Chapter 1 - Income Tax Flashcards
Basis of Assessment
Self-employed people prepare annual accounts up to whatever date in the tax year they choose. Their accounts DO NOT have to coincide with the tax year.
Current-Year Basis
Up to and including the tax year 2022/23.
Tax-Year Basis
2024/25 onwards.
Transition Year Basis
2023/24.
Deductions
Expenditure must be wholly and exclusively incurred for the purpose of business and be of revenue. NOT CAPITAL.
Trading Allowance
£1,000 annual trading allowance.
Employment Income
Incl. salaries, fees, bonuses & benefits in kind (taxable benefits). These are all assessed in the tax year which the income in received/benefit is used.
Deducted under the PAYE system.
Property Income
Income from UK property is taxable to UK or non-UK resident.
Income from overseas property is taxable to UK residents.
£1,000 ANNUAL PROPERTY ALLOWANCE.
Letting accounts need to be drawn up to 5TH APRIL or 31 MARCH using ordinary business accounting rules.
If income (before deducting expenses) is less than £150,000, accounts are drawn up on a SIMPLIFIED cash basis.
If the landlord opts-out of the above, ACCRUALS basis is used.
Income is assessed the same tax year is arises.
Savings Income
Includes interest, purchased life annuity contracts, & gains from life assurance contracts.
UK RESIDENT - taxable whether in or outside the UK.
Taxed in the year it arises.
No deductions.
Dividend Income
Includes stock dividends, & dividends from shareholdings in overseas companies.
UK RESIDENT - taxable whether in or outside the UK.
Taxed in the year it arises.
No deductions.
Employee
CONTRACT OF SERVICE
Self-Employed
CONTRACT FOR SERVICES
Income paid gross
From:
-Bank & Building Society interest
-Interest distributions from UTs, OEICs & investment trusts
-Corporate Bonds
-Dividend Income
Interest & Annuities - Deduction of Tax
Deducted at the basic rate of 20% from SOME interest & annuity payments by the PAYER.
Interest - Deduction of Tax by PAYER
Tax is deducted before payment if a company (or partnership where the company is a member), pays interest to an individual, partnership (unless all the partners are UK companies), or non-UK company.
Annuities - Deduction of Tax by PAYER
Basic rate of 20% tax deducted if an annuity is NOT paid wholly out the profits/gains subject to income tax.
REMEMBER - MOST PURCHASED LIFE ANNUITIES ARE PAID NET OF BASIC RATE TAX.
Grossing Up Net Payments
People who receive income NET of basic rate tax (20%), must include the GROSS amount int heir tax calculation.
Although the NET amount is entered int he tax return, the GROSS amount is used to calculated the person’s tax liability.
Total Income
Sum of the amounts of income which the taxpayer will be charged INCOME TAX for the year.
Amount which tax will be calculated
(Total Income) - (Tax Relief) = Net Income
(Net Income) - (Personal Allowance) = Taxable Income
Amounts that receive tax relief
-Qualifying interest payments
-Allowable business losses
-Gifts to charities of shares & securities
-Qualifying contributions to occupational pension plans & retirement annuity plans (where the provider doesn’t give relief at source).
Interest Payments
Allowable deduction from total income if the loan was taken out for qualifying purposes.
Qualifying purposes:
-Purchase of shares in the borrower’s company, or the finance loans to the company.
-Investment in a partnership.
-Purchase of plant & machinery for use in a partnership.
-Payment of IHT.
GROSS figure used when doing tax calculation.
Amount of interest + allowable business losses deductible is capped at higher of £50k or 25% of person’s adjusted total income.
Adjusted Total Income
(Total Income) + (charitable donations made through payroll) - (any pension contributions)
Share Purchase & Loans to Companies
Relief is given for
-Interest paid on a loan for the purpose of acquiring shares in, or making a loan to a close trading company.
Partnership Investment
Tax relief is given to a partner who pays interest on a loan.
Purchase of Plant & Machinery
Tax relief is given to a partner who pays interest on a loan used to buy plant or machinery for use in the partnership business.
Payment of IHT
Interest is allowable if its payable on a loan used to pay IHT on death.
-Relief is restricted to a period of 1 year from the making of the loan.
