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 and trustees (pay income tax on the income produced by the trust fund)

Question 3

How to calculate income tax

Answer 3

1) Calculate total income
2) Deduct reliefs
This produces NET INCOME
3) Deduct any personal allowances
This produces TAXABLE INCOME
4) Separate 3 types of income and calculate the tax on each type of income at applicable rates
5) Add together amount of taxes

Question 4

Various types of income

Answer 4

1) NSNDI- everything except savings and dividends - Trading, property and employment
2) Savings income - interest from various sources
3) Dividend income

Question 5

Step 1 Total income -

Answer 5

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

Question 6

Step 2 - Deduct Reliefs - Allowable reliefs

Answer 6

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 7

Step 3 Deduct any personal allowances - Rates

Answer 7

1) If you earn up to £100,000 Personal allowance = £12,570
2) Lose £1 for every £2 over £100,000 - £12,570 - (net income - £100,000 divided 2)
2) If income over £125,140 = £0

Question 8

Step 3 Deduct any personal allowances - How can it be set against

Answer 8

It can be set against income of any kind but it is applied in the following order:
1) NSNDI
2) If there is surplus then against savings income
3) Any remaining surplus is applied against dividend income
Any unused cannot be carried forward

Question 9

Step 4 - calculate the tax on each type of income - Order in which to tax

Answer 9

1) NSNDI
2) Savings income
3) Dividend income

Question 10

Step 4 Calculate the tax on each type of income - How to tax NSNDI

Answer 10

Taxable income (point 3) - savings and dividend income = taxable NSNDI

Question 11

Step 4 calculate the tax on each type of income - NSNDI rates

Answer 11

Basic rate (£0-£37,700): 20%
Higher rate £37,701-£125,140): 40%
Additional rate (over £125,140): 45%

Question 12

Step 4 calculate the tax on each type of income - Calculating taxable savings income

Answer 12

Savings income - Personal savings allowance (£1000 if earn under £37,700, £500 if earn £37,700 - £125,140) = taxable savings income

Question 13

Step 4 calculate the tax on each type of income - How to tax taxable savings income

Answer 13

Add remaining taxable savings income to total taxable NSNDI figure then apply savings income rates

Question 14

Step 4 - calculate the tax on each type of income - Savings Income rates

Answer 14

1) Starting rate (£0-£5000) = 0%
2) Basic rate (£5,001 - £37,700): 20%
3) Higher rate (£37,701 - £125,140)= 40%
4) Additional rate (over £125,140)= 45%

Question 15

Step 4 calculate the tax on each type of income - How to tax dividend income

Answer 15

Dividend income - dividend allowance (£500) = remaining taxable dividend income

Question 16

Step 4 calculate the tax on each type of income - Calculating dividend income

Answer 16

Add the dividend allowance to total taxable NSNDI and total savings income

Question 17

Step 4 - calculate the tax on each type of income - Dividend income rates

Answer 17

1) Earn less than £37,700 = 8.75%
2) More than £37,700 but less than £125,140 = 33.75%
3) More than £125,140 = 39.35%

Question 18

Step 5 - Calculate overall tax

Answer 18

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