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SQE1: Business Law & Practice > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

Who pays income tax? (6)

A

Employees: pay income tax on their salary

Sole Traders: pay income tax on their trading profits

Shareholders: pay income tax on their dividends

Partners: pay income tax on their share of the partnership profits Nb. If partners individual human beings, may also have to pay on partnership’s trading profits & CGT on partnership’s capital gains

Individual Lenders: pay income tax on money they are paid in interest

Debenture Holders: pay income tax on the income from the debenture (fixed form of interest)

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2
Q

What is the tax year?

A

6 April - 5 April

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3
Q

What are the 3 categories of income?

A

(a) Non-savings, non-dividend income

(b) Savings income

(c) Dividend income

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4
Q

What are the 5 steps for calculating income tax?

A
  1. Calculate total income
  2. Deduct any allowance reliefs
  3. Deduct any personal allowances
  4. Separate NSNDI, savings income & dividend income → calculate tax on each type at the applicable rate(s)
  5. Add together the amounts of tax from (4) to give the overall income tax liability
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5
Q

1. Calculate total income

What are the 5 types of income chargeable to income tax?

A

a. Trading income

b. Property income

c. Savings & investment income

d. Employment & pensions income

e. Certain misc. income

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6
Q

1. Calculate total income

Is compensation for unfair dismissal chargeable to income tax?

A

Not the first £30,000 - anything after is

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7
Q

1. Calculate total income

What are two types of interest which are not chargeable to income tax?

A

Interest on damages for personal injury / death

Interest on savings certificates

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8
Q

1. Calculate total income

Are premium bond winnings income tax?

A

No (gaming / betting prizes are not chargeable)

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9
Q

1. Calculate total income

Are non-cash benefits (eg. company car for private & business use; medical insurance) taxable?

A

Yes

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10
Q

1. Calculate total income

Is rent-free or low-rent accommodation provided to an employee taxable?

A

Not taxable if:

  • Necessary to live on premises to perform duties; or
  • Accommodation is provided so that employee can perform their duties better & it is customary in that type of employment to have their accommodation provided
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11
Q

1. Calculate total income

Are low-interest or interest-free loans to employees taxable?

A

Yes above £10,000

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12
Q

1. Calculate total income

Are an employer’s pension contributions taxable?

A

Not taxable if paying into an HMRC-approved scheme

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13
Q

How do you calculate trading profits for a business?

A

Chargeable receipts less deductible expenses less capital allowances

→ Chargeable receipts: income (ie. recurring) of money received from sale of goods & services

→ Deductible Expenditure: must of income nature & incurred ‘wholly & exclusively’ for the trade

→ Capital Allowances: WDA & AIA/full expensing

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14
Q

When calculating trading profits, what is ‘deductible expenditure’?

A

Of an income nature & incurred ‘wholly & exclusively’ for the trade

Commonly deductible items include:

  • Salaries
  • Rent on commercial premises
  • Utility bills
  • Stock
  • Contributions to an approved pension scheme for directors/employees
  • Interest payments on borrowings
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15
Q

When calculating trading profits, what are the three main capital allowances?

A

Writing Down Allowance

Annual Investment Allowance

Full Expensing (companies only)

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16
Q

What is Writing Down Allowance?

A

Deduct 18% of the value of plant & machinery

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17
Q

What is the Annual Investment Allowance?

A

Deduct the first £1m of cost of plant & machinery purchased in the accounting period, whether new, second-hand or refurbished

18
Q

What is full expensing?

A

Deduct 100% of cost (uncapped) of brand new plant & machinery purchased in the accounting period

Available to companies only

19
Q

2. Deduct any allowable reliefs

What is the main relief?

A

Interest payments on qualifying loans

eg.

  • Loan to buy a share in a partnership or to contribute capital / loan to partnership
  • Loan to invest in a close trading company
  • Loan to PRs to pay IHT
20
Q

2. Deduct any allowable reliefs

What are 3 examples of qualifying loans?

A
  • Loan to buy a share in a partnership or to contribute capital / loan to partnership
  • Loan to invest in a close trading company
  • Loan to PRs to pay IHT
21
Q

3. Deduct any personal allowances

How much is the personal allowance?

A

£12,570

22
Q

3. Deduct any personal allowances

What is the effect of the personal allowance depending on net income?