-Relief is at the borrower’s top tax rate, but subject to a cap, which is the higher of £50k, or 25% of adjusted total income.
-Borrower must be a personal representative of the deceased.
Gift Aid
Gift aid donation to the charity is treated as a payment which the donor has already paid BASIC rate tax (20%).
The charity then recovers the tax deducted.
Payroll Giving
Employees can make regular charity gifts through their employer’s payroll system.
The employer deducts the charity gift from the salary BEFORE deducting tax.
In turn, the employee gets tax relief at their highest rate.
Gifts of Assets
People who donate certain assets to charity can get INCOME TAX relief on the full market value of the gifts. This is in addition to the CGT exemption for gifts to charity.
The assets that qualify are:
-Listed shares & securities
-Unlisted shares & securities dealt on a recognised stock exchange (e.g. AIM)
-Units in authorised UTs
-Shares in OEICs
-Holdings in foreign collective investment schemes
-Any freehold or leasehold property (provided whole interested is given)
Pension Payments Tax Relief
Given through:
-Relief at source
-Net pay arrangement
-Relief by making a claim
Relievable Pension Contribution
Contribution paid to a registered pension scheme by a member of the scheme, who is a relevant UK individual, or by a third party on their behalf (e.g. parent paying into a pension set up or their child).
Relevant UK Earnings
-Profits from UK self-employment or partnership
-Earnings from UK employment
-Earnings from certain overseas crown employments that are subject to UK tax
Relevant UK Individual
Someone who:
-has relevant UK earnings for the year
-Is resident in the UK at some point in the tax year
-Was resident in the UK at some point during the five previous tax years and were UK resident when they joined the pension scheme
Pension Contribution Limit
The maximum amount that you can claim tax relief in any tax year is the greater of £3,600, or the amount of your relevant UK earnings that are subject to income tax that tax year.
Th annual allowance however is £60,000 for 2023/24, and £40,000 from 2014/15 to 2022/23.
If this is exceeded, you get a charge at your marginal tax rate.
Any unused allowance can be carried forward for up to 3 years.
There is no longer a lifetime allowance, however this used to be £1,073,100.
Tapered Annual Allowance
2023/24 - the annual allowance is tapered down to a minimum of £10,000.
This happens if your income for the year exceeds £260,000.
The rate of reduction is £1 for every £2 that exceeds £260,000 (divide the amount by 2).
If you’re self-employed, any TRANSITIONAL period additional profits are ignored regarding the £260,000 limit.
Relief at Source
Operates by allowing you to make a relievable pension contribution after deducting a sum equal to the basic rate of income tax (20%).
The pension admin will then claim the tax relief from HMRC.
Net Pay Arrangement
Where an employees’ payments to an occupational pension scheme are usually deducted from pay before calculating tax, so the employee doesn’t have to claim tax relief afterwards.
Relief by Making a Claim
Some providers of retirement annuity contracts don’t operate the ‘relief at source’ system.
Payments are made gross and tax relief is given by deducting them from TOTAL INCOME.
You can contribute up to 100% of relevant UK earnings.
Taxation of Employee Benefits
A type of non-monetary compensation e.g. pension provision, medical cover or a company car.
They are treated as earnings of employment, so are taxable.
Cash Equivalent
You are taxed on the cash equivalent of the benefit. This is defined as the cost to the employer.
-Any contribution made by the employee towards the cost is deducted from the cash equivalent
-The cost to the employer of actually providing an ‘in-house’ benefit is known as the ‘MARGINAL COST’.
Use of Assets
If you have use of an asset (excluding a car or accommodation), the cash equivalent is:
-the ‘annual value’ of the use of the asset (20% of the market value of the asset when you could first use it)
-any expenses incurred by the employer in maintaining the asset
If the asset is given to you outright, the tax charge is based on the market value of the asset AT TIME OF TRANSFER.
If you could use the asset BEFORE its given to you, the tax charge is the higher of:
-the market value of the asset at time of transfer, OR
-the market value of the asset when you were first able to use it (less any amounts already taxed as benefits)
In-House Benefits
-Goods & services sold in the usual course of the employer’s business, provided free or at a discount
-Services and facilities provided in-house
-Assets used in the business and made available for an employee’s private use, and then subsequently transferred to the employee
Calculation of Car Benefit
Calculated as a percentage of the list price of the car (the % based on the car’s CO2 emissions).
