Chapter 1 - Income Tax

Question 1

Phil owns a buy-to-let property and is calculating the tax payable on his rental income. Which would NOT be an allowable deduction for income tax purposes?

a. Fixing the front door after an attempted break in.
b. Rates payable to the local council.
c. Cost of converting the attic into a new bedroom.
d. Redecorating the hall, stairs and landing.

Answer 1

c. Cost of converting the attic into a new bedroom.

Allowable expenses include amounts spent by the landlord on:
-maintenance and repairs;
-rates and rents,
-replacing furniture, furnishings, appliances and kitchenware provided for the tenant,
-any other expenses wholly and exclusively incurred in the course of the lettings.

Question 2

Jane is a higher-rate taxpayer and has received net interest of £5,000 from her portfolio of directly held gilts. What should she declare on her annual tax return?

The unit trust provider.
The grossed up interest.
The amount of tax deducted.
The net interest received.

Answer 2

The net interest received

Grossing up net payments means that individuals who receive income from which basic rate tax (20%) has been deducted at source must include the amount of gross income before the deduction of tax in their tax calculation. Although the net amount is entered on the tax return, the gross income is used to calculate the individual’s tax liability.

For example, if net interest is £1,000, the gross interest is £1,250 (calculated as £1,000 × 1.25 or £1,000 - 0.8). The difference between the gross interest and the net interest, £1,250
- £1,000, is the tax deducted, £250, which is 20% of £1,250.

Question 3

Silvia wants to set up a trust for her grandchildren where the assets and income can be distributed to them in line with their individual needs and requirements. Which is the most suitable trust?

a. Interest in possession trust.
b. Bare trust.
c. Accumulation and maintenance trust.
d. Discretionary trust.

Answer 3

d. Discretionary trust.

With a discretionary trust or an A&M trust, the trustees have discretion over the distribution of income and capital.

Question 4

In this tax year, Alonzo has a share of partnership profits of £450,000, out of which he makes gross pension contributions of £40,000 and pays interest of £125,000 on a loan in his name taken out for the purposes of buying plant and machinery for the partnership. How much of this interest will NOT benefit from tax relief?

a. £12.500.
b. £50,000
c. £22,500.
d. £75,000.

Answer 4

c. £22,500

Sally
For 2023/24, Sally has a share of partnership profits of £450,000. During the year, she made gross personal pension contributions of £40,000 and paid interest of £125,000 on a loan taken out to finance the partnership.

Sally’s adjusted total income is £410,000. (£450,000 - £40,000), so the cap is £102,500 (£410,000 × 25%). Therefore, only £102,500 of the loan interest can be deducted with no relief being given for the remaining £22500.

Question 5

Margaret is a higher-rate taxpayer and has total dividend income of £60,000, all of which falls within the higher rate tax band. How much tax will she pay on this income in 2023/24?

£19.912.50
£20.250
£19.175
£24.000

Answer 5

£19.912.50

Taxable income rates, dividend then other respectively

£0-£37,700 - basic, 8.75%, 20%

£37,701-£125,140 - higher, 33.75%, 40%

+ £125,140 - additional, 39.35%, 45%

The basic- and higher-rate band limits (&37, 700 and £125,140) may be extended by the addition of the gross value of payments into pension schemes, subject to relief at source and donations to charity under gift aid. These payments are made net of basic rate tax.
Extending the basic and higher rate bands gives tax relief at the higher and additional rates.

Dividend Income so receives £1000 tax free no matter the tax bracket

Question 6

Anastasia has had some of her husband’s income tax personal allowance transferred to her. This must mean that

a. he has an income of less than £12,570 and she is neither a higher-rate taxpayer, nor an additional-rate taxpayer.

• b. he pays tax at the basic rate but is not either a higher-rate taxpayer or an additional-rate taxpaver.

