Income Tax Flashcards
What is subject to income tax?
Liability for income tax is based on income received in a fiscal or tax year, which, in the UK, runs from 6 April in one calendar year to 5 April in the next.
employment income;
trading (self-employment) income;
pension income;
income from property;
income from savings and investments (including dividends); and other income.
What are allowance for income tax?
a personal allowance – amount of income that can be made before tax is owed. married couples and civil partners can transfer 10% of their personal allowance to their partner, if receiving partner is not a higher- or additional-rate taxpayer.
If an individual’s income (adjusted for pension contributions and charitable donations) exceeds £100,000 per annum, the personal allowance will be reduced by £1 for every £2 of income above £100,000.
What are deductions for income tax?
1. Pension contributions (within specified limits) to certain schemes set up by an employer (tax relief is also available on contributions to a personal pension or stakeholder pension but not as a deduction);
2. charitable donations; and
3. allowable expenses, such as costs incurred in carrying out one’s employment. For self-employed people, these must be incurred ‘wholly and exclusively for the purpose of a trade’, while for employed persons, they must be incurred ‘wholly, exclusively and necessarily’ in the course of doing their job.
Income tax on investment income allowance?
For savings income (for example, deposit account interest) there is a personal savings allowance, which is £1,000 for a basic-rate taxpayer and £500 for a higher-rate taxpayer. An additional-rate taxpayer does not have a personal savings allowance.
There is also a starting-rate tax band on which 0 per cent tax is charged. This band, where available, is used before the personal savings allowance. However, it is reduced depending on the amount of any taxable non-savings income.
Dividend taxes on investment income?
A different system applies to dividends on shares.
A dividend allowance is available where no tax is payable by an individual on the first portion of dividends received each year, regardless of the level of non-dividend income. However, dividend income is counted when determining the tax bands that apply to an individual.
Tax is payable on dividends received in excess of the allowance. the tax bands that apply to an individual.
Tax is payable on dividends received in excess of the allowance.
Proceeds from life assurance policies?
all benefits coming out of a life fund are deemed to have already borne tax at the basic rate and so, for the basic-rate taxpayer, there is no further liability.
For a higher-rate taxpayer, this will be the difference between the higher rate and the basic rate (ie a credit is given for the basic rate deemed to have been deducted at source). For an additional-rate taxpayer, this will be the difference between the additional rate and the basic rate.
This further tax liability can arise only if the policy is non-qualifying. Qualifying policies do not suffer any further tax. Contributions to new qualifying policies taken out from 21 March 2012 are limited to £3,600 per year.
Tax on proceeds from Unit trusts?
The investments within a unit trust will generate income in the form of dividends and interest.
Where a dividend distribution is will be paid gross and taxable if the distribution exceeds the dividend allowance.
Unitholders are able to benefit from the 0 per cent starting-rate band for savings and their personal savings allowance on this income.
Tax on capital gains?
Income taxable?
What are taxable employee benefits?
Readily convertible assets – these assets can easily be turned into money
Vouchers, credit cards and other credit tokens – vouchers can be exchanged for cash alone, for goods or cash, or for goods that can readily be converted to cash. Employees who buy goods or services with company credit cards are liable to tax on the cost incurred by the employer on transactions carried out by the employee in the tax year.
2: Income tax
Non‐cash vouchers – these are not taxable if the goods or services for which they can be exchanged are exempt, for example vouchers for sports and recreational facilities available to all employees.
Meeting an employee’s private expenses and living accommodation.
Private medical insurance, where the premiums are paid by the employer.
Loans made by employers to employees at beneficial rates of interest.
How are employee benefits taxed?
Generally, employees are taxed on the cash equivalent. The definition of this is the cost to the employer of providing the benefit.
If an employee has the use of an asset, then the cash equivalent is calculated as:
‘Annual value’ of the use of the asset + any expenses incurred by the employer in maintaining the asset
The annual value is taken to be 20 per cent of the market value of the asset when it was first provided to the employee.
Classification of income
1. The Income Tax (Earnings and Pensions) Act 2003 covers income from employment, pensions and taxable social security benefits.
2. The Income Tax (Trading and Other Income) Act 2005 covers other kinds of income, in particular:
— Part 2 covers trading income – that is, income from self-employment;
— Part 3 covers income from property rental trades; and
— Part 4 covers income from savings and investment, including interest and dividends.
Calculate income tax liability order:
1. Earned income and pension income
2. rental income, savings income and, finally, dividend income.
3. Taxable gains under life policies form the top slice of an individual’s income.
4 step process in calculating income tax
- Ascertain the total amount of each kind of income.
- Make appropriate deductions from each kind of income. Employees may also be able to deduct certain expenses
Contributions to occupational pension schemes may be deducted from gross salary.
Tax relief for other pension arrangements, such as stakeholder pensions and free-standing additional voluntary contributions (AVCs) is obtained by the pension member making a net contribution from their after-tax income with HMRC refunding the basic-rate tax already paid into their pension scheme and any higher- or additional-rate tax relief returned by means of an extension of the member’s basic- and higher-rate tax bands. - Deduct the personal allowance and other allowances
The resulting figure is known as the taxable income and the current tax rates are applied to the appropriate bands of income,
Classes of national insurance are?
Class 1 – these are paid by employees on earnings between certain levels known as the primary threshold and the upper earnings limit, with a reduced level payable on earnings above the upper limit. They are also paid by employers on employees’ earnings above a lower limit called the secondary threshold – but with no upper limit. Employers are not required to pay NICs for employees who:
— are under the age of 21;
— are apprentices under 25; or
— for qualifying veterans in their first 12 months of civilian employment, unless their earnings exceed the upper secondary threshold or the apprentice upper secondary threshold.
In addition, employers must pay Class 1A National Insurance on certain taxable employee benefits.
Class 2 – these are flat-rate contributions at a specified rate per week and are paid by the self-employed if their annual profits exceed the small profits threshold.
Class 3 – these are voluntary contributions that can be paid by people who would not otherwise be entitled to the full State pension or sickness benefits. This can occur because a person has, for example, taken a career break or spent some time working overseas. They are flat-rate contributions.
Class 4 – these are additional contributions payable by self-employed people on their annual profits between specified minimum and maximum levels, with a reduced rate payable above the upper limit, as for Class 1. They are paid to HMRC in half-yearly instalments along with income tax. There is a rate on profits between a lower limit and an upper limit, plus a lower additional rate on profits above this upper limit.
