Income tax Flashcards
Who pays income tax?
- individuals
- partners
- personal representatives: pay the deceased’s outstanding income tax and income tax chargeable during administration of estate.
- trustees:pay income tax on income produced by trust
Charities are exempt and companies pay corporation tax
Tax year
- From 6 April to 5 April the following year.
- Individuals pay tax on all income earned between these dates
How to calculate income tax?
Step 1: Calculate total income
Step 2: Deduct any allowable reliefs
Result is net income
Step 3: Deduct any personal allowances
Result is taxable income
Step 4: Separate non-savings, non-dividend income, savings and dividend income and calculate the tax on each type of income at applicable rates
Step 5: add together the amounts of tax to give overall **income tax liability **
Step 1 Total Income
trading income: profits of trade, profession or vocation. This
applies to sole traders, trading partnerships, sole practitioners and professional partnerships;
property income: rents and other receipts from land in the UK;
savings and investment income: interest, annuities and
dividends;
employment and pensions income, including social security payments such as sick pay and maternity pay; and
certain miscellaneous income
**
What income is not chargeable to income tax?
- interest on damages for personal injuries or death,
- interest on savings certificates,
- certain state benefits,
- premium bond winnings and
- income from investment in an individual savings account (ISA).
Allowable reliefs
The most significant example is interest payments on qualifying loans.
To benefit from this relief, interest must be payable on a ‘qualifying loan’, including:
* a loan to buy a share in a partnership, or to contribute capital
or make a loan to a partnership;
* a loan to invest in a close trading company; and
* a loan to personal representatives to pay inheritance tax.
Personal Allowances
The personal allowance for 2023/24 is £12,570. It can be set against income of any kind but is applied in a certain order:
* firstly, against NSNDI
* if there is surplus, against savings income
* any remaining surplus is applied against dividend income
Any unused personal allowances cannot be carried forward for use in future unless marriage allowance applies.
Once a taxpayer’s income reaches £125,140, personal allowance will have been reduced to zero by this point.
To calculate the personal allowance a net income above £100,000 but below £125,140 you can use the
following method:
Allowance PA = £12,570 - (net income - 100,000)/2
Marriage Allowance
Where a person does not have enough income to use their personal allowance fully for that tax year, they can transfer £1,260 of their personal allowance to their spouse or civil partner.
This is not available if the recipient is a higher or additional rate taxpayer
Blind person’s allowance
**Any taxpayer who is registered blind receives an allowance of
£2,870, which is subtracted from net income just like the personal
allowance.
Property and trading allowances
Where individuals are in receipt of gross property income or gross
trading income below £1,000, the income will not be subject to income tax.
Where gross property or trading income is in excess of £1,000,
the taxpayer can choose to take the £1,000 allowance as a deduction against gross income instead of deducting actual expenses to arrive at their taxable income figure
Personal savings allowance PSA
PSA can be set against savings income:
Basic rate taxpayer £0–£37,700) gets PSA: £1,000 tax free
Higher rate taxpayer £37,701 £125,140 gets PSA £500 tax free
Additional rate taxpayer
over £125,140 No allowance.
Dividend allowance
The dividend allowance is £1,000. It means that the first £1,000 of a taxpayer’s dividend income will be free from tax.
Nil rate bands
- the PSA and dividend allowance reduce the rate of tax applied to these types of income to 0% (‘nil rate’).
- PSA and dividend allowance are not used with the personal allowance to reduce taxable income.
- If the PSA and dividend allowance apply, it just means that savings and dividend income will be taxed at 0%.
Order of taxation
- Income is taxed in ‘slices’. The bottom slice, taxed first, is the NSNDI. The middle slice is the savings income, and the top slice is the dividend income.
- The tax rates are different for each slice, and the cut-off point between the rates usually (but not always) changes annually.
