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SQE 1 > Chapter 8 - Income Tax > Flashcards

Chapter 8 - Income Tax Flashcards

1
Q

What do you need to know for SQE regarding Income Tax?

A

Who is liable for paying income tax and
types of income
how is it calculated
how is it charged

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2
Q

Who are chargeable persons?

A

Who are liable to pay IT
Individuals (including sole traders)
Individual partners
Trustees
Personal Representatives

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3
Q

Who pays corporation tax?

A

Companies
Corporate Partners on their income profits and capital gain

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4
Q

What is IT?

A

Income tax is a chargeable person’s income

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5
Q

Types of income?

A

Salary
Divedents ( a shareholders return on their investment)
Interest received
Trading profit (sole traders and partners)
The profit element of rent received

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6
Q

What is the difference between income and capital gain?

A

Capital gain accumulates over time while income is recurring in nature.

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7
Q

Which are the 3 key charging statutes?

A

Income Tax Act 2007
Income Tax (Trading and Other Income) Act 2005
Income Tax (Earnings and Pensions) Act 2003

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8
Q

Who pays IT (Income tax) on income-earned profits made during the income tax year?

A

Chargeable persons

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9
Q

How often is IT renewed?

A

Annually

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10
Q

What can change from year to year in income tax?

A

Rates,
thresholds,
exemptions and
reliefs,

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11
Q

What do you need to know for SQE?

A

The personal allowance for the current tax year]
The basic and the higher rate threshold
KEy rates for IT

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12
Q

What type of tax is Income Tax?

A

Progressive Tax

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13
Q

What does it mean progressive tax?

A

Progressive means that the rate increases as the income increases

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14
Q

What are individuals doing for the low rates?

A

Individuals make use for the lower rates

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15
Q

What do individuals do at a higher rate?

A

They pay IT at a higher rate as their income increases

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16
Q

How many steps are for calculating income tax?

A

5 steps

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17
Q

What is the first step for calculating income tax?

A

Calculate total income

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18
Q

What is the second step in calculating IT?

A

Deduct reliable relief (gives net income)

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19
Q

What is step 3i in calculating IT?

A

Deduct personal allowances = taxable income

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20
Q

What needs to be deducted before the tax is calculated?

A

Allowable relief and personal allowances must be deducted first

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21
Q

Can you tell from taxable income if someone is a basic rate, higher rate or additional rate taxpayer?

A

Yes

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22
Q

What is a BAsic rate taxpayer and how much is it?

A

A person whose taxable income does not exceed the basic rate threshold 37.7k in 2021/2022

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23
Q

Explain the higher rate taxpayer

A

A person whose taxable income does exceed the basic rate, but does not exceed the additional rate threshold 150K.

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24
Q

Explain the additional rate taxpayer

A

A person whose taxable income exceeds the basic rate threshold

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25
Q

Does the savings income needs to be separated from the dividend income?

A

Yes

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26
Q

What does NSNDI stand for?

A

Taxable non saving/non-divident income

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27
Q

How to calculate NSNDI?

A

Taxable income-savings income-divident income = taxable NSNDI

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28
Q

What is step 4 a) of calculating IT?

A

First - NSNDI

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29
Q

What is step 4 b) of calculating IT?

A

Second - savings income

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30
Q

What is the income tax main rates for NSDNI for Basic Rate, higher rate and additional rate?

A

20% - BR
40% - HR
45% - AR

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31
Q

What is the income tax rate for saving income for BR, HR and AR?

A

Same as for NSDNI but starter rate is 0%

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32
Q

What is step 4 c) of calculating IT?

A

Finally - dividend income

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33
Q

What is the income tax rate for dividend income for Basic rate, higher rate and additional rate?

A

Basic rate - 7.5%
Higher rate - 32.5%
Additional rate - 38.1%

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34
Q

What is the step 5 calculation of IT?

A

Add together the tax for each source and deduct any tax previously paid/deducted at source to give IT liability

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35
Q

What does Taxable income means again?

A

Means that the allowable reliefs and the personal allowances have been deducted.

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36
Q

Apply the IT rates on the following scenario:
Celine has a taxable NSNDI of 20K, Sandra - 52K
Gali - 200K

A

Celine is BRT - she will pay IT at 20%
Sandra is HRT - she will pay IT at the first 37.7 K and 40% on the balance
Gali is ART - he will pay 20% on 37.7 K, 40% on the balance up to 150K and 45% on the top slice of 50K

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37
Q

What is the first step of the of the It calculation?

A

Total income

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38
Q

Define total income

A

|s the aggregate gross income from each source without any tax deducted

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39
Q

When is income taxable?

A

When it comes from property income
profits of a trade or a profession
savings income
employment and pensions income

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39
Q

Which income is exempt?

