Chapter 8 - Income Tax Flashcards
What do you need to know for SQE regarding Income Tax?
Who is liable for paying income tax and
types of income
how is it calculated
how is it charged
Who are chargeable persons?
Who are liable to pay IT
Individuals (including sole traders)
Individual partners
Trustees
Personal Representatives
Who pays corporation tax?
Companies
Corporate Partners on their income profits and capital gain
What is IT?
Income tax is a chargeable person’s income
Types of income?
Salary
Divedents ( a shareholders return on their investment)
Interest received
Trading profit (sole traders and partners)
The profit element of rent received
What is the difference between income and capital gain?
Capital gain accumulates over time while income is recurring in nature.
Which are the 3 key charging statutes?
Income Tax Act 2007
Income Tax (Trading and Other Income) Act 2005
Income Tax (Earnings and Pensions) Act 2003
Who pays IT (Income tax) on income-earned profits made during the income tax year?
Chargeable persons
How often is IT renewed?
Annually
What can change from year to year in income tax?
Rates,
thresholds,
exemptions and
reliefs,
What do you need to know for SQE?
The personal allowance for the current tax year]
The basic and the higher rate threshold
KEy rates for IT
What type of tax is Income Tax?
Progressive Tax
What does it mean progressive tax?
Progressive means that the rate increases as the income increases
What are individuals doing for the low rates?
Individuals make use for the lower rates
What do individuals do at a higher rate?
They pay IT at a higher rate as their income increases
How many steps are for calculating income tax?
5 steps
What is the first step for calculating income tax?
Calculate total income
What is the second step in calculating IT?
Deduct reliable relief (gives net income)
What is step 3i in calculating IT?
Deduct personal allowances = taxable income
What needs to be deducted before the tax is calculated?
Allowable relief and personal allowances must be deducted first
Can you tell from taxable income if someone is a basic rate, higher rate or additional rate taxpayer?
Yes
What is a BAsic rate taxpayer and how much is it?
A person whose taxable income does not exceed the basic rate threshold 37.7k in 2021/2022
Explain the higher rate taxpayer
A person whose taxable income does exceed the basic rate, but does not exceed the additional rate threshold 150K.
Explain the additional rate taxpayer
A person whose taxable income exceeds the basic rate threshold
Does the savings income needs to be separated from the dividend income?
Yes
What does NSNDI stand for?
Taxable non saving/non-divident income
How to calculate NSNDI?
Taxable income-savings income-divident income = taxable NSNDI
What is step 4 a) of calculating IT?
First - NSNDI
What is step 4 b) of calculating IT?
Second - savings income
What is the income tax main rates for NSDNI for Basic Rate, higher rate and additional rate?
20% - BR
40% - HR
45% - AR
What is the income tax rate for saving income for BR, HR and AR?
Same as for NSDNI but starter rate is 0%
What is step 4 c) of calculating IT?
Finally - dividend income
What is the income tax rate for dividend income for Basic rate, higher rate and additional rate?
Basic rate - 7.5%
Higher rate - 32.5%
Additional rate - 38.1%
What is the step 5 calculation of IT?
Add together the tax for each source and deduct any tax previously paid/deducted at source to give IT liability
What does Taxable income means again?
Means that the allowable reliefs and the personal allowances have been deducted.
Apply the IT rates on the following scenario:
Celine has a taxable NSNDI of 20K, Sandra - 52K
Gali - 200K
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
What is the first step of the of the It calculation?
Total income
Define total income
|s the aggregate gross income from each source without any tax deducted
When is income taxable?
When it comes from property income
profits of a trade or a profession
savings income
employment and pensions income
Which income is exempt?
Child benefit, interest paid on national savings certificates
Interest from individual savings account
Interest on damages for personal injuries or death
What types on income are payed gross?
Interest payed by Banks and building societies
Dividends payed to shareholders
Rental income
What means some income will be payed net?
It means IT will be deducted at source
What needs to be included in the full tax calculation?
The gross amount plus the IT deducted already
How to charge IT on employees and directors?
Can be done under IEPTA statute
Are the benefits that derive from the office or employment are liable to tax?
Yes, all benefits that derive from the office or employment are liable to tax
What are employees taxed on?
They are taxed on the cost to the employer of providing the benefit
Are directors liable to tax? On what benefits?
Yes, on the benefits of rent-free and low rent accomodation
Is a lump sum payment that is made to compensate the director for an early contract termination taxable?
Yes
Is a payment on retirement taxable /or removal from the office taxable?
Yes, but the first 30K is exempt
Which step if IT is allowable relief?
Stept two
What is the most important thing to remember about allowable reliefs?
Interest payments on qualifying loans
What means interest payments on qualifying loans and what does it include?
It includes a loan to buy a share in a partnership
A loan to invest in a close trading company
From where is AR (allowable reliefs) deducted?
AR is deducted from total income
What equals after AR is deducted from total income?
Net income
What is net income?
Total income after deduction of AR, but before deduction of personal allowances
Which step of IT is personal allowances?
Step three
From what do you deduct personal allowances?
From net income
What gives after you deduct personal allowances from net income?
Taxable income
What is a personal allowance?
The amount an individual can earn each year before paying IT is subject to an income limit of 100K
What is the personal allowance income limit?
100 K
Can the personal allowance be carried over to the following tax year?
No
By how much is the personal allowance reduced?
By 50%
How to get the revised PA (personal allowance) for those over the income limit?
Take the net income figure, minus 100K (limit) divided by two. Then deduct that figure from the PA.
What is the figure for personal allowance for year 2021/22?
£12,570
What are the other PA’s (personal allowances )that might be applicable?
