Income Tax Flashcards
What is income tax and who pays it?
It is the tax paid by individuals (residents for tax in the UK) on taxable income paid in the tax year.
Why is it important to determine the residence of a taxpayer?
A taxpayer’s liability to income tax, CGT and IHT is based upon their residence.
A UK resident will be liable to income tax on worldwide income while a non-UK resident will be liable on only UK income.
Therefore, it is essential to be able to determine the residence of a taxpayer to determine their UK tax liability.
The rules regarding determining whether an individual is UK or Not UK resident are based on/determined by what?
The rules are based on the number of days that an individual spends in the UK.
What are the 3 steps in determining whether someone is UK resident or not UK resident?
Step 1: Does the individual satisfy any of the automatic overseas tests? (If YES, automatically NOT UK resident, if NO, move on to step 2).
Step 2: Does the individual satisfy any of the automatic UK tests? (If YES, automatically UK resident, if NO, move on to step 3).
Step 3: Does the individual satisfy the Sufficient Ties test? (If YES, automatically UK resident, if NO, automatically NOT UK resident).
Explain the Automatic Tests.
Step 1: Automatic Overseas Tests. Individual is in the UK in the tax year for less than:
1) 16 days or
2) 46 days and not UK resident for any of the last 3 years or
3) 91 days and works full time overseas.
(If YES, then NOT UK resident, if NO, then Step 2).
Step 2: Automatic UK Tests.
1) He/She spends at least 183 days in the UK in the tax year or
2) His/Her only home is in the UK or
3) He/She works full time in the UK.
(If YES, then UK resident, if NO, then Step 3).
Explain the Sufficient Ties Tests.
Step 3: Does the individual satisfy the sufficient ties test? If YES, then automatically UK resident, if NO, then automatically NOT UK resident.
5 UK ties:
1) Family Tie: has a spouse/civil partner or minor child nder the age of 18 in the UK.
2) Accommodation Tie: has accommodation in the UK which is made use of during the year. (used by you, not rented).
3) Work Tie: does substantive work in the UK. (substantive work = 40 days of more than 3 hours in the tax year)
4) Days in the Past Tie: spent more than 90 days in the UK in either or both of the previous 2 tax years.
5) Country Tie: spends more time in the UK than in any other country in the tax year. (this country tie is only applicable if a person has been a resident in the UK in any of the 3 previous tax years).
How many of the conditions of the sufficient ties test does a person need to pass in order to be considered UK or Not UK resident?
It depends on the table (which will be given in the exam).
It also depends on whether you’re an arriver (previously not Uk resident) or a leaver (previously UK resident) and also depends on the number of days you spend in the UK.
When counting the number of days to determine whether someone is UK or not UK resident, should the first day and the day of departure also be included/counted?
Yes. Both the first day and the day of departure should be counted.
What is taxable income?
It is income on which income tax is payable.
How is income tax calculated?
It is calculated separately for each year by preparing the income tax computation.
What are benefits in kind (BIK)?
These are non cash benefits given to you by a company. Eg: Cars, mobile phones, laptops, a flat, etc that are taxable.
Do you pay tax on the cost figure of the BIK that a company gives you?
No. The cost of the BIK figure is not the figure on which you pay tax. You’re going to apply certain rules to convert the value of the asset into a tax value. That tax value is then added to other taxable income (the salaries and bonuses for eg).
Is the income earned from being self employed taxable? If so, which type of tax do you pay on this income?
Yes it is taxable. It is a personal tax, not a corporation tax, as when you are self employed, you and your business are regarded as a single entity.
From a tax POV, would you want your profits to be as high as possible or as low as possible.
You want to keep your profits as low as possible.
Is depreciation allowed in taxation?
No, it is not. From a tax POV you want to keep you profits as low as possible and one way to do that is through legally increasing your expenses (such as increasing the rate of depreciation). That’s what you’d think but bad news for you, depreciation is not allowed in taxation.
Are profits on a trade in the P and L account taxable?
Once you’ve applied the tax rules on the P&L profit then that figure is the figure on which you pay tax. You call that profit “trading profit”.
Give examples of other types of income that are subject to income tax.
1 - Employment income
2 - Self employment (trade income)
3 - Rental/Property income
4 - Pension income
5 - Interest received
6 - Dividend received
What are the 3 most important types of income?
Employment income, trading profit and rental/property income since usually there is a separate working required for them.
What are some vital points to keep in mind while calculating the income tax payable?
- You must apply the income tax rates on the taxable income in order to calculate the income tax payable. (the income tax rates will be given in the exam).
- To calculate the income tax payable correctly, you must split the taxable income into a maximum of 3 categories as each category could attract a different rate of income tax based on the cumulative totals.
- In order to calculate the income tax and the income tax payable/liability, you must prepare an income tax computation for each individual and every tax year.
What are the 3 categories in the income tax computation?
1 - Non-Savings Income (NSI)
2 - Savings Income (SI)
3 - Dividend Income (DI)
In what order do the 3 categories use up the tax bands?
NSI, then SI, then DI.
What is the NSI category made up of?
1 - Employment Income
2 - Trade Income
3 - Property Income
4 - Pension Income.
What are tax bands?
In the UK, you have 3 tax bands that you are taxed in accordance with.
As you move into different bands, the tax rates change. The higher your income the greater your tax rates.
There is no fixed rate, the rate varies.
1) Basic rate: 20%
2) Higher rate: 40%
3) Additional rate: 45%
What is the SI category made up of?
Interest received.
