Chapter 1 - Income Tax

Question 1

Types of Income

Answer 1

Trading Income
Employment Income (Inc pensions and state benefits) 
Income from Property 
Investment Income 
Other Income

Question 2

Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

Answer 2

Contains rules for income from employment, pensions and State benefits

Question 3

Income Tax (Trading and Other Income) Act 2005 (ITTOIA)

Answer 3

Covers income from trading, property, savings and other investments and miscellaneous sources

Question 4

Trading Income

Answer 4

Income tax charged on the income from trades, professions and vocations carried out by the UK residents around the world, and by non UK residents in the UK

Question 5

Basis of assessment

Answer 5

Self employed can prepare accounts up to whatever date in the tax year they choose, do not have to coincide with the tax year

Question 6

Trading allowance

Answer 6

£1,000, trading Income is exempt from tax and does not have to be declared on a tax return if it is less than £1,000 (before deducting expenses)

Question 7

Employment income

Answer 7

Salaries, fees, bonuses and benefits in kind. Deducted by employee under the PAYE

Question 8

Income from Property

Answer 8

Includes rents and various other receipts from letting property
Taxed whether it is received by a UK or non UK resident
Income from overseas property is taxable only when the property business is carried by a UK resident
Accounts have to be drawn up to 5th April or 31st March
Allowance of £1,000
Rent a room relief of £7,500 can be claimed against income from letting part of one’s home

Question 9

Investment income (savings and dividend income)

Answer 9

Saving income - Inc interest, purchased life annuity payments and gains from life assurance contracts

Dividend income - stock dividends and dividends from shareholdings overseas companies

Question 10

Other Income

Answer 10

E.g receipts from intellectual property, beneficiaries income from estates in administration

Question 11

Employed or self-employed

Answer 11

Contract of service - employee
Contract for services - self employed
Attractions of self employment - treatment of expenses & lower level of NICs
Salaried members of LLPs - member is taxed as an employee unless the conditions are met (more than 20% of the remuneration is based on the profitability of the LLP as a whole, member has a significant say in the running of the business, member has made a significant capital contribution to the business - at least 25% of their expected income from the LLP for a particular tax year.

Question 12

Deduction of tax

Answer 12

Bank and building society interest and interest distributions from unit trusts, OEICs and investment trusts are paid gross without any tax being deducted at source.

Question 13

Interest and annuities

Answer 13

Tax is deducted at the basic rate of 20% from some payments of interest and annuities before the recipient receives it.

Interest - tax deducted where the interest is from a company or a partnership of which a company is a member, and it is paid to an individual, a partnership or a non UK company. Interest on corporate bonds is paid gross.

Non tax payers can reclaim the 20% tax.

Annuities - payer must deduct 20% tax where the payments are not paid wholly out of profits or gains subject to income tax.

Payment made from taxed income - payer can deduct the 20% tax and keep it.

Question 14

Dividend income

Answer 14

Dividends received from a UK company are received as gross income.

Question 15

Total income and the amount on which tax is calculated

Answer 15

The sum of the amounts of income on which the taxpayer is charged income tax for the tax year

Tax relief is given by deduction from income - qualifying interest payment, allowable business losses, gifts to charities of shares and securities, qualifying contributions to pensions

Question 16

Interest payments

Answer 16

Interest payments are allowable deductions from total income if the loan is taken out for qualifying purposes.
Main qualifying purposes - purchase of shares in the borrowers company or to finance loads to company, investment in partnership, to buy plant and machinery for use in a partnership, payment of inheritance tax.

Adjusted total income - total income with any charitable donations made through payroll gifting being added back, and all types of pension payment being deducted.

Adjusted total income=total income+charitable donations through payroll gifting-all types of pension payments

Internet on a loan to purchase or develop land and buildings is not a deductions from total income. No tax relief for interest for property that is not let.

Question 17

Share purchase and loans to companies

Answer 17

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 that is resident within EEA.

A close company - controlled by five or fewer shareholders, or by its directors regardless of their number.

Relief is available of the borrower has more than 5% of the shares at the time of paying the interest.

Relief is at the borrowers top tax rate but is subject to the cap of £50,000 or 25% of adjusted total income.

No relief for interest is available if the loan is used to buy shares on which EIS relief is claimed.

Question 18

Partnership investment

Answer 18

Tax relief is available to a partner who pays interest on a loan

Question 19

Purchase of plant and machinery

Answer 19

Tax relief is available to a partner who pays interest on a loan used to buy plant or machinery for use in the partnership business.
The partners must be entitled to capital allowance on the machinery or plant.
Relief is similarly available to an employee who buys machinery or plant other than cars for use in their employment subject to the same capital allowance conditions
Relief is at the borrowers top tax rate, subject to cap of £50,000 or 25% of adjusted total income.

Question 20

Payment on inheritance tax

Answer 20

Interest is allowable if it is payable on the loan used to pay IHT on death
Relief is restricted to one year from making of the loan
Relief is at the borrowers top tax rate, subject to a cap or £50,000 or 25% of adjusted total income
The borrower must be a personal representative of the deceased

Question 21

Charitable gifts

Answer 21

The main tax efficient ways of making financial donations to charities - gift aid, payroll giving, gifts of certain assets

Gift aid - the donation is treated as a payment on which the donor has already paid tax at the basic rate of 20%. The charity can recover the tax deducted. The donors basic and higher rate limits are increased by the grossed up amount of the donation. The grossed up donation is an amount which after deducting income tax at 20% is equal to the payment made to the charity. The charity must be established in the UK or an EU member.

Payroll giving - employees can make regular gifts to charities of any amount in tax efficient way through the employers payroll system. The employer deducts the payment from salary before calculating tax under PAYE, this gives the employee tax relief at their highest rate. Donations made through payroll giving are not shown on a tax return or included in a tax computation.

Gifts of assets - individuals who donate certain assets to charity benefit from income tax relief on the full marked value of the gift. This relief is added to the CGT exemption for gifts to charity. Assets that qualify are listed shares and securities, unlisted shares and securities dealt on a recognised stock exchange, units in authorised unit trust, shares in OEICs, holdings in foreign collective investment schemes, any freehold or leasehold property given the whole interest. The tax reduction is equivalent to 30% of the value of the pre eminent object. The tax reduction can be used against the individuals income or CGT liabilities and can be spread forward over a period of up to five years.

Question 22

Pension payments

Answer 22

Tax relief for relievale pension contributions is given through - relief at sources, net pay arrangement, relief by making a claim.

Relief at source - operates by allowing an individual to make a relievale pension contribution after deducting a sum equal to the basic rate of income tax (20%).
The payer gets basic rate tax relief by deduction from the payments.

Net pay arrangement - employees payments to an occupational pensions scheme are usually ducted from pay before calculating tax and so the employee does not have to claim tax relief on them.

Relief by making a claim - retirement annuity contract providers do not operate relief at source. Payments are made gross and tax relief is given by deducting them from total income. Individuals can contribute up to 100% of relevant UK earnings.

Question 23

Taxation of employee benefits

Answer 23

Also known as fringe benefit - non monetary compensation.

Unless benefits have been payrolled, employers have to complete HMRC form P11D for each employee who has been provided with benefits or had received expense payments.

Basis of taxation - any benefits provided are treated as earnings of the employment and are taxable.

Cash equivalent - employees are taxed on the cash equivalent of the benefit rather than on its own second hand value. The cash equivalent is defined as the cost to the employer of providing the benefit. Marginal cost is the additional cost incurred in providing the employee with the benefit.

Use of assets - if an employee has the use of an asset exc a motor car or accommodation, the cash equivalent is: the annual value of the use of the asset + any expenses incurred by the employee in maintaining the asset.
The annual value is taken as 20% of the market value of the asset when it was first provided to the employee.