer 3

 Balancing payment due on following 31 January.
 Consists of adjustment calculated by comparing actual tax payable with total tax already
paid through payments on account. Could be payment to or from HMRC.
 Also includes capital gains tax payable.

Question 4

Penalties on self assessment

Answer 4

 Interest and surcharges automatically charged on late / under-payments.
 HMRC pays interest on overpaid tax.
 Interest rates on under/overpaid tax linked to BOE base rate from the date the tax payment was due.
 5% surcharge levied on any tax unpaid 30 days
2nd 5% surcharge on any tax remaining unpaid 6 months
3rd 5% surcharge on any tax remaining unpaid 12 months Surcharges are in addition to interest.
 Automatic fixed penalties: £100 for return not sent back by 31 January, £100 for return still outstanding 6 months later.
Fixed penalties cannot exceed the tax amount due.
 Variable penalties, e.g. for failing to keep records and documents required to complete tax return.
 Some penalties charged as percentage of tax due but not paid.
 During processing, HMRC only checks self-assessments for obvious errors, so most self-
assessments are processed as submitted.
 HMRC has right to enquire into accuracy of any return or self-assessment.
 Tax payers can amend their returns any time in the period ending 12 months after 31st January following the tax year. E.g. if they realise they have made a mistake.

Question 5

Key dates

Answer 5

6th July = P11D form 
31st October = deadline if you want HMRC to calculate your tax
31st Jan (following year) = deadline if tax calculated
28th Feb = Surcharges levied

Question 6

PAYE

Answer 6

 HMRC gives employers a PAYE code for each employee. PAYE tax tables issued each year and incorporated into payroll software let employer deduct correct tax.
 PAYE code designed to deduct correct amount of tax so that employee does not need to complete tax-return.
 For a K-code, a specified amount is added to the employee’s normal pay before calculating tax under PAYE.

Question 7

Property income

Answer 7

Income from UK property is taxable UK resident or non-resident. Income from overseas property is taxable only on UK resident.
 Property letting accounts have to be drawn up to 5 April using ordinary business accounting principles.
 Income and expenses of all properties let are pooled together and interest paid is included as an expense.
 Income from UK and overseas properties are pooled separately.
 Income is assessed in tax year in which it arises.
 Allowable expenses include a range of items including:
- Amount spent by landlord on maintenance and repairs,
- Rates and rents,
- Council tax,
- Interest,
- Any other expenses wholly and exclusively incurred in course of letting.
 Spends on improvements, alterations and additions are not allowed.

Question 8

Interest payments

Answer 8

Security for the loan is not relevant, the purpose of the loan is crucial. Main qualifying purposes are:
 Purchase of shares in borrower’s company or to finance loans to a company.
 Investment in a partnership.
 To buy plant and machinery for use in a partnership.
 Payment of inheritance tax.
The gross figure of interest paid in the tax year should be deducted in the tax computation.

Question 9

Gift aid

Answer 9

 Donations to charity are treated as payments on which the donor has deducted tax at the basic rate – charity can recover this tax.
 Donor’s basic tax rate and higher rate limit is increased by grossed up amount of the donation.
 Grossed up donation is amount which, after deducting income tax, is equal to the payment made to charity.
 The effect of increasing the basic rate band by grossed up donation is to give the donor an extra 20% or 25% tax relief.

Question 10

Gifts of assets

Answer 10

Individuals who donate certain assets to charity benefit from income tax relief on the full market value. This is in addition to capital gains tax exemptions for gifts to charity. Qualifying assets are:
 Listed shares and securities.
 Unlisted shares and securities dealt in on a recognised stock exchange (e.g. AIM).
 Units in authorised Unit Trusts / OEICs.
 Holdings in foreign collective investment schemes.
 Freehold or leasehold property provided whole interest is given. Tax relief is given on the market value at the date of the gift.

Question 11

Some employee benefits are not taxable. e.g:

Answer 11

 Group Income protection.
 Provision of meals.
 Workplace nurseries.