The bases of taxation for 2023/24 is:
-2% charges for cars that can only be driven in zero-emission mode
-For hybrid car with emissions between 1 & 50 g/km, the electric range of the car is used to determine the car benefit package
Free Fuel for Private Use
-Charged as a % of a set figure announced each year. 2023/24 figure is £27,800
-% used is the same used for car benefit purposes and ranges from 2% to 37%.
-The fuel benefit is reduced proportionately if the car is only available for part of the year or not available for a period of 30 days or more.
-The fuel benefit is reduced proportionately if the car fuel is only provided for part of the year.
Green Transport
NO TAX CHARGE for benefits aimed to encourage employees to travel to work other than by private car.
Mileage Allowances
NO TAX CHARGE if you use your private vehicle for business use and then get reimbursed.
TAX CHARGE if you are reimbursed for costs of private travel.
Company Vans
TAXABLE BENEFIT of £3,960 for employees provided with a company van + £757 fuel benefit for private journeys.
These can be reduced if the van cannot be used for more than 30days in a row or if an employee reimburses the private fuel use.
Beneficial Loans
If you receive interest-free or ‘cheap’ loans from your employer, you are taxed on the benefit you receive from the arrangement.
This is measured as the difference between the amount of interest you actually paid vs. the official interest rate (2.25% for 2023/24).
Living Accomodation
Where an employee lives in a rent-free accommodation or pays very low rent, there is a tax charge on the benefit.
Other Taxable Benefits
-Cash vouchers
-Non-cash vouchers
-Credit tokens
-Employee liabilities
-Medical Insurance
Benefits Wholly or Largely Exempt from Tax
- Group IP
-Meals
-Mobile phones
-Long service awards
-Suggestion schemes
-Work training
-Relocation & removal expenses
-Home-working
Workplace nurseries
-Liability insurance
-Pension advice
-Trivial benefits
Personal Allowances
The personal allowance is deducted after working out your aggregate income minus reliefs from total income.
Married couple’s allowance is a TAX REDUCER.
You can transfer 10% of your personal allowance to a spouse or civil partner - this is a TAX REDUCER.
Eligibility for Personal Allowances
Any UK resident.
For non-UK resident if you are:
-a UK citizen
-nationals of a country in the EEA
-are, or were employed in the service on the Crown or a missionary society
-employed in the service on territory under HM protection
-resident of IoM or Channel Islands
-previous UK resident however are abroad for the sake of your health or health of a family member
-person whose late spouse/civil partner were in the service of the Crown
Anyone paying tax on the remittance basis is not entitled to personal allowances - EXCEPT if their unremitted overseas income for the year is less than £2,000.
Personal Allowance
All qualifying individuals have a personal allowance of £12,570.
No minimum age requirement.
The allowance is gradually reduced to £0 where someone’s adjusted net income is more than £100,000.
Adjusted Net Income
NET INCOME (total income - deductions for loss relief and interest payments) - GROSS AMOUNT OF PERSONAL PENSION CONTRIBUTIONS & GIFT AID DONATIONS.
Marriage Allowance
You can transfer 10% of the personal allowance to a spouse/civil partner
Married Couple’s Allowance
IF YOU OR YOUR SPOUSE WERE BORN BEFOE 6 APRIL 1935, you have a married couple’s allowance of £10,375.
If you have an adjusted net income of over £34,600, the married couple’s allowance is reduced by £1 for every £2 over a base allowance of £4,010.
Blind Person’s Allowance
£2,870 for registered blind people
Tax Charge - Step-By-Step
STEP 1
Calculate all the pre-tax income for the year. Income is then taxed in the following order:
- Earnings, pensions, rental income & any income not classed as savings or dividend income
- Savings income
- Dividend income
- Chargeable gains under life assurance policies
STEP 2
Deduct reliefs from total income in the following order:
- from earnings & pensions
- from savings income
- from dividend income
- from chargeable gains under life assurance policies
STEP 3
Deduct the personal allowance
£12,570 (+ blind person’s allowance if applicable).
STEP 4
Calculate the amount of any payments for which higher & additional rate relief is given by extending the basic & higher rate bans.