C.she has an income of less than £12,570 and he is neither a higher-rate taxpayer, nor an additional-rate taxpayer.

d. she is either a higher-rate taxpayer or an additional-rate taxpayer.

Answer 6

a. he has an income of less than £12,570 and she is neither a higher-rate taxpayer, nor an additional-rate taxpayer.

A person can transfer 10% of the £12,570 personal allowance for 2023/24 to a spouse or civil partner. The transterable amount of £1,260 (rounded up from £1,257) is also known as the marriage allowance or marriage tax allowance.

Question 7

Glen has £10,000 gross pension income, £5,000 dividends, £2,000 gain from an offshore life assurance bond and £3,000 interest from a purchased life annuity. What is his non-investment income?

а.£20,000.
B.£10,000.
C.£17,000
d.£12.000.

Answer 7

B.£10,000.

Investment income is split into two categories

Savings income includes interest, purchased life annuity payments and gains from life assurance contracts.

Dividend income includes stock dividends and dividends from shareholdings in overseas companies.

Question 8

In deciding whether an individual should be treated as employed or self-employed for tax purposes:

a. the existence of a contract to provide services usually indicates that the individual is v self-employed.

b. the existence of a contract of service usually indicates that the individual is self-employed.

C. a self-employed individual is never given set hours or engaged for a long period of time.

d. a self-employed individual cannot sub-contract someone else to carry out the work.

Answer 8

a. the existence of a contract to provide services usually indicates that the individual is self-employed

There are a few of these look up chapter 1A7A - test of status

Question 9

Conlan, who is an additional-rate taxpayer, makes a gift aid payment of £4,500 to his favourite charity. The payment is treated as if it were a donation of.

A. £6,525
b. £5,625
C. £5,400
d. £10,000

Answer 9

b. £5,625

Additional tax payers give an additional 25% others give 20%

The effect of increasing the basic and higher rate bands by the grossed-up donation is to give the donor an extra 20% or 25% tax relief, depending on their marginal rate of tax.
More income is taxed at 20%, but a corresponding smaller amount of income is taxed at either 40% or 45%.

Question 10

When calculating an individual’s income tax liability certain payments are tax reducers, including:

A. qualifying interest payments and investments into venture capital trusts.

b. qualifying interest payments and investments into enterprise investment schemes.

C. gifts to charities of shares and securities, allowable business losses and qualifying interest payments.

d. investments into enterprise investment schemes and venture capital trusts.

Answer 10

d. investments into enterprise investment schemes and venture capital trusts.

Some payments are tax reducers. Tax relief on these payments is given at a specified rate and is deducted from the taxpayer’s tax liability. Examples of tax reducers include the basic rate tax deduction for property income tinance costs and investments in enterprise investment schemes (EIS), seed enterprise investment schemes (SEIS) and venture capital trusts (VCTs). The relief for ElS and VCT investments is given at the rate of 30% whereas 50% relief is given for SEIS investment.

Question 11

What are the main Acts containing the income tax legislation?

Answer 11

The Income Tax Act 2007, the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the Income Tax (Trading and Other Income) Act 2005 (ITTOIA
2005).

Question 12

To what date or dates may property income accounts be drawn up for tax purposes?

Answer 12

5 April or 31 March.

Question 13

Under what legislation are a self-employed person’s profits taxed?

Answer 13

ITTOlA part 2.

Question 14

What did Pepper v. Hart (1992) decide?

Answer 14

That the taxable benefit for an employee on in-house benefits provided by an employer is based on the marginal cost only.

Question 15

If an employer provides a beneficial loan to an employee, what is the basic benefit for tax purposes?

Answer 15

The difference between the interest at the official rate and the actual interest paid.

Question 16

An employer purchased a property for £120,000 in 2021 and spent £13,000 on improvements during 2022. From 1 January 2023 onwards, the property was let to a senior employee for an annual rent of £3,000. The property has an annual value of £5,600. Calculate the taxable benefit for 2023/24.