Marriage allowance
Blind persona allowance
Property and trading allowances
How much can be transferred from an individual unused PA to a spouse or civil partner?
£1260
What must be the spouse and civil partner?
Must be BRT
How much PA can a blind person receive?
£2520
How much is not subject to IT from property and trading allowances?
Up to 1K of trading property
What happens to allowances for property over 1K?
The allowance might be deducted from the gross figure as an alternative of deducting expenses
What is step 4 of IT?
Slices of taxable income
Define step 4? What to do?
Separate the different types of income and calculate the tax for each source in order
What do you need to do with tax NSNDI, Tax saving income and tax dividend income?
YOu need to calculate the tax for each of them separately in that order
What is important to know about IT calculation?
How far is the taxpayer away from hitting the next threshold (higher rate) at each stage of calculation
What is the shortcut for personal savings allowance?
PSA?
What does PSA stand for?
Personal savings allowance
Under the PSA how much of the savings are going to be tax free?
Up to 1K
On what does depend on the personal savings allowance?
On the income of the individual
What is the PSA taxable income for BRT ? 0-37,700?
100K tax free
What is the PSA taxable income for HRT? 37,501-£150,000
£500 tax free
What is the PSA taxable income for ART? £150.001 and above?
No allowance
Where is the available PSa added?
To the taxable NSNDI figure and then taxed at 0%
Towards what it counts the tax free amount in moving from one threshold to the next?
It counts towards the cumulative total
How does the DA dividend allowance work?
Provides that the first 2K of taxpayer dividend income will be free from tax
To whom does DA dividend allowance apply to?
Applies to all taxpayers irrespective of their taxable income
Where is added the available DA?
To the taxable NSNDI, the available PSA, and the remaining interest income and then taxed at 0%
For the full It calculation how many substeps are at step 4?
3 -a,b,c
How often does a sole trader does IT?
for 12 months
Does the accounting period need to match the Income tax year?
No,
For sole traders how does IT work?
If there is profit, IT is payable on it but if they made a loss, relief may be available
What do you need to know for SQE to apply on the fact scenarios?
How the opening year rule
Current year basis
Closing year rule
What does OYR stand for?
Opening Year Rule
How does the Opening YEar rule work and on what will the IT taxed?
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
What does CYB stand for?
Current year basis
How does CYB work?
In the second tax year which the business trades
Income tax works on cyb?
IT will be assessed on the taxable profits of the 12th month accounting period that ends in the second tax year.
When does the CYB apply?
Applies to the third and subsequent tax years until the final year of the business.
When does CYR apply?
In the final tax year in which the business trades.
On what will be IT taxed on CYR?
On the taxable profits, made from the end form the last accounting period to the date the business stops trading.
What is an overlap profit?
Means income profit, of a business which are assessed of IT more than once in the opening years of the business trade.
From what is deducted the overlap profit and when?
It’s deduceted from the income profits assessable to IT in the business final year of trade.
How are the Partners charged on IT ?
They will be charged on income profit same as a sole trader
How is the taxable profit between partners done ?
Under the default provision of PA
A formal partnership agreement
Or other expressed or implied agreement
Are partners taxed separately or together ?
Separately
Is each partner liable to pay its own task ?
Yes
Why is not the partnership liable to pay its tax?
Because partnership is not a separate legal
Entity
Why is not the partnership liable to pay its tax?
Because partnership is not a separate legal
Entity
What happens if the partnership made a loss ?
Each partner can choose what type of relief to claim
In a partnership when does the business start and when does it stop ?
The business begins when they become a partner and ends when they stop to be a partner
What are the consequences of a partner joining a firm ?
The OYR will apply to to that partner only
What happens to the existing partner if a new partner join the partnership, what are they going to be assessed on ?
On the CYB
For how long is the new partner going to be assessed on OYR?
Only the first tax year
What are the consequences of a partner leaving a continuing firm ? What will apply to them ?
The CYR will apply to that partner only as they are leaving the firm
What does a taxpayer need to do if they have other income ?
They must complete a tax return under the self-assessment scheme
If an individual is liable for self assessment how far in advance do they must notify HMRC?
Within 6 months of the relevant tax year otherwise they will be fined
What is the deadline of submitting tax returns ?
31st Jan online or 31st October (paper)
How is payment made for tax returns ?
By two payments on the account
What are the two payments on the tax return represent ?
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
Who are the ones who do not need to make tax return payment in the account ?
Those who already paid more than 80% of their tax bill through deduction at source or in a previous tax year less than 1k
What do penalties on tax return include ?
Penalties include interests on late payments and fixed penalties if tax is not paid or paid late
Can you get penalties if you do not submit accurate records ?
Yes
Where are the appeals made for penalties ?
First Tier Tribunal
What means tax avoidance ?
Working within the law to minimise tax liability
What means tax evasion ?
Deliberately misinterpreting or misapplying the law to minimise tax liability. Tax evasion is illegal
What does GAAR stand for ?
The general anti avoidance rule
What does GAAR stand for ?
The general anti avoidance rule
What does GAAR mean ?
A rule that applies to certain taxes that including IT to combat abusive tax avoidance arrangements that go beyond lawful tax avoidance
What does ATAA stand for ?
Abusive tax avoidance arrangement
What it means ATAA? When is a tax arrangement abuzive ?
If it cannot reasonable be regarded as a reasonable course of action having regard to all the circumstances
Who is dealing with the representation at GAAR?
The advisory panel
Who is dealing with the representation of GAAR?
The advisory panel
Who can be fined as GAAR?
Any person who enabled the scheme as part of their business
Who is issuing guidance on GAAR?
HMRC
