Income Tax

Question 1

Name the 5 types of income

Answer 1

Trade, employment, property, investment, miscellaneous

Question 2

Legislation for employment income tax rules

Answer 2

Income Tax (Earnings and Pensions) Act 2003

Question 3

Legislation for trading, property, investment and miscellaneous income

Answer 3

Income Tax (Trading and Other Income) Act 2005

Question 4

What’s the rent-a-room relief amount?

Answer 4

£7,500

Question 5

13 employment benefits exempt from tax

Answer 5

1. Group income protection
2. Provision of meals
3. Mobile phones
4. Long service awards
5. Suggestion schemes
6. Work-related training
7. Relocation and removal expenses
8. Home working
9. Workplace nurseries
10. Liability insurance
11. Pension advice
12. Coronavirus tests
13. Trivial benefits

Question 6

10 taxable employee benefits

Answer 6

1. Use of assets
2. In-house benefits
3. Company cars
4. Beneficial loans
5. Living accommodation
6. Cash vouchers
7. Non-cash vouchers
8. Credit tokens
9. Employee liabilities
10. Medical insurance

Question 7

Calculation of personal allowance reduction over £100,000

Answer 7

(Adjusted net income - 100,000)/2

Adjusted net income is net income minus personal pension contributions and gift aid donations

Question 8

How to avoid personal allowance trap (income between £100k and £125,140)

Answer 8

1. Use tax free investments (e.g. ISAs)

2. Make pension payments or gift aid donations

Question 9

What are the personal savings allowances?

Answer 9

Basic-rate payers: £1,000
Higher-rate payers: £500
Additional-rate payers: £0

Question 10

How do relief at source pension payments and gift aid donations affect tax liability?

How is this calculated?

Answer 10

They extend the band limits at the basic tax rate (20%)

Increase the tax band limit by the donation plus 25%

Question 11

What is the dividend allowance?

Is it affected by tax banding?

Answer 11

£2,000

No, everyone is entitled but excess dividends are taxed at different rates in each band

Question 12

What rate is dividend income taxed at?

Answer 12

Basic: 8.75%
Higher: 33.75%
Additional: 39.35%

Question 13

Explain the £5,000 0% rate on savings income

Answer 13

No tax is paid on savings income, up to £5000, which falls in the first £5,000 of income above the personal allowance.

E.g. if employment income is £13,570, there is room for £4,000 of tax free savings income.

Question 14

What counts as savings income for purpose of personal savings allowance? (3 items)

Answer 14

1. Interest
2. Interest element of purchased life annuities
3. Gains from life assurance contracts

Question 15

6 steps to calculate tax charge

Answer 15

1. Calculate pre-tax income for year
2. Deduct reliefs from total income
3. Deduct the personal allowance
4. Add payment which extend bands
5. Calculate tax on remaining income
6. Deduct any tax reducers

Question 16

What order is income taxed in? (4 items)

Answer 16

1. Earnings, pensions, rental income
2. Savings income (exc. 4 below)
3. Dividend income
4. Chargeable gains under life assurance policies

Question 17

What is the difference between a child’s parental and non-parental money?

Answer 17

Interest or income from parental money is taxed as part of the parent’s income.

Parental and non-parental money should be kept separate.

Question 18

How much can a parent save in a Junior ISA without it affecting their tax liability?

Answer 18

£9,000

Question 19

Can parents pay into a 16/17 year old’s ISA to take advantage of the £20,000 tax-free savings allowance?

Answer 19

No, if the income originates from a parent it will be treated as the parent’s capital.

Question 20

How is child benefit reduced for high earners?

Answer 20

There is a charge of 1% of CB payments per £100 of income over £50,000. At £60,000, the payment charge is equivalent to 100% of the payment.

Question 21

How is income in child’s bare trust treated for income tax

Answer 21

1. If income is less than £100 per year, no tax
2. If more than £100 per year and comes from parent, taxed on full amount as parent’s income
3. No tax if capital from other relative

Question 22

Under the general position, whose tax liability is income from bare trusts added to?

Answer 22

The beneficiary’s

Question 23

How is special tax relief for vulnerable beneficiaries calculated?

Answer 23

Deduct tax paid if trust income was taxed as beneficiary’s normal income, from the tax paid under normal property trust rules.

The level of relief is the difference between the two.

Question 24

When should trustees and vulnerable beneficiaries make an election for special treatment?

Answer 24

No later than 12 months after date tax should be reported (i.e. January 31 2025 for tax year 22/23)

Question 25

12 types of trust

Answer 25

1. Bare. 2. Interest in possession.
2. Discretionary. 4. Accumulation
3. Mixed. 6. Settlor-interested.
4. Non-resident. 8. Life interest.
5. Power of appointment 10. Will
6. Statutory. 12. Pension Scheme

Question 26

How do beneficiaries receive the personal allowance, personal savings allowance, or dividend allowance?

Answer 26

As a refund from own tax, as all trust income is taxed at the basic rate, without allowances, and paid by the trustee before being passed to the beneficiary (unless income is paid directly to the beneficiary).

Question 27

Can trustees claim tax relief on the expenses of managing a trust?

Answer 27

No. Costs can be saved by having payments mandated or paid directly to beneficiary.

Question 28

In what order are trust expenses set against income before payment to the beneficiary?

Answer 28

1. UK dividends
2. Foreign dividends
3. Savings income
4. Other income

Question 29

Which form is used to tell beneficiaries about trust income?

Answer 29

R185

Question 30

Case that decided no single factor conclusive in determining employment status.

Answer 30

Hall v Lorimer