Answer 16

Basic benefit: £5,600 - £3,000 = £2,600
Additional benefit: £120,000 + £13,000 - £75,000 = £58,000 at 2.25% = £1,305
Total benefit: £3,905

Question 17

Can a French national claim UK personal allowances?

Answer 17

Yes (France is part of the European Economic Area (EA) and the entitlement continues despite the UK leaving the EEA).

Question 18

How much of the personal allowance can be transferred to a spouse or civil partner
for 2023/24?

Answer 18

£1,260 (10% of the personal allowance of £12,570 for 2023/24 (rounded up from
£1,257)).

Question 19

In what way is higher- and additional-rate tax relief obtained for pension contributions
paid net?

Answer 19

By extending the basic- and higher-rate tax bands by the amount of the gross payment.

Question 20

When is a trust subject to UK income tax?

Answer 20

When it has at least one trustee who is resident in the UK.

Question 21

Are trustees entitled to a personal allowance for trust income?

Answer 21

No

Question 22

What is the current rate of tax applicable to discretionary trusts for savings interest?

Answer 22

20% within the standard rate band, then 45%.

Question 23

If a father sets up a trust for his eight-year-old son that generates £150 income, who is taxed on this?
You will find the answers at the back of the book

Answer 23

The father is taxed on the full £150.

When the child’s income from all investments made by the same parent is not more than £100, the income is treated as that of the child

Question 24

A discretionary trust holds assets that generate both dividends and interest. The trustees, who are
UK resident, should be aware that

A. all income received within the standard-rate band has a 10% Income Tax liability only
B. the amount of the standard-rate band for the trust depends on the existence in the tax year of any other trusts created by the settlor.
C. dividends received may have a maximum 33.75% Income Tax liability.
D. interest received may have a maximum 40% Income Tax liability.

Answer 24

B. the amount of the standard-rate band for the trust depends on the existence in the tax year of any other trusts created by the settlor.

•The trustees have a standard rate band of £1,000. Where the settlor has created more than one trust, this band is divided by the number of trusts that same settlor has in existence at any point in the tax year. Where there are five or more trusts, the minimum standard rate band will be £200.
• The standard rate band is not a tax-free allowance. Any income that falls within the standard rate band will still be liable to tax, but tax will be charged at the basic rate of 20% for non-dividend income and 8.75% for dividends, rather than the usual higher rates applicable to trustees.
• The standard rate band will be used against non-dividend income first and will only be used against dividend income if there is not enough non-dividend income (i.e. less than
£1,000）.
• Above the standard rate band, the rate applicable to trustees is 39.35% for dividends and 45% for other forms of income - the same rates that apply to an additional-rate-taxpaying individual.

Question 25

15. Joanna is an employee in receipt of employee benefits, earning above the Income Tax allowance. She uses the company’s work bus, provided free of charge, to travel to and from work. She is wondering whether to switch to & pool car for that travel to and from work; the pool car would be provided free of charge and garaged at her home overnight, available to her family for use. She should be advised that with regard to any benefits received from the work bus and the pool car

A. both generate an Income Tax liability, but only if she is a higher or additional-rate taxpayer.
B. neither generates an Income Tax liability, whatever her taxpaying status.
C. the pool car, but not the work bus, could generate an Income Tax liability.
D. the work bus, but not the pool car, could generate an Income Tax liability, depending on its CO2 emissions.

Answer 25

C. the pool car, but not the work bus, could generate an Income Tax liability.

• If a car provided to an employee or a member of their family is available for private use, then there is a taxable benefit. The benefit is calculated as a percentage of the list price of the car

• A fuel benefit charge linked to a car’s CO2 emissions applies when fuel is provided by the employer for a company car that is used by an employee for private mileage.

Question 26

Ben holds 3,000 shares in a UK listed company which declares a dividend of 70 pence per share. If he is a higher rate taxpayer and has already used his dividend allowance, how much tax will he pay on these dividends?

