Income Tax Flashcards
What are the learning objectives for Module 1 - Income Tax?
Explain the main features of income tax
Calculate income tax
What is Income Tax?
Annual tax on income between 6th April - 5th April
Why is Income Tax considered to be progressive and direct?
Progressive - rates applied increase with earnings
Direct - levied directly to individual
How are Income Tax rates set?
Annually by Parliament
What is the process for calculating Income Tax?
- Calculate total income & divide into tax tower
- Make allowable deductions
- Deduct personal allowances from income
- Consider band extensions
- Apply tax rates
- Add child benefit high income tax charge & deduct tax reducers
What are the types of income?
- Trading income
- Employed income
- Property income
- Savings & Investment income
- Other income
What is the tax tower?
A process for comparing each type of income (gross) in an order of which tax bands can be applied
What are the contents of the tax tower?
- Chargeable gains
- Dividend income
- Savings income
- Earned income
What is the grossing up calculation?
Net interest figure / 0.8
What are the 3 types of allowable deductions?
• Interest payments on qualifying loans
• Charitable donations
• Pension contributions
What are allowable deductions?
A deduction of expenses from total gross income to provide tax relief
Why are allowable deductions removed from gross income?
To promote investment in businesses, charities and retirement
How do allowable deductions impact income tax?
Total gross income is reduced, meaning a lower amount of income tax is paid
What are the main types of qualifying loans?
• investment in own company
• purchase of plant/machinery for a partnership
• payment of IHT liability - capped at 1 year
How much interest from qualifying loans is deducted from gross income?
100% - capped at the higher of £50,000 or 25% of adjusted total income
What is adjusted total income?
Total income + payroll giving - pension contributions
What are the two types of charitable giving which impact the amount of income tax paid?
• Gift aid
• Payroll giving
Which type of charitable giving is an allowable deduction?
Payroll giving
How does payroll giving work?
• allowable expense taken before tax
•contributions paid to a chosen charity from gross income
• tax relief at highest marginal rate
• voluntary
• uncommon as lots of admin
What are the 3 types of pension contributions which are considered to be income tax allowable deductions?
• net payment arrangements
• relief at claim
• relief at source
How does a net payment arrangement pension work?
• Typically occupational pension
• tax relief applied before pay received
• no further tax relief to claim via self assessment
How does a relief at a source pension arrangement work?
• 20% tax relief at source
• 80% paid in by employer
• 20% reclaimed by pension from HMRC
• higher/additional rate taxpayers complete self assessment for 20/25% additional tax relief
Who is a relief at source pension arrangement most beneficial for?
• non tax payers - tax relief gained at 20%
What is the current personal allowance?
£12,570
What can reduce the personal allowance?
- Employee benefits
- Beneficial loans
- Adjusted net income over £100k
What is the current personal allowance?
£12,570
What reduces the personal allowance?
- Employee benefits
- Beneficial loans
- Net income > £100k
How are employee benefits usually charged?
Using market value
How are in house benefits charged?
Using marginal cost to employer
What are the tax exempt benefits?
Home working up to £6 weekly
Group income protection
Mobile - 1 per employee
Work-related training
How are company cars taxed?
Business use BIK = list price * fuel emissions
Private use = £25,300 * fuel emissions
Above reduces the personal allowance
What is the diesel surcharge on fuel emissions for company cars?
4%
What is the max charge for fuel emissions on company cars
37%
How does the charge on fuel emissions increase for fuel over 100g?
1% for every 5g over 100g
- rounded down to nearest 5g
How are upfront contributions to a company car treated?
Deduced from list price - max £5k
How are monthly contributions to a company car treated?
Deduced from benefit in kind
How are pool cars taxed?
They’re not providing they’re strictly used for business and stay at work
How do beneficial loans reduce personal allowance?
If the loan interest is lower than the official government rate of interest, the difference will be a charge which reduces the personal allowance
How do beneficial loans up to £10k impact the personal allowance?
They don’t
How do beneficial qualifying loans impact the personal allowance?
No charge for interest up to the higher of £50k or 25% of adjusted total income
Above this incurs a charge
How does adjusted net income over £100k impact the personal allowance?
PA reduces by £1 for every £2 over
What is adjusted net income?
Income - loss relief - interest - gross pension and gift aid contributions
What is the equation for taxable income?
Taxable income = net income - allowances
Why are allowances deducted from taxable income?
To ensure the correct level of income tax is applied to total income
What are the types of allowance available to an individual?
- PSA
- Starter rate for savings
- Dividend allowance
- Transferable personal allowance
What are the PSA’s?
Basic £1000
Higher £500
Additional £0
How does the PSA work?
Income within the PSA is tax free, however the PSA is still used within the tax band for further calculations
How are unused income tax allowances used?
To offset against chargeable gains if applicable
How does the starter rate for savings work?
£5000 available for income up to £18,750
Earned income above the PA reduces the starter rate for savings allowance proportionately
Starter rate for savings works in conjunction with PSA
What is the dividend allowance?
£2k tax free (forms pard of tax band)
How does the transferable personal allowance for income tax work?
A non-tax paying spouse can transfer 10% of their personal allowance to a basic rate tax paying spouse
What is the transferable personal allowance for income tax also referred to as?
Marriage allowance
What is net income?
Total income - allowable deductions
Why are basic rate tax bands extended?
To ensure the correct rates of tax are applied to the correct level of income
What causes the basic rate tax bands to be extended?
Relief at source pension contributions
Gift aid contributions
Why are relief at source pension and gift aid contributions considered to be basic rate tax band extenders?
The contributions are paid to the individual net of 20% which needs to be reclaimed
Who reclaims the 20% tax relief following relief at source and gift aid contributions?
The relevant scheme
Why isn’t the basic rate band extended for basic rate taxpayers?
They already receive the correct level of tax relief (20%)
How do higher rate taxpayers gain the correct level of tax relief?
New amount taxable at 20% = gross contributions (relief at source pension & gift aid) + basic rate taxable income (£37,700)
How does a basic rate band extension provide a higher rate taxpayer with the correct level of tax relief?
Income which would previously be taxed at 40% is now taxed at 20%. Combined with relief at source of 20%, the client now gets 40% tax relief
What are the current rates of tax for all income besides dividends?
£0 - £12,570 = 0%
£12,571 - £50,270 = 20%
£50,271 - £150,000 = 40%
£150,001 + = 45%
What are the current dividend tax rates?
£0 - £2000 = 0% - uses up relevant band rate
Basic = 8.75%
Higher = 33.75%
Additional = 39.35%
