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RO3: Personal Taxation > Income Tax > Flashcards

Income Tax Flashcards

1
Q

What are the learning objectives for Module 1 - Income Tax?

A

Explain the main features of income tax

Calculate income tax

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2
Q

What is Income Tax?

A

Annual tax on income between 6th April - 5th April

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3
Q

Why is Income Tax considered to be progressive and direct?

A

Progressive - rates applied increase with earnings

Direct - levied directly to individual

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4
Q

How are Income Tax rates set?

A

Annually by Parliament

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5
Q

What is the process for calculating Income Tax?

A
  1. Calculate total income & divide into tax tower
  2. Make allowable deductions
  3. Deduct personal allowances from income
  4. Consider band extensions
  5. Apply tax rates
  6. Add child benefit high income tax charge & deduct tax reducers
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6
Q

What are the types of income?

A
  1. Trading income
  2. Employed income
  3. Property income
  4. Savings & Investment income
  5. Other income
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7
Q

What is the tax tower?

A

A process for comparing each type of income (gross) in an order of which tax bands can be applied

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8
Q

What are the contents of the tax tower?

A
  1. Chargeable gains
  2. Dividend income
  3. Savings income
  4. Earned income
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9
Q

What is the grossing up calculation?

A

Net interest figure / 0.8

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10
Q

What are the 3 types of allowable deductions?

A

• Interest payments on qualifying loans
• Charitable donations
• Pension contributions

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11
Q

What are allowable deductions?

A

A deduction of expenses from total gross income to provide tax relief

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12
Q

Why are allowable deductions removed from gross income?

A

To promote investment in businesses, charities and retirement

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13
Q

How do allowable deductions impact income tax?

A

Total gross income is reduced, meaning a lower amount of income tax is paid

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14
Q

What are the main types of qualifying loans?

A

• investment in own company
• purchase of plant/machinery for a partnership
• payment of IHT liability - capped at 1 year

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15
Q

How much interest from qualifying loans is deducted from gross income?

A

100% - capped at the higher of £50,000 or 25% of adjusted total income

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16
Q

What is adjusted total income?

A

Total income + payroll giving - pension contributions

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17
Q

What are the two types of charitable giving which impact the amount of income tax paid?

A

• Gift aid
• Payroll giving

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18
Q

Which type of charitable giving is an allowable deduction?

A

Payroll giving

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19
Q

How does payroll giving work?

A

• 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

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20
Q

What are the 3 types of pension contributions which are considered to be income tax allowable deductions?

A

• net payment arrangements
• relief at claim
• relief at source

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21
Q

How does a net payment arrangement pension work?

A

• Typically occupational pension
• tax relief applied before pay received
• no further tax relief to claim via self assessment

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22
Q

How does a relief at a source pension arrangement work?

A

• 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

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23
Q

Who is a relief at source pension arrangement most beneficial for?

A

• non tax payers - tax relief gained at 20%

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24
Q

What is the current personal allowance?

A

£12,570

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25
Q

What can reduce the personal allowance?

A
  1. Employee benefits
  2. Beneficial loans
  3. Adjusted net income over £100k
26
Q

What is the current personal allowance?

A

£12,570

27
Q

What reduces the personal allowance?

A
  1. Employee benefits
  2. Beneficial loans
  3. Net income > £100k
28
Q

How are employee benefits usually charged?

A

Using market value

29
Q

How are in house benefits charged?

A

Using marginal cost to employer

30
Q

What are the tax exempt benefits?

A

Home working up to £6 weekly
Group income protection
Mobile - 1 per employee
Work-related training

31
Q

How are company cars taxed?

A

Business use BIK = list price * fuel emissions

Private use = £25,300 * fuel emissions

Above reduces the personal allowance

32
Q

What is the diesel surcharge on fuel emissions for company cars?

A

4%

33
Q

What is the max charge for fuel emissions on company cars

A

37%

34
Q

How does the charge on fuel emissions increase for fuel over 100g?

A

1% for every 5g over 100g

  • rounded down to nearest 5g
35
Q

How are upfront contributions to a company car treated?

A

Deduced from list price - max £5k

36
Q

How are monthly contributions to a company car treated?

A

Deduced from benefit in kind

37
Q

How are pool cars taxed?

A

They’re not providing they’re strictly used for business and stay at work

38
Q

How do beneficial loans reduce personal allowance?

A

If the loan interest is lower than the official government rate of interest, the difference will be a charge which reduces the personal allowance

39
Q

How do beneficial loans up to £10k impact the personal allowance?

A

They don’t

40
Q

How do beneficial qualifying loans impact the personal allowance?

A

No charge for interest up to the higher of £50k or 25% of adjusted total income

Above this incurs a charge

41
Q

How does adjusted net income over £100k impact the personal allowance?

A

PA reduces by £1 for every £2 over

42
Q

What is adjusted net income?

A

Income - loss relief - interest - gross pension and gift aid contributions

43
Q

What is the equation for taxable income?

A

Taxable income = net income - allowances

44
Q

Why are allowances deducted from taxable income?

A

To ensure the correct level of income tax is applied to total income

45
Q

What are the types of allowance available to an individual?

A
  1. PSA
  2. Starter rate for savings
  3. Dividend allowance
  4. Transferable personal allowance
46
Q

What are the PSA’s?

A

Basic £1000
Higher £500
Additional £0

47
Q

How does the PSA work?

A

Income within the PSA is tax free, however the PSA is still used within the tax band for further calculations

48
Q

How are unused income tax allowances used?

A

To offset against chargeable gains if applicable

49
Q

How does the starter rate for savings work?

A

£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

50
Q

What is the dividend allowance?

A

£2k tax free (forms pard of tax band)

51
Q

How does the transferable personal allowance for income tax work?

A

A non-tax paying spouse can transfer 10% of their personal allowance to a basic rate tax paying spouse

52
Q

What is the transferable personal allowance for income tax also referred to as?

A

Marriage allowance

53
Q

What is net income?

A

Total income - allowable deductions

54
Q

Why are basic rate tax bands extended?

A

To ensure the correct rates of tax are applied to the correct level of income

55
Q

What causes the basic rate tax bands to be extended?

A

Relief at source pension contributions
Gift aid contributions

56
Q

Why are relief at source pension and gift aid contributions considered to be basic rate tax band extenders?

A

The contributions are paid to the individual net of 20% which needs to be reclaimed

57
Q

Who reclaims the 20% tax relief following relief at source and gift aid contributions?

A

The relevant scheme

58
Q

Why isn’t the basic rate band extended for basic rate taxpayers?

A

They already receive the correct level of tax relief (20%)

59
Q

How do higher rate taxpayers gain the correct level of tax relief?

A

New amount taxable at 20% = gross contributions (relief at source pension & gift aid) + basic rate taxable income (£37,700)

60
Q

How does a basic rate band extension provide a higher rate taxpayer with the correct level of tax relief?

A

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

61
Q

What are the current rates of tax for all income besides dividends?

A

£0 - £12,570 = 0%
£12,571 - £50,270 = 20%
£50,271 - £150,000 = 40%
£150,001 + = 45%

62
Q

What are the current dividend tax rates?

A

£0 - £2000 = 0% - uses up relevant band rate

Basic = 8.75%
Higher = 33.75%
Additional = 39.35%

RO3: Personal Taxation (2 decks)

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