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ACA Tax > Chapter 2 - Introduction to Income Tax > Flashcards

Chapter 2 - Introduction to Income Tax Flashcards

1
Q

Q: What tax year applies to the Principles of Tax exam?

A

A: The tax year 2023/24, from 6 April 2023 to 5 April 2024.

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2
Q

Q: What are the two main types of income for tax purposes?

A

A: Chargeable (taxable) income and exempt income.

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3
Q

Q: Give examples of exempt income.

A

A: Exempt income includes:

  • Income from ISAs (including Junior ISAs)
  • Interest from National Savings Certificates
  • Lottery and betting winnings
  • Certain social security benefits (e.g., housing benefit)
  • Scholarships
  • Income tax repayment interest
  • Compensation from certain schemes (e.g., Windrush compensation)
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4
Q

Q: What is chargeable income?

A

A: Chargeable income is all taxable income that must be reported gross (before tax is deducted) in tax computations.

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5
Q

Q: List some types of chargeable income.

A

A: Chargeable income includes:

  • Trading income
  • Property income
  • Interest income
  • Dividend income
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6
Q

Q: How is employment income treated in terms of tax deduction?

A

A: Employment income is generally received net of tax under the PAYE system, with a credit for tax already paid.

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7
Q

Q: What is net income?

A

A: Net income is the total of all chargeable income after deducting any reliefs (although no reliefs are tested in Principles of Tax).

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8
Q

Q: How is net income categorized for tax purposes?

A

A: Net income is divided into:

  1. Non-savings income (e.g., trading income, employment income)
  2. Savings income (e.g., bank interest)
  3. Dividend income
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9
Q

Q: In what order is income taxed in the UK tax system?

A

A: Income is taxed in this order: Non-savings income, Savings income, Dividend income.

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10
Q

Q: What is the scope of income tax in the UK?

A

A: Income tax is payable by individuals resident in the UK, based on their taxable income earned during the tax year (6 April to 5 April).

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11
Q

Q: What is taxable income?

A

A: Taxable income is net income after deducting the personal allowance (PA), applied in the order of non-savings, savings, and then dividend income.

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12
Q

Q: In what order is the personal allowance (PA) deducted?

A

A: PA is deducted in this order: 1. Non-savings income, 2. Savings income, 3. Dividend income.

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13
Q

Q: What are the tax rates for non-savings income?

A

A: 20%, 40%, and 45%.

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14
Q

Q: What are the tax rates for savings income?

A

A: 0%, 20%, 40%, and 45%.

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15
Q

Q: What are the tax rates for dividend income?

A

A: 0%, 8.75%, 33.75%, and 39.35%.

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16
Q

Q: What is the personal allowance (PA) amount for the 2023/24 tax year?

A

A: £12,570.

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17
Q

Q: Can the personal allowance be used for taxes other than income tax?

A

A: No, the PA only applies to income tax.

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18
Q

Q: How is personal allowance withdrawn for those with income over £100,000?

A

A: It is reduced by:

(AdjustedNetIncome − £100,000) × 0.5.

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19
Q

Q: At what income level is the personal allowance fully removed?

A

A: £125,140 or more.

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20
Q

Q: What are the non-savings income tax rates for 2023/24?

A

A:

  • Basic rate (BRB): £0 – £37,700 (20%)
  • Higher rate (HRB): £37,701 – £125,140 (40%)
  • Additional rate (ARB): £125,140+ (45%)
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21
Q

Q: What are the savings income tax rates for 2023/24?

A

A:

  • Starting rate (SRB): £0 – £5,000 (0%), if savings income falls within
    the first £5,000 of taxable income
  • Basic rate (BRB): £0 – £37,700 (20%)
  • Higher rate (HRB): £37,701 – £125,140 (40%)
  • Additional rate (ARB): £125,140+ (45%)
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22
Q

Q: What are the dividend income tax rates for 2023/24?

A

A:

  • Basic rate (BRB): £0 – £37,700 (8.75%)
  • Higher rate (HRB): £37,701 – £125,140 (33.75%)
  • Additional rate (ARB): £125,140+ (39.35%)
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23
Q

Q: What are the types of taxpayers based on income tax bands?

