Chapter 2 - Introduction to Income Tax Flashcards
Q: What tax year applies to the Principles of Tax exam?
A: The tax year 2023/24, from 6 April 2023 to 5 April 2024.
Q: What are the two main types of income for tax purposes?
A: Chargeable (taxable) income and exempt income.
Q: Give examples of exempt income.
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)
Q: What is chargeable income?
A: Chargeable income is all taxable income that must be reported gross (before tax is deducted) in tax computations.
Q: List some types of chargeable income.
A: Chargeable income includes:
- Trading income
- Property income
- Interest income
- Dividend income
Q: How is employment income treated in terms of tax deduction?
A: Employment income is generally received net of tax under the PAYE system, with a credit for tax already paid.
Q: What is net income?
A: Net income is the total of all chargeable income after deducting any reliefs (although no reliefs are tested in Principles of Tax).
Q: How is net income categorized for tax purposes?
A: Net income is divided into:
- Non-savings income (e.g., trading income, employment income)
- Savings income (e.g., bank interest)
- Dividend income
Q: In what order is income taxed in the UK tax system?
A: Income is taxed in this order: Non-savings income, Savings income, Dividend income.
Q: What is the scope of income tax in the UK?
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).
Q: What is taxable income?
A: Taxable income is net income after deducting the personal allowance (PA), applied in the order of non-savings, savings, and then dividend income.
Q: In what order is the personal allowance (PA) deducted?
A: PA is deducted in this order: 1. Non-savings income, 2. Savings income, 3. Dividend income.
Q: What are the tax rates for non-savings income?
A: 20%, 40%, and 45%.
Q: What are the tax rates for savings income?
A: 0%, 20%, 40%, and 45%.
Q: What are the tax rates for dividend income?
A: 0%, 8.75%, 33.75%, and 39.35%.
Q: What is the personal allowance (PA) amount for the 2023/24 tax year?
A: £12,570.
Q: Can the personal allowance be used for taxes other than income tax?
A: No, the PA only applies to income tax.
Q: How is personal allowance withdrawn for those with income over £100,000?
A: It is reduced by:
(AdjustedNetIncome − £100,000) × 0.5.
Q: At what income level is the personal allowance fully removed?
A: £125,140 or more.
Q: What are the non-savings income tax rates for 2023/24?
A:
- Basic rate (BRB): £0 – £37,700 (20%)
- Higher rate (HRB): £37,701 – £125,140 (40%)
- Additional rate (ARB): £125,140+ (45%)
Q: What are the savings income tax rates for 2023/24?
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%)
Q: What are the dividend income tax rates for 2023/24?
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%)
Q: What are the types of taxpayers based on income tax bands?
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
Q: What is the savings income nil rate band?
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.
Q: What is the dividend nil rate?
A: The first £1,000 of dividend income is tax-free but uses part of the BRB or HRB.
Q: How does PAYE affect tax payable or repayable?
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.
Q: How does Gift Aid provide tax relief for a Basic Rate Taxpayer (BRTP)?
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.
Q: How does Gift Aid provide tax relief for a Higher Rate Taxpayer (HRTP)?
A: The higher rate threshold is raised by the gross donation amount, providing additional tax relief up to 20%.
Q: How does Gift Aid provide tax relief for an Additional Rate Taxpayer (ARTP)?
A: The higher and additional rate thresholds are raised by the gross donation amount, providing additional tax relief up to 25%.
Q: What is the transferable marriage allowance?
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.
Q: When must an individual notify HMRC if they need a tax return but haven’t received one?
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.
Q: What are short tax returns, and who can use them?
A: Short tax returns are available for employees (who are not directors), pensioners, and traders with a turnover up to the VAT registration limit.
Q: What are the specific deadlines for submitting a tax return?
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.)
Q: Can a tax return be amended?
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.
Q: How long does a taxpayer have to claim ‘overpayment relief’?
A: A taxpayer can claim overpayment relief within four years of the end of the tax year to which the return relates.
Q: How is repayment interest applied to overpaid income tax?
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.
Q: Is repayment interest subject to income tax?
A: No, repayment interest is exempt from income tax.
Q: How is interest calculated for late payment of income tax?
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.
Q: What happens if a tax return is submitted late?
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.
Q: What is a discovery assessment?
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.
Q: What happens if additional tax is due after amendments or discovery assessments?
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.
Q: What is the time limit for making amendments to a tax return?
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.
Q: How is overpayment relief claimed?
A: Claims must be made in writing to HMRC
Q: What is the Common Penalty Regime?
A: The Common Penalty Regime standardises penalties for errors, failure to notify HMRC, and late filing of returns across various taxes.
Q: When do penalties for errors apply under the Common Penalty Regime?
A: Penalties apply when there are errors in returns, but no penalty is applied if the taxpayer took reasonable care and disclosed errors.
Q: Does a taxpayer remain responsible for a return when using an agent?
A: Yes, the taxpayer is responsible for the correctness of the return even if an agent (e.g., accountant) is used.
Q: How long does a taxpayer have to pay a penalty after it is issued by HMRC?
A: Penalties must be paid within 30 days of the assessment being issued by HMRC.
Q: Can penalties be suspended?
A: Yes, penalties can be suspended for up to two years to allow the taxpayer to improve their records and compliance.
Q: Can a taxpayer appeal a penalty?
A: Yes, the taxpayer can appeal against a penalty.
Q: What types of errors can trigger penalties?
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.
Q: How are penalties for errors calculated?
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.
Q: What are the three types of errors and their penalty severity?
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.
Q: How can penalties be reduced?
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.
Q: What happens if a taxpayer fails to notify HMRC?
A: A penalty applies based on PLR, but can be reduced to £Nil if the issue is rectified within 12 months via unprompted disclosure.
Q: Can penalties apply to company officers?
A: Yes, penalties can be applied to company officers (e.g., directors) if their deliberate actions are responsible for the failure to notify.
Q: What is a reasonable excuse for failing to meet tax obligations?
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.
Q: Is a lack of funds to pay tax a reasonable excuse?
A: No, a lack of funds is not a reasonable excuse.
Q: Which taxes does the penalty regime for late filing apply to?
A: The penalty regime for late filing applies to income tax (personal and partnership returns) and capital gains tax (personal tax return).
Q: How are penalties for late filing determined?
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.