E.G. pension contributions paid net & gift aid donations.
STEP 5
Calculate the tax on the remaining income in the order shown in STEP 1.
STEP 6
Deduct any TAX REDUCERS.
Payment of Tax
Tax deducted at source from investment income or by PAYE is set against the tax liability as calculated.
-If a balance of tax payable remains, you are liable to pay it to HMRC under self assessment, or adjusting next year’s PAYE code.
-If tax deducted is MORE than the initial tax liability, the excess is repaid.
Tax - Marriage/Civil Partnership
Couples are taxed separately.
In certain conditions you can transfer 10% of your personal allowance to your partner (£1,260).
Taxation of Children’s Income
Children are subject to tax the same way adults are.
High Income Child Benefit Charge
There’s an income tax charge for those who receive Child Benefit (or their partner does), and have an adjusted net income of more than £50k.
-If salary = £50k to £60k, the charge is 1% of the child benefit amount for every £100 over £50k.
-If salary = >£60k, the charge is the equivalent of the full child benefit amount.
-If both partners have income >£50k, the charge is made to the partner with the higher income.
-Tax is collected through self-assessment.
-Child Benefit for 2023/24 is £24 pw for the 1st child, and £15.90 pw for each subsequent child.
Income Tax Liability of Trusts
If a trust has at least one trustee resident in the UK, there is potentially a liability to income tax on the total income.
Bare Trusts
The asset is in the name of the nominee (trustee), but the actual asset and income belong to the BENEFICIARY.
Income is taxable as the beneficiary’s income, therefore are the ones liable to tax.
Trust income must be included on the beneficiary’s self-assessment tax return.
Qualifying Beneficiaries & Trusts
Special tax treatment is available to trusts where the individuals fit within certain definitions.
- A disabled person refers to someone who is eligible for the following benefits:
-Attendance allowance
-DLA
-PIP
-Constant attendance allowance
-AFIP - A relevant minor is a child under 18 and at least one parent has died.
The eligible trusts for relevant minors are:
-Statutory trusts
-Trusts established under the will of the deceased parent
-Trusts established under the Criminal Injuries Compensation Scheme
Life Interest & Interest in Possession Trusts
There is an interest in possession when one or more beneficiaries have a right to the trust income.
Tax on the Trustees
-Tax on SAVINGS INCOME is at 20% (the personal savings allowance is NOT applicable to trustees)
-Bank & building society interest is paid gross
-Tax on dividends is at 8.75% (the dividend allowance is NOT applicable to trustees)
-Tax on other income received by the trustees is 20% and paid through self-assessment
Trustees complete a R185 form (Trust Income) which details the net income & tax deducted, and give this to the beneficiaries for their tax returns.
Tax on the Beneficiaries (BARE)
They must add trust income from the R185 to their other income for that tax year to calculate their income tax liability.
If they’re a non-taxpayer, they may be able to reclaim tax deducted.
-The beneficiary will have no further tax to pay if they’re a basic-rate taxpayer and the additional income doesn’t push them into the higher bracket.
-A beneficiary who is higher or additional-taxpayer, will have a further tax liability at the appropriate rate, LESS the rate at which tax has already been paid by the trustees.
Dividends from Shares & UTs
Dividend Allowance = £1,000
In excess of this they’re subject to:
-Basic-rate tax payers = 8.75%
-Higher-rate tax payers = 33.75%
-Additional-rate tax payers = 39.35%
TRUSTEES are NOT entitled to the dividend allowance and their liability is for BASIC RATE ONLY.
Discretionary Trusts and Accumulation & Maintenance Trusts
With a discretionary or A&M trust, the trustees have discretion on how the income & capital of the trust is distributed.
Income Tax position -
-Trustees do NOT get PSA or DA
-Trustees have a standard rate band of £1,000. Where there’s more than one trust, this band is dividend equally between them. The minimum standard rate band is £200.
-Standard rate band means income within this band will see tax at 20% for NON-DIVIDEND income and 8.75% for DIVIDENDS.
-Standard rate band will be used for non-dividend income first, and then dividend income.
-Income above this band, will see tax at 39.35% for DIVIDENDS and 45% for other income.
Tax on the Beneficiary (DISCRETIONARY & A&M)