A

A:

  • Basic Rate Taxpayer (BRTP): Taxed only in BRB
  • Higher Rate Taxpayer (HRTP): Taxed in BRB and HRB
  • Additional Rate Taxpayer (ARTP): Taxed in BRB, HRB, and ARB
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24
Q

Q: What is the savings income nil rate band?

A

A: Available for taxpayers with taxable income below £125,140:

  • £1,000 for a BRTP
  • £500 for a HRTP
  • Nil rate band is taxed at 0% but counts toward the BRB or HRB.
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25
Q

Q: What is the dividend nil rate?

A

A: The first £1,000 of dividend income is tax-free but uses part of the BRB or HRB.

26
Q

Q: How does PAYE affect tax payable or repayable?

A

A: PAYE deducted from employment income is subtracted from income tax liability to prevent double taxation. If PAYE exceeds the income tax liability, a repayment is generated.

27
Q

Q: How does Gift Aid provide tax relief for a Basic Rate Taxpayer (BRTP)?

A

A: A BRTP like Emma receives a tax benefit from Gift Aid by making a donation grossed up. For every £80 donated, the charity receives £100, and Emma can claim back £20 (20% of £100) from HMRC, effectively reducing her tax liability.

28
Q

Q: How does Gift Aid provide tax relief for a Higher Rate Taxpayer (HRTP)?

A

A: The higher rate threshold is raised by the gross donation amount, providing additional tax relief up to 20%.

29
Q

Q: How does Gift Aid provide tax relief for an Additional Rate Taxpayer (ARTP)?

A

A: The higher and additional rate thresholds are raised by the gross donation amount, providing additional tax relief up to 25%.

30
Q

Q: What is the transferable marriage allowance?

A

A: One spouse can transfer £1,260 of their personal allowance to the other if the transferor has no tax liability or will remain a BRTP, and the recipient is a BRTP. This reduces tax liability by up to £252.

31
Q

Q: When must an individual notify HMRC if they need a tax return but haven’t received one?

A

A: An individual must notify HMRC by 5 October following the end of the tax year if they need a return but haven’t received one.

32
Q

Q: What are short tax returns, and who can use them?

A

A: Short tax returns are available for employees (who are not directors), pensioners, and traders with a turnover up to the VAT registration limit.

33
Q

Q: What are the specific deadlines for submitting a tax return?

A

A:

  • Paper tax return: Due by 31 October following the end of the tax
    year.
  • Electronic tax return: Due by 31 January following the end of the tax
    year.
    (Penalties apply if the return is submitted late.)
34
Q

Q: Can a tax return be amended?

A

A: Yes, HMRC may correct a return within nine months of filing, and the taxpayer can amend a return within 12 months after the later of 31 January following the end of the tax year or three months after the return was issued.

35
Q

Q: How long does a taxpayer have to claim ‘overpayment relief’?

A

A: A taxpayer can claim overpayment relief within four years of the end of the tax year to which the return relates.

36
Q

Q: How is repayment interest applied to overpaid income tax?

A

A: Repayment interest is paid by HMRC on overpaid income tax and penalties. Interest runs from the later of the due date or payment date to the day before repayment.

37
Q

Q: Is repayment interest subject to income tax?

A

A: No, repayment interest is exempt from income tax.

38
Q

Q: How is interest calculated for late payment of income tax?

A

A: Interest on late payments runs from the due date to the date payment is made. For additional tax due, interest runs from the submission date to the day before payment.

39
Q

Q: What happens if a tax return is submitted late?

A

A:
Penalties depend on how late the return is submitted:

  • 1 day late: £100 fixed penalty.
  • 3 months late: Additional £10 per day, up to 90 days, totalling £900.
  • 6 months late: Additional penalty of 5% of the tax due or £300
    (whichever is higher).
  • 12 months late: Another penalty of 5% of the tax due.
40
Q

Q: What is a discovery assessment?

