Chapter 6 – UK Tax Compliance And Self Assessment (1 OR 2)

Question 1

What are the 2 main ways tax is paid in the UK?

Answer 1

Self assessment

Pay as you earn (PAYE)

Question 2

What are the Key self-assessment dates? LOOK AT 6.2.1

Question 3

Where a taxpayer has underpaid via the PAYE system, they can ask for that underpayment to be taken from future PAYE collections.

This is only possible if the underpayment is less than £3,000.

Question 4

What are the 2 key tax payment dates?

Answer 4

31st January
The first payment on account
The balancing payment from the previous tax year

31st July
The second payment on account

NOTE: The UK operates a ‘current year’ taxation system which means that the first payment on account is due on the 31st January of the tax year to which the liability is created.

In reality, this means that the exact tax liability is likely to be not known yet, either because the individual hasn’t finished their trading year, or because the calculation hasn’t been finalised.

As a result, the first payment on account is usually an estimate, based on the 50% of the tax liability from the previous tax year.

Look at example 6.2

Question 5

Look at example 6.2 AND do activity 6.1

LEARN WHY THE BALANCING PAYMENT AND FIRST PAYMENT ON ACCOUNT ARE DUE ON SAME DAY

Question 6

This linked to 6.2

If a tax payer knows that they are overpaying on any of the payments of account (for example, if they know their income has dropped) what can they do?

A taxpayer may also be able to ‘carry back’ tax relief, such as for some personal pension payments. When does this get repaid in the process?

Answer 6

They can claim a reduction in the payment on account. (If this is claimed unjustifiably (ie there was no way they were overpaying) interest can be charged)

The relief is given as a repayment for the tax assessment for the year in which the claim arises. The carry back does not change any of the payments on account (meaning they will have to wait to receive the relief back

Question 7

As seen above, there are set dates for filing and paying tax via self-assessment/. What happens if this isnt done?

Answer 7

Interest can be charged and penalties can be given

Interest -
Interest can be charged automatically on late payments or underpayments.

Penalties -
5% on unpaid tax more than 30days after balancing payment is due. Then 5% more if still not paid after 5 months. Then another 5% if still not paid 6 months are that

fixed £100 penalty for late tax return. If more than 3 months late £10 is added everyday for 90 days (£900 in total)

Question 8

What is a tax payer makes a genuine mistake in relation to their tac return?

Answer 8

Genuine mistakes (if identified by the taxpayer) can also be rectified as amendments are allowed at any time for 12 months after 31 January following the tax year.

Question 9

As the UK operates a system of self-assessment, mistakes are likely to happen, but HMRC only regularly checks submissions for obvious errors.

How does HRMC made non obvious errors?

Answer 9

HMRC can order a compliance check (an ‘enquiry’) either randomly or targeted; they do not need to give a reason either way.

These are usually started within 12 months of receiving the tax return; any enquiries after this time will only be generated because of a suspicion of fraud or negligent conduct

Question 10

What is Pay as you earn (PAYE)?

Answer 10

PAYE is administered by employers on behalf of their employees. They deduct income tax and Class 1 primary NICs from all payments to employees and directors.

Question 11

What is the PAYE code?

Answer 11

Its someone’s tax code

The code is designed to ensure the correct amount of tax is deducted, so that the employee does not have to complete a tax return

Question 12

What do each part of the tax code show?

Answer 12

Each PAYE code is made up of:
A letter. This indicates the type of personal allowance to which the employee is entitled

For example, ‘L’ indicates the individual is entitled to the basic personal allowance

A ‘K’ code indicates there is no tax-free income available to that individual, because their taxable benefits in kind and other deductions exceed their allowances

A number. This indicates the amount of tax-free income to which the employee is entitled

The format removes the last digit (but always assumes it is a ‘9’)

A ‘K’ code indicates the notional additional income that needs to be taxed

A common tax code = 1,257L = 12579 personal allowance
Ie the employer can deduct 1/12th of 12579 each month from gross pay before calculating and deducting tax due

Question 13

What is the Real Time Information (RTI) system?

Answer 13

With RTI:

Employers Send tax and NIC information to HMRC electronically every time employees are paid. RTI must be filed electronically, removing the option of running a manual payroll

Employers previously had dates that they had to stick to bu tthis is no longer the case because RTI was introduced which modernised the PAYE system for employers

Question 14

Look at end of 6.3 about PAYE system

Question 15

RTI has severely cut down an employer’s year-end reporting requirements to HMRC. However, they still must provide relevant information to employees, particularly concerning benefits in kind:

P11D forms must be completed for each employee with taxable benefits in kind
A P11D(b) form shows the employer NIC due
The returns are due by 6 July

Question 16

Remember: Tax planning is recommended; tax mitigation is legal but often raises a moral issue whereas tax evasion is illegal

Question 17

The self-employed pays their income tax in three instalments. Payments on accounts in January and July with a balancing payment made in the January following the end of the tax year being assessed

Question 18

Rob is a self-employed builder. He had a total income tax liability in 2023/24 of £9,200 of which

£7,600 was paid on account prior to the submission of his tax return. In 2024/25 his income rose, and his accountant has calculated that his total tax due for this tax year is £11,000.

Which option accurately reflects Rob’s income tax payments for 2024/25?

£3,666 each by 31/1/2024, 31/7/2024 and 31/1/2025

£4,600 each by 31/1/2024 and 31/7/2024 and £1,800 by 31/1/2025

£4,600 each by 31/1/2025 and 31/7/2025 and £1,800 by 31/1/2026

£5,500 each by 31/1/2025 and 31/7/2025

Answer 18

£4,600 each by 31/1/2025 and 31/7/2025 and £1,800 by 31/1/2026

The first payment on account is due on the 31st January of the tax year in question, in this case 31st January 2025. The payment is 50% of the last tax year’s tax liability of £9,200, so £4,600. The second payment on account, for the same amount, is due on the 31st July following the end of the tax year in question; 31st July 2025. The final, balancing payment is made on 31st January of the following tax year; 31st January 2026. Here, the difference between the tax due and the tax paid is due, meaning a further £1,800 (£11,000 - £9,200) is paid

NOTE: The question is not asking about the balancing payment for the first year (ie, 1600)

Question 19

Jenny is employed and a higher-rate taxpayer with more than £5,000 of tax owing. How will she make any payments on account under the self-assessment tax regime?

Through the P11D system

Through the PAYE system

By making payments twice a year

By annual payments due on 31st January

Answer 19

By making payments twice a year

Employed people with less than £3,000 of tax due can ask for the amount due to be collected via PAYE (as long as they request this by 31/10 if on paper and 30/12 if filing online).

Jenny hasn’t got that choice, and so will pay the amounts due via the standard payment on account dates of 31st January and 31st July.

Question 20

BTS Ltd, an employer, is not responsible for…

reporting details of employees pay and deductions via real time reporting

paying the correct amount of tax and NICs to HMRC monthly

giving each employee a payslip, showing wages and deductions

completing each employee’s tax returns by 31st January of each tax year

Answer 20

completing each employee’s tax returns by 31st January of each tax year

Hopefully, a fairly obvious answer. Individuals are responsible for their own tax returns.

Question 21

Gary will pay income tax in three instalments. This is most likely to be because

He is self-employed

He has underpaid via the PAYE system

He was previously non-UK resident

He is the director of his own personal services company

Answer 21

He is self-employed

Because the self-employed pay their income tax via the self-assessment system they usually pay their income tax in 3 instalments; two payments on account and a balancing payment.