A £183.75
B £708.75
С £682.50
D £840.00

Answer 26

B £708.75

3000 units x £0.7 = £2100 dividend
33.75% of this is £708.75

They are higher rate so pay this level of tax

Question 27

2. Jill, aged 52, has an income which is made up of a £25,000 salary, building society interest of £8,000 and dividends of £12,280. Her income tax liability is:

A £4,873
B £4,732
C £5,073
D £6,542

Answer 27

A £4,873

£12570 of basic rate so only £12430 to pay on the salary at 20% = £2486

£12,280 dividends minus the £1000 dividend allowance = £11280
This is taxed at the basic rate of dividend allowance which is 8.75% this = £987

You can use the personal allowance on the Building society interest, as this client is basic rate they get the whole £1000 allowance. So £7000 is then taxable at the clients income tax rate of 20% which = £1400

£2486 + £987 + £1400 = £4873

Question 28

8. Alicia has fully surrendered an onshore single premium investment bond with a gain of £20,000. If she has no other savings income and her taxable income is £32,000, she should be aware that:

A. the full gain would be subject to 20% income tax.
B. the full gain would be subject to an additional 25% income tax.
C. she would have a personal savings allowance of £1,000.
D. she would have a personal savings allowance of £500.

Answer 28

D. she would have a personal savings allowance of £500.
The full gain may not be subject to 20% due to top slicing methods keeping the client in the lower tax bracket

The client wouldn’t be charged 25% as they are not additional tax payers

She does not have a PSA of £1000 as that’s for basic rates

She does have a PSA of £500 as she is definitely a higher rate tax payer due to the gain

Question 29

Which of the following is a taxable benefit for employees?

A. Liability insurance.
B. Group income protection.
C. Private medical insurance.
D. A mobile phone.

Answer 29

C. Private medical insurance.

While premiums paid by an employer for private medical insurance are usually taxable, those paid for group income protection are not. Where employers pay for indemnity insurance for directors or employees, the payment is not a taxable benefit. Nor is the provision of one mobile phone. - Chapter 1, Section G5E/G6, Learning Outcome 1.1

Question 30

Joshua has earnings in 2025/24 of £115,000. What is his total liability to Income Tax?

A. £33,432
B. £36,432
C. £38,432
D. £44,000

Answer 30

B. £36,432

In this question, we are told that Joshua has earnings of £115,000. Candidates should straight away realise this means that he will lose some of his personal allowance, due to his income being over £100,000 with the reduction calculated as E1 for every 12 over the threshold.
The calculation therefore is: £115,000 - £100,000 = £15,000 / 2 = £7,500.
This is the amount that is deducted from his personal allowance of £12,570 leaving him with an amount of £5,070.
We then start again and take £5.070 from his earnings of £115,000 leaving us with £109,950 of taxable income. 137,700 of this is taxable at the basic rate of 20% (27,540). and the remainder of £72,230 is taxable at the higher rate of 40% (£28,892). Therefore
E7,540 + £28,092 = £36,432 meaning the correct answer is B.

Question 31

Liz has been off work sick for six months and is being paid through her employer’s income protection (IP) policy. Which of the following statements concerning the tax treatment of the IP is correct?

Answer 31

The benefit is paid directly to the employer and treated as a trading receipt.

The benefit from a group income protection plan is paid directly to the employer and treated as a trading receipt. The employer will then pay the benefit to Liz under PAYE meaning that Liz will receive the net amount (i.e. after Income Tax and National Insurance contributions have been deducted). The premiums paid by Liz’s employer will be classed as an allowable expense. They are not, however, treated as a taxable benefit in kind for Liz. - Chapter 1, Section G6A, Learning Outcome 1.1

Question 32

Tim has recently started a job with a company car and is concerned about the tax position. The car has been specially adapted as Tim has limited mobility in his left arm and hand. Which of the following would be taken into account when calculating the taxable benefit?

