Income tax

Question 1

What is income?

Answer 1

Generally money received will be income if there is an element of recurrence e.g salary, interest

Question 2

Who pays?

Answer 2

Individuals, partnerships, PRs (pay deceased’s outstanding income tax) and trustees (pay income tax on the income produced by the trust fund)

Question 3

Who doesn’t pay?

Answer 3

Companies pay corporation tax and charities are usually exempt from paying tax

Question 4

Various types of income

Answer 4

The allowances and rates are different for the various types of income. 3 categories:
1) Non-savings, non-dividend income (NSNDI) comprising all sources of income except income derived from savings and dividends
2) Savings income - interest from various sources
3) Dividend income

Question 5

Steps to work out tax payable for income tax - Step 1

Answer 5

• Step 1 - Calculate the total income

Question 6

Steps to work out tax payable for income tax - Step 2

Answer 6

• Step 2 - Deduct any allowable reliefs - resulting sum is the net income

Question 7

Steps to work out tax payable for income tax - Step 3

Answer 7

• Step 3 - Deduct any personal allowances - resulting sum is taxable income

Question 8

Steps to work out tax payable for income tax - Step 4

Answer 8

• Step 4 - Separate NSNDI, savings income and dividend income and calculate tax on each type of income

Question 9

Steps to work out tax payable for income tax - Step 5

Answer 9

• Step 5 - Add together the amounts of tax from Step 4

Question 10

Step 1 - Explanation

Answer 10

Trading income (profits of trade) + Property income (rents and other receipts from land) + Employment income (salary) + Savings income (Interest) + Dividends = Total income

Question 11

Step 2 - Explanation

Answer 11

Total income - Allowable reliefs = Net income

Question 12

Step 2 - Explanation - Allowable reliefs

Answer 12

Interest payments on a qualifying loan:
- A loan to buy a share in a partnership
- A loan to invest in a close trading company
- A loan to PRs to pay inheritance tax

Question 13

Step 3 - Explanation

Answer 13

Net income - Personal allowance = taxable income
Personal allowance = £12,570
£0 if income over £125,140

Question 14

Step 3 - Personal savings allowance

Answer 14

Up to the first £1000 of savings income will be tax free if you fall into basic rate (0-37,700). £500 if you fall into higher rate (37,701-150,000). No allowance if you fall into additional rate (150,001 and above)

Question 15

Step 3 - Dividend allowance

Answer 15

First £2000 of a taxpayer’s dividend income is free of tax

Question 16

Step 4 - Explanation - What falls into NSNDI

Answer 16

• Trading income
• Employment income
• Property income

Question 17

Step 4 - Explanation - What falls into savings income?

Answer 17

Savings income

Question 18

Step 4 - Explanation - What falls into dividend income

Answer 18

Investment income

Question 19

Step 4 - Explanation - Basic rate

Answer 19

NSNDI - 20%
Savings - 20%
Dividend - 8.75%

Question 20

Step 4 - Explanation - Higher rate

Answer 20

NSNDI - 40%
Savings - 40%
Dividend - 33.75%

Question 21

Step 4 - Explanation - Additional rate

Answer 21

NSNDI - 45%
Savings - 45%
Dividend - 39.35%

Question 22

Step 5 - Explanation

Answer 22

Total tax - tax already paid = tax due
Add together amount of tax