Income Tax Flashcards by elena s

Who pays income tax? (6)

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)

How well did you know this?

Not at all

Perfectly

What is the tax year?

6 April - 5 April

How well did you know this?

Not at all

Perfectly

What are the 3 categories of income?

(a) Non-savings, non-dividend income

(b) Savings income

How well did you know this?

Not at all

Perfectly

What are the 5 steps for calculating income tax?

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

How well did you know this?

Not at all

Perfectly

1. Calculate total income

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

a. Trading income

b. Property income

c. Savings & investment income

d. Employment & pensions income

e. Certain misc. income

How well did you know this?

Not at all

Perfectly

1. Calculate total income

Is compensation for unfair dismissal chargeable to income tax?

Not the first £30,000 - anything after is

How well did you know this?

Not at all

Perfectly

1. Calculate total income

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

Interest on damages for personal injury / death

Interest on savings certificates

How well did you know this?

Not at all

Perfectly

1. Calculate total income

Are premium bond winnings income tax?

No (gaming / betting prizes are not chargeable)

How well did you know this?

Not at all

Perfectly

1. Calculate total income

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

Yes

How well did you know this?

Not at all

Perfectly

1. Calculate total income

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

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

How well did you know this?

Not at all

Perfectly

1. Calculate total income

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

Yes above £10,000

How well did you know this?

Not at all

Perfectly

1. Calculate total income

Are an employer’s pension contributions taxable?

Not taxable if paying into an HMRC-approved scheme

How well did you know this?

Not at all

Perfectly

How do you calculate trading profits for a business?

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

How well did you know this?

Not at all

Perfectly

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

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

How well did you know this?

Not at all

Perfectly

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

Writing Down Allowance

Annual Investment Allowance

Full Expensing (companies only)

How well did you know this?

Not at all

Perfectly

What is Writing Down Allowance?

Deduct 18% of the value of plant & machinery

How well did you know this?

Not at all

Perfectly

What is the Annual Investment Allowance?

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

What is full expensing?

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

Available to companies only

2. Deduct any allowable reliefs

What is the main relief?

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

2. Deduct any allowable reliefs

What are 3 examples of qualifying loans?

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

3. Deduct any personal allowances

How much is the personal allowance?

£12,570

3. Deduct any personal allowances

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

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

3. Deduct any personal allowances

What is the formula for working out Adjusