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Personal Taxation - R03 > Chapter 1 - Income Tax > Flashcards

Chapter 1 - Income Tax Flashcards

1
Q

What are the main Income Tax allowances?

A
  • Personal allowance
  • Marriage allowance
  • Married couples allowance
  • Personal savings allowance
  • Dividend allowance
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2
Q

How much is the personal allowance for tax year 17/18 and describe briefly how it works.

A

£11,500

The personal allowance is how much income an individual can have before they start paying income tax.

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3
Q

Over what income level does the personal allowance begin to be reduced and at what rate?

A

The personal allowance is reduced £1 for every £2 of income that exceeds £100,000.

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4
Q

Bill earns £105,000 what is his personal allowance?

A

Income exceeds £100,000 by £5,000 therefore Bill’s personal allowance is reduced by £2,500 (£5,000/2).

£11,500 - £2,500 = £9,000 new personal allowance

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5
Q

How much is the marriage allowance for tax year 17/18 and describe briefly how it works.

A

£1,150 (10% of the personal allowance)

The marriage allowance allows an individual to transfer up to £1,150 of their unused personal allowance to their spouse.

This is given to the recipient as a deduction to their tax liability, essentially increasing their personal allowance to £12,650

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6
Q

What are the conditions for the marriage allowance?

A

Must be born after 6th April 1935

Transfers of less than £1,150 not possible

Spouse must be a basic rate taxpayer (i.e not higher or additional)

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7
Q

How much is the married couples allowance for tax year 17/18 and describe briefly how it works.

A

£8,445

10% of available married couples allowance is deducted from the individuals tax liability

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8
Q

Who can qualify for married couples allowance?

A

Married couples where one spouse is born before 6th April 1935

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9
Q

Over what income level does the married couples allowance begin to be reduced and at what rate?

A

The married couples allowance is reduced £1 for every £2 of income that exceeds £28,000, to a minimum of £3,260.

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10
Q

What is the minimum amount of married couples allowance?

A

£3,260

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11
Q

How much is the personal savings allowance for tax year 17/18 and describe briefly how it works.

A

£1,000 for a basic rate taxpayer
£500 for a higher rate tax payer
£0 for an additional rate taxpayer

The personal savings allowance is how much savings interest you can generate a tax year before paying tax on it

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12
Q

How much is the dividend allowance for tax year 17/18 and describe briefly how it works.

A

£5,000

The dividend allowance is how much dividend income you can generate a tax year before paying tax on it. The £5,000 can not be reduced

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13
Q

What income tax is due for Mrs Trade who has earned income of £65,000

A

£14,700

£11,500 x 0% = £0
£33,500 x 20% = £6,700
£20,000 x 40% = £8,000

£6,700 + £8,000 = £14,700

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14
Q

What income tax is due for Mr Union who has earned income of £28,000

A

£3,300

£11,500 x 0% = £0
£16,500 x 20% = £6,700

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15
Q

If Harry has earned income of £10,000 and savings interest of £10,000 what is his income tax liability in 17/18?

A

£500

£10,000 earned income is cover by the personal allowance. £1,500 of PA is remaining

Of the savings interest;
The first £1,500 is covered by the remaining PA
The next £5000 is covered by the 0% savings rate band
The next £1,000 is covered by the personal savings allowance

This leaves £2,500 taxable at 20% = £500

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16
Q

If Jean has earned income of £14,000 and savings interest of £6,000 what is her income tax liability in 17/18?

A

£1,000

The earned income is £2,500 over the personal allowance x 20% = £500

Of the savings interest;
The 0% savings rate band is reduced by £2,500 due to the earned income.
The first £2,500 is covered by the 0% savings rate band
The next £1,000 is covered by the personal savings allowance
This leaves £2,500 taxable at 20% = £500

£500 + £500 = £1,000

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17
Q

Bill earns £15,500 and has £15,000 of dividends. How much tax is due?

A
  • £15,500 - £11,500 = £4,000 x 20% = £800
  • £15,000 - £5,000 = £10,000 x 7.5% = £750
  • £800 + £750 = £1,550
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18
Q

John earns £11,500 and has £12,000 worth of dividends. How much tax is due?

A
  • £11,500 uses the personal allowance
  • First £5,000 of dividends are taxed at 0%
  • £7,000 x 7.5% = £525
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19
Q

In what order are various types of income taxed?

A

Earned income

Savings/Interest

Dividends

Gains from life assurance policies

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20
Q 
Simon has the following income;
Earned income - £95,000
Building society interest - £10,000
Dividend income - £7,000
What is his total income tax liability for 17/18?
A
  • Personal allowance = £112,000 - £100,000 = £12,000 / 2 = £6,000 reduction. £11,500 - £6,000 = £5,500
  • Personal savings allowance = £500

• Income = £5,500 X 0% = £0
£33,500 x 20% = £6,700
£56,000 x 40% = £22,400
£6,700 + £22,400 = £29,100

  • B Soc = £10,000 - £500 = £9,500 x 40% = £3,800
  • Dividends = £7,000 - £5,000 = £2,000 x 32.5% = £650
  • £29,100 + £3,800 + £650 = £33,350
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21
Q

Describe briefly how gift aid works.

A

All donations are treated as a payment on which income tax has already been paid. Therefore the charity reclaims the deducted tax from HMRC.

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22
Q

Why is gift aid beneficial to higher rate tax payers but not recommended for non taxpayers?

A

For a HRT the contribution extends the basic rate tax band by the amount of the gross contribution.

For a non taxpayer as no tax has been deducted from their income there is nothing for the charity top reclaim.

23
Q

Cheryl who is a HRT donates £5,000 to her favourite wildlife charity. How much can the charity reclaim from HMRC and what is the extension to Cheryl’s basic rate band?

A

o £5,000 / 0.8 = £6,250 gross contribution

o £6,250 - £5,000 = £1,250 can be reclaimed by the charity

o Cheryl’s basic rate tax band is also extended by £6,250

24
Q

With regard to company car benefit what additional rate is applicable to diesel cars?

A

3%

25
Q

With regard to company car benefit the % charge applied is based on C02 emissions which are rounded……..

A

Down to the nearest 5 g/km

26
Q

A car with a list price of £18,000 and CO2 emissions of 134 g/km what is the benefit cost?

A

£18,000 x 25% = £4,500

27
Q

A car with a list price of £25,000 and accessories of £6,000 has emissions of 123 g/km, what is the benefit cost?

A

£31,000 x 23% = £7,130

28
Q

What are the 2 main types of pension tax relief?

A

Relief at source and net pay

29
Q

Briefly explain how relief at source works for pension tax relief.

A

20% uplift paid on contributions. Common for payments into personal pension plans. For example – if you pay £10,000 into a pension this would be topped up by 20% by HMRC. £10,000 / 0.8 = £12,500. The 20% is based on the gross contribution.

Higher and additional rate tax payers can claim further tax relief when completing their self assessment. This works by their basic rate tax band being extended by the gross contribution. The effect is that they pay more tax at 20% generating total tax relief of 40/45%.

30
Q

Briefly explain how net pay works for pension tax relief.

A

Typical for employer schemes. The pension contribution is made from the employees pay before any tax or national insurance is deducted. Therefore going directly into the pension gross.

31
Q

How much is the pension annual allowance?

A

£40,000

32
Q

Describe briefly how pension carry forward works.

A

Any amount of unused annual allowance from the previous 3 tax years can be carried forward to this year.

This could give a potential annual allowance of £160,000 (£40,000 for this year and 3 x £40,000 for the previous 3)

An individual must have the NRE’s to support this contribution to receive tax relief on the whole amount

33
Q

An individual has paid £15,000 & £20,000 into pensions in the last 2 years and none this, what carry forward do they have available this year?

A

£125,000

£40,000 - £15,000 = £25,000 + 
£40,000 - £20,000 = £20,000 + 
£40,000 + 
£40,000 
= £125,000
34
Q

What impact can an individuals income have on what child benefit they will receive?

A

Child benefit is reduced at a rate of 1% for every £100 earned over £50,000

35
Q

Jill has 3 children so receives child benefit of £2,501. She earns £57,000. How much is the child benefit charge?

A
  • £7,000 / 100 = 70% reduction.

* £2501 x 70% = £1750.70 charge

36
Q

Steve has 1 child and receives child benefit of £1,076. He earns £52,000. How much child benefit does he receive?

A
  • £2,000 / 100 = 20% reduction
  • £1,076 x 20% = £215.20
  • £1,076 - £215.20 = £860.80
37
Q

Explain the tax position of a bare/absolute trust.

A

A bare trust is taxed on the beneficiary.

If the beneficiary is a BRT the trust pays BRT.

38
Q

Explain the tax position of a interest in possession trust.

A

An interest in possession trust is taxed at basic rate.

20% on savings and other income and 7.5% on dividends

39
Q

Explain the tax position of a discretionary trust.

A

An interest in possession trust is taxed at additional rate.

The trust has a £1,000 basic rate band anything over 1000 is taxed at additional rate.

45% savings and other income and 38.1% on dividends

40
Q

How are income distributions from a discretionary trust taxed in the hands of a beneficiary?

A

Income distributions from a discretionary trust are paid out with a 45% tax credit applying. Therefore the distribution is deemed to be net and depending on the clients tax status further tax may be due on the gross distribution amount.

For example

A payment is made to the beneficiaries of the ABC trust of £1,320. This is the net distribution and needs to be grossed up. 45% has been deducted at source so this is calculated as £1,320 / 0.55 = £2,400. £2,400 is the gross distribution. There was a tax credit of £1,080. The tax liability for the beneficiaries is calculated on the gross payment, for the majority of taxpayers this will constitute a reclaim.

41
Q

How is the income tax liability for a self employed person calculated?

A

Tax is based on earnings for the accounting period that ends in the tax year in question. For example if accounts are drawn up August to July, then profits for the period ending July 2017 (which is tax year 2017/18) these would be taxable in tax year 17/18.

42
Q

How much is the trading allowance and how does it work?

A

£1,000

£1,000 trading allowance which can be offset against trading income. If income higher can choose to deduct £1,000 trading allowance or work out and deduct all expenses.

43
Q

What is the major advantage of being self employed rather than employed?

A

Self employed people pay lower national insurance and have a more lenient treatment of expenses.

44
Q

Name 2 allowable interest payments that can be deducted from total income?

A

Any 2 of;

  • Purchase of shares in the borrowers company
  • Investment in a partnership
  • To buy plant and machinery for a partnership
  • To pay IHT
45
Q

What is the cap for interest payments that can be deducted from income?

A

£50,000 or 25% of income

46
Q

What is the taxable benefit for beneficial loans

A

The taxable benefit is the difference between the official rate which for 17/18 is 2.5% and the beneficial rate.

47
Q

If an employer loan is less than what amount it is tax free?

A

£10,000

48
Q

Is Private Medical Insurance a tax free or taxable employee benefit?

A

Taxable

49
Q

Is Personal Health Insurance a tax free or taxable employee benefit?

A

Tax free

50
Q

Name 4 employee benefits that are wholly or largely free of tax.

A

4 from the following;

group PHI, ,
meals, 
mobiles, 
long service award, 
training, 
home working, 
relocation expenses, 
suggestions schemes
51
Q

If money/assets is gifted from a parent to a child, what level of interest can it generate before becoming taxable in the hands of the parent.

A

£100

52
Q

Do gifts from grandparents fall foul of the £100 rule?

A

No

53
Q

What is the threshold for relocation and removal expenses paid by an employer before they become taxable?

A

£8,000

54
Q

Briefly explain how relief by making a claim works for pension tax relief.

A

This is on mainly older pension policies such as retirement annuity contracts that can not operate tax relief at source.

In these circumstances then tax relief is given by the contribution being made gross and the full amount deducted from the individuals total income for the year

Personal Taxation - R03 (11 decks)

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