A) discounts provided by dealership
B) CO2 emissions
C) a car phone
D) the cost of adaptations for the disability

Answer 32

B) CO2 emissions

. The car’s level of COz emissions is the determining factor. Any discounts are ignored, as is the provision of a car phone and the cost of adaptations or equipment to enable a person with a disability to use the car. - Chapter 1, Section G2A, Learning Outcome 1.1

Question 33

Luanne, who earns £23,500 a year and has no other income, wishes to make a gross contribution of £4,375 into her group personal pension (GPP). This means that

Answer 33

C. the GPP’s scheme administrator will claim £875 from HMRC.

Correct. The scheme administrator of the GPP will claim the basic-rate tax deducted of £875 from HMRC. - Chapter 1, Section F2, Learning Outcome 1.1

Question 34

How do you figure out the amount of loan interest which can be deducted for tax relief purposes

Answer 34

Adjusted total income (total income + charitable donations - pension contributions)

25% of the Adjusted total income or £50k whichever is higher

Question 35

How does Jane receive basic rate tax relief on her individual personal pension contributions?

Answer 35

Contributions to personal pensions are paid net under the relief at source method. The pension provider will reclaim the 20% deducted at source and add it to Jane’s pension fund. - Chapter 1, Section F2, Learning Outcome 1.1

Question 36

Question 5
In the current tax year, Miss Simpson has gross earned income from her employer of £24,000 and she also received a cheap loan from them of £18,000, on which she is being charged an interest rate of 1.25%. She also took out a loan of £15,000 at an interest rate of 8%, which she used to buy 10% of the shares in a trading company run by two of her friends.

Calculate, showing all your workings, the value of the taxable benefits on the loan from her employer. Also calculate the amount of income tax relief she can expect as a result of the loan for the company shares she bought.

Answer 36

Answer

Loan:
€18,000 x (2.25% - 1.25%) = £18,000 x 1% = £180
Company shares:
£15,000 x 8% = £1,200
£1,200 × 20% = £240

Detailed explanation

The value of the taxable benefit of the beneficial loan from her employer is the difference between the rate of interest paid and the official rate, which is set at 2.25% for 2023/24.
£18,000 x (2.25% - 1.25%) 1%. = £180.
Interest paid on the loan, which was used to buy shares in the company run by her friends, is eligible for tax relief on the interest. £15,000 x 8% = £1,200 interest per year.
She can therefore deduct £1,200 from total income. She is a basic rate taxpayer and therefore saves £1,200 x 20% = £240 per year in tax.

CIl R03 Study Text Chapter 1, Sections G3 and D1

Question 37

Lewis, an additional rate taxpayer, makes a gift aid payment to the Cats Protection League of £8,000.

(a) Calculate how much, in total, the Cats Protection League will receive as a result of Lewis’s donation and explain how they will receive this.

(b) Calculate how much income tax relief Lewis will receive as a result of his donation and explain how he will receive this.

Answer 37

A) £10,000

Because it’s always 20% additional for basic and higher then 25% additional for additional rate payers

B) £4500

The client is an additional rate tax payer, they will hence get 45% of their £10k gross payment tax relieved.

Question 38

Wallace and Roger are both employed and living in company-provided accommodation. Both need accommodation as part of their employment as it is a requirement of their roles. Only Wallace is charged income tax on its value as a benefit in kind. The MOST likely reason for this is..

A - Wallace is a director of the firm, holding less than 5% of the company’s share capital.
B - Roger is a director of the firm, holding less than 5% of the company s share capital.
C - Wallace is a director of the firm, holding more than 5% of the company’s share capital..
D - Roger is a director of the firm, holding more than 5% of the company’s share capital.

Answer 38

Special rules apply where accommodation is provided and is a requirement of the role, such as a publican or groundskeeper. If you are required to live there as part of a contractual arrangement, then it is not a benefit in kind unless you own more than 5% of the company’s shares.