A

Net income £100,000 or less: deduct £12,570

Net income more than £100,000: personal allowance reduced by £1 for every £2 income above £100,000

Net income above £125,140: personal allowance is zero

23
Q

3. Deduct any personal allowances

What is the formula for working out Adjusted Personal Allowance?

A

(£12,570 - (net income - £100,000)) / 2

(round up to nearest £1)

24
Q

3. Deduct any personal allowances

What is the blind person’s allowance?

A

Registered blind taxpayers receive £2,870 extra allowance

25
Q

3. Deduct any personal allowances

What is the property & trading allowance?

A

Where individual in receipt of gross property / trading income below £1,000, it is not subject to income tax

If gross property / trading income is more than £1,000, receive an allowance of £1,000

26
Q

4. Separate NSNDI, savings income & dividend income → calculate tax on each type

What order are the different types of income taxed?

A

I. NSNDI (taxed first)

II. Savings income (taxed next)

III. Dividend income (taxed last)

27
Q

4. Separate NSNDI, savings income & dividend income → calculate tax on each type

What are the tax rates for NSNDI?

A

Basic (20%) - £0 - £37,700

Higher (40%) - £37,701 - £125,140

Additional (45%) - Over £125,140

28
Q

4. Separate NSNDI, savings income & dividend income → calculate tax on each type

How do you calculate the tax on savings income?

A
  1. Set personal savings allowance against savings income
  • Basic rate taxpayer: PSA £1,000
  • Higher rate taxpayer: PSA £500
  • Additional rate taxpayer: zero PSA available
  1. Calculate tax (tax rate: taxable NSNDI + PSA):

Savings Basic (20%) - £0 - £37,700

Savings Higher (40%) - £37,701 - £125,140

Savings Additional (45%) - Over £125,140

Nb. If an individual has less than £5,000 NSNDI, the first £5,000 of their savings income is taxed at 0%

29
Q

4. Separate NSNDI, savings income & dividend income → calculate tax on each type

How do you calculate the tax on dividends income?

A
  1. Set the dividends allowance (first £1,000) against dividends income
  2. Calculate tax (tax rate: taxable NSNDI + total SI + dividend allowance)

Ordinary (8.75%) - £0 - £37,700

Upper (33.75%) - £37,701 - £125,140

Additional (39.35%) - Over £125,140

30
Q

5. Add together amounts from (4) to give overall income tax liability

How do you calculate the overall income tax liability?

A

Add together the amounts from (4) & deduct any tax deducted at source (ie any PAYE)

31
Q

What are the two ways income tax can be collected?

A

Through deduction at source (eg. employee) or through self-assessment (eg. sole trader)

32
Q

When must taxpayer pay income tax?

A

Must submit tax return to HMRC by 31 January after the tax year in question

Must make two payments on account towards income tax due for any year:

  • First payment on account - by 31 January in tax year in question
  • Second payment on account - by 31 July after end of tax year
  • Any balancing payment - the next 31 January
33
Q

What is GAAR?

A

General Anti-Avoidance Rule

HMRC can make adjustments (counteraction) to a taxpayer’s liability if they have gained an advantage from abusive tax arrangements

Anyone who enables an abusive tax arrangement may be required to pay a penalty

34
Q

What is start-up loss relief?

A

For a loss in the first four tax years of a new business

Claim back on the taxpayer’s total income in the first 3 years prior to the loss
- Must be set against earlier years before later years

Cap = £50,000 or 25% taxpayer’s income

35
Q

When can a loss be set against capital gains?

A

Where carry-across relief is applied but not all of the loss has been absorbed

36
Q

What is carry-across relief?

A

In any year of trading, loss set against total income from the same tax year

Cap = £50,000 or 25% of taxpayer’s income

37
Q

What is carry-forward relief?

A

For loss in any year of trading, loss is carried forward for tax year & set against subsequent profits

Can be carried forward indefinitely (but must notify HMRC)

38
Q

What is carry-back terminal relief?

A

Losses incurred in the final 12 months of trading set against trading profits in the 3 years preceding the loss

39
Q

What is carry-forward relief on incorporation of business?

A

Losses up to incorporation set against subsequent income until the loss has been absorbed

40
Q

What are the 5 reliefs that may be available if a sole trader or partner has made a loss?

A

Start-up loss relief

Carry-across relief

Carry-forward relief

Carry-back terminal relief

Carry-forward relief on incorporation of business

SQE1: Business Law & Practice (9 decks)

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