A

A:
A discovery assessment is issued when HMRC identifies that tax has been underpaid due to a mistake or omission in the tax return.

  • Can be issued if HMRC discovers income or gains that were not
    declared.
  • Additional tax is payable with interest and potential penalties.
41
Q

Q: What happens if additional tax is due after amendments or discovery assessments?

A

A:

  • Interest is charged from the due date to the day payment is made.
  • HMRC charges interest on unpaid tax starting from the submission
    date (for discovery assessments) or the amendment date.
42
Q

Q: What is the time limit for making amendments to a tax return?

A

A:

  • A tax return can be amended by the taxpayer within 12 months
    from the later of:
    * 31 January following the end of the tax year.
    * 3 months after the return was issued.
  • HMRC may correct errors within 9 months of the actual filing date.
43
Q

Q: How is overpayment relief claimed?

A

A: Claims must be made in writing to HMRC

44
Q

Q: What is the Common Penalty Regime?

A

A: The Common Penalty Regime standardises penalties for errors, failure to notify HMRC, and late filing of returns across various taxes.

45
Q

Q: When do penalties for errors apply under the Common Penalty Regime?

A

A: Penalties apply when there are errors in returns, but no penalty is applied if the taxpayer took reasonable care and disclosed errors.

46
Q

Q: Does a taxpayer remain responsible for a return when using an agent?

A

A: Yes, the taxpayer is responsible for the correctness of the return even if an agent (e.g., accountant) is used.

47
Q

Q: How long does a taxpayer have to pay a penalty after it is issued by HMRC?

A

A: Penalties must be paid within 30 days of the assessment being issued by HMRC.

48
Q

Q: Can penalties be suspended?

A

A: Yes, penalties can be suspended for up to two years to allow the taxpayer to improve their records and compliance.

49
Q

Q: Can a taxpayer appeal a penalty?

A

A: Yes, the taxpayer can appeal against a penalty.

50
Q

Q: What types of errors can trigger penalties?

A

A: Penalties are charged for:

  • Understated tax
  • False or excessive loss claims
  • Incorrect tax repayments
  • Incorrect claims or reliefs
  • Failure to notify HMRC of an incorrect assessment within 30 days.
51
Q

Q: How are penalties for errors calculated?

A

A: Penalties are based on Potential Lost Revenue (PLR), which is the unpaid tax due to the error, and can be up to 100% of PLR.

52
Q

Q: What are the three types of errors and their penalty severity?

A

A:

  • Careless error: e.g., failing to check consistency with records.
  • Deliberate but not concealed: e.g., omitting large income amounts.
  • Deliberate and concealed: e.g., creating false invoices or destroying
    records.
53
Q

Q: How can penalties be reduced?

A

A: Penalties can be reduced if the taxpayer makes unprompted disclosure of the error, with a larger reduction for voluntary disclosure before HMRC identifies the error.

54
Q

Q: What happens if a taxpayer fails to notify HMRC?

A

A: A penalty applies based on PLR, but can be reduced to £Nil if the issue is rectified within 12 months via unprompted disclosure.

55
Q

Q: Can penalties apply to company officers?

A

A: Yes, penalties can be applied to company officers (e.g., directors) if their deliberate actions are responsible for the failure to notify.

56
Q

Q: What is a reasonable excuse for failing to meet tax obligations?

A

A: A reasonable excuse can include:

  • Death of a close relative
  • Hospitalization
  • Serious illness
  • Disability-related delays
  • Computer/software failure
  • Delays due to fire, flood, theft, or postal issues.
57
Q

Q: Is a lack of funds to pay tax a reasonable excuse?

A

A: No, a lack of funds is not a reasonable excuse.

58
Q

Q: Which taxes does the penalty regime for late filing apply to?

A

A: The penalty regime for late filing applies to income tax (personal and partnership returns) and capital gains tax (personal tax return).

59
Q

Q: How are penalties for late filing determined?

A

A: Penalties depend on the length of delay in submitting the return. The specific amounts are listed in the table for Income tax and CGT penalties for late filing.

60
Q
A

ACA Tax (10 decks)

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