A

Child benefit, interest paid on national savings certificates
Interest from individual savings account
Interest on damages for personal injuries or death

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39
Q

What types on income are payed gross?

A

Interest payed by Banks and building societies
Dividends payed to shareholders
Rental income

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39
Q

What means some income will be payed net?

A

It means IT will be deducted at source

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39
Q

What needs to be included in the full tax calculation?

A

The gross amount plus the IT deducted already

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39
Q

How to charge IT on employees and directors?

A

Can be done under IEPTA statute

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39
Q

Are the benefits that derive from the office or employment are liable to tax?

A

Yes, all benefits that derive from the office or employment are liable to tax

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39
Q

What are employees taxed on?

A

They are taxed on the cost to the employer of providing the benefit

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39
Q

Are directors liable to tax? On what benefits?

A

Yes, on the benefits of rent-free and low rent accomodation

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40
Q

Is a lump sum payment that is made to compensate the director for an early contract termination taxable?

A

Yes

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41
Q

Is a payment on retirement taxable /or removal from the office taxable?

A

Yes, but the first 30K is exempt

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42
Q

Which step if IT is allowable relief?

A

Stept two

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43
Q

What is the most important thing to remember about allowable reliefs?

A

Interest payments on qualifying loans

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44
Q

What means interest payments on qualifying loans and what does it include?

A

It includes a loan to buy a share in a partnership
A loan to invest in a close trading company

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45
Q

From where is AR (allowable reliefs) deducted?

A

AR is deducted from total income

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46
Q

What equals after AR is deducted from total income?

A

Net income

47
Q

What is net income?

A

Total income after deduction of AR, but before deduction of personal allowances

48
Q

Which step of IT is personal allowances?

A

Step three

49
Q

From what do you deduct personal allowances?

A

From net income

50
Q

What gives after you deduct personal allowances from net income?

A

Taxable income

51
Q

What is a personal allowance?

A

The amount an individual can earn each year before paying IT is subject to an income limit of 100K

52
Q

What is the personal allowance income limit?

A

100 K

53
Q

Can the personal allowance be carried over to the following tax year?

A

No

54
Q

By how much is the personal allowance reduced?

A

By 50%

55
Q

How to get the revised PA (personal allowance) for those over the income limit?

A

Take the net income figure, minus 100K (limit) divided by two. Then deduct that figure from the PA.

56
Q

What is the figure for personal allowance for year 2021/22?

A

£12,570

57
Q

What are the other PA’s (personal allowances )that might be applicable?

A

Marriage allowance
Blind persona allowance
Property and trading allowances

58
Q

How much can be transferred from an individual unused PA to a spouse or civil partner?

A

£1260

59
Q

What must be the spouse and civil partner?

A

Must be BRT

60
Q

How much PA can a blind person receive?

A

£2520

61
Q

How much is not subject to IT from property and trading allowances?

A

Up to 1K of trading property

62
Q

What happens to allowances for property over 1K?

A

The allowance might be deducted from the gross figure as an alternative of deducting expenses

63
Q

What is step 4 of IT?

A

Slices of taxable income

64
Q

Define step 4? What to do?

A

Separate the different types of income and calculate the tax for each source in order

65
Q

What do you need to do with tax NSNDI, Tax saving income and tax dividend income?

A

YOu need to calculate the tax for each of them separately in that order

66
Q

What is important to know about IT calculation?

A

How far is the taxpayer away from hitting the next threshold (higher rate) at each stage of calculation

67
Q

What is the shortcut for personal savings allowance?

A

PSA?

68
Q

What does PSA stand for?

A

Personal savings allowance

69
Q

Under the PSA how much of the savings are going to be tax free?

A

Up to 1K

70
Q

On what does depend on the personal savings allowance?

A

On the income of the individual

71
Q

What is the PSA taxable income for BRT ? 0-37,700?

A

100K tax free

72
Q

What is the PSA taxable income for HRT? 37,501-£150,000

A

£500 tax free

73
Q

What is the PSA taxable income for ART? £150.001 and above?

A

No allowance

74
Q

Where is the available PSa added?

A

To the taxable NSNDI figure and then taxed at 0%

75
Q

Towards what it counts the tax free amount in moving from one threshold to the next?

A

It counts towards the cumulative total

76
Q

How does the DA dividend allowance work?

A

Provides that the first 2K of taxpayer dividend income will be free from tax

77
Q

To whom does DA dividend allowance apply to?

A

Applies to all taxpayers irrespective of their taxable income

78
Q

Where is added the available DA?

A

To the taxable NSNDI, the available PSA, and the remaining interest income and then taxed at 0%

79
Q

For the full It calculation how many substeps are at step 4?

A

3 -a,b,c

80
Q

How often does a sole trader does IT?

A

for 12 months

81
Q

Does the accounting period need to match the Income tax year?

A

No,

82
Q

For sole traders how does IT work?

A

If there is profit, IT is payable on it but if they made a loss, relief may be available

83
Q

What do you need to know for SQE to apply on the fact scenarios?

A

How the opening year rule
Current year basis
Closing year rule

84
Q

What does OYR stand for?

A

Opening Year Rule

85
Q

How does the Opening YEar rule work and on what will the IT taxed?

A

In the first year when the business trades, IT will be assessed on the taxable profits made by the business on the day it started trading to the following 5th APril

86
Q

What does CYB stand for?

A

Current year basis

87
Q

How does CYB work?

A

In the second tax year which the business trades

88
Q

Income tax works on cyb?

A

IT will be assessed on the taxable profits of the 12th month accounting period that ends in the second tax year.

89
Q

When does the CYB apply?

A

Applies to the third and subsequent tax years until the final year of the business.

90
Q

When does CYR apply?

A

In the final tax year in which the business trades.

91
Q

On what will be IT taxed on CYR?

A

On the taxable profits, made from the end form the last accounting period to the date the business stops trading.

92
Q

What is an overlap profit?

A

Means income profit, of a business which are assessed of IT more than once in the opening years of the business trade.

93
Q

From what is deducted the overlap profit and when?

A

It’s deduceted from the income profits assessable to IT in the business final year of trade.

94
Q
A
95
Q

How are the Partners charged on IT ?

A

They will be charged on income profit same as a sole trader

96
Q

How is the taxable profit between partners done ?

A

Under the default provision of PA
A formal partnership agreement
Or other expressed or implied agreement

97
Q

Are partners taxed separately or together ?

A

Separately

98
Q

Is each partner liable to pay its own task ?

A

Yes

99
Q

Why is not the partnership liable to pay its tax?

A

Because partnership is not a separate legal
Entity

100
Q

Why is not the partnership liable to pay its tax?

A

Because partnership is not a separate legal
Entity

101
Q

What happens if the partnership made a loss ?

A

Each partner can choose what type of relief to claim

102
Q

In a partnership when does the business start and when does it stop ?

A

The business begins when they become a partner and ends when they stop to be a partner

103
Q

What are the consequences of a partner joining a firm ?

A

The OYR will apply to to that partner only

104
Q

What happens to the existing partner if a new partner join the partnership, what are they going to be assessed on ?

A

On the CYB

105
Q

For how long is the new partner going to be assessed on OYR?

A

Only the first tax year

106
Q

What are the consequences of a partner leaving a continuing firm ? What will apply to them ?

A

The CYR will apply to that partner only as they are leaving the firm

107
Q

What does a taxpayer need to do if they have other income ?

A

They must complete a tax return under the self-assessment scheme

108
Q

If an individual is liable for self assessment how far in advance do they must notify HMRC?

A

Within 6 months of the relevant tax year otherwise they will be fined

109
Q

What is the deadline of submitting tax returns ?

A

31st Jan online or 31st October (paper)

110
Q

How is payment made for tax returns ?

A

By two payments on the account

111
Q

What are the two payments on the tax return represent ?

A

Half of the individual tax bill from the previous tax year and made by 31st January and 31st July after the tax year and a final amount must be made by the following 31 st Jan

112
Q

Who are the ones who do not need to make tax return payment in the account ?

A

Those who already paid more than 80% of their tax bill through deduction at source or in a previous tax year less than 1k

113
Q

What do penalties on tax return include ?

A

Penalties include interests on late payments and fixed penalties if tax is not paid or paid late

114
Q

Can you get penalties if you do not submit accurate records ?

A

Yes

115
Q

Where are the appeals made for penalties ?

A

First Tier Tribunal

116
Q

What means tax avoidance ?

A

Working within the law to minimise tax liability

117
Q

What means tax evasion ?

A

Deliberately misinterpreting or misapplying the law to minimise tax liability. Tax evasion is illegal

118
Q

What does GAAR stand for ?

A

The general anti avoidance rule

119
Q

What does GAAR stand for ?

A

The general anti avoidance rule

120
Q

What does GAAR mean ?

A

A rule that applies to certain taxes that including IT to combat abusive tax avoidance arrangements that go beyond lawful tax avoidance

121
Q

What does ATAA stand for ?

A

Abusive tax avoidance arrangement

122
Q

What it means ATAA? When is a tax arrangement abuzive ?

A

If it cannot reasonable be regarded as a reasonable course of action having regard to all the circumstances

123
Q

Who is dealing with the representation at GAAR?

A

The advisory panel

124
Q

Who is dealing with the representation of GAAR?

A

The advisory panel

125
Q

Who can be fined as GAAR?

A

Any person who enabled the scheme as part of their business

126
Q

Who is issuing guidance on GAAR?

A

HMRC

SQE 1 (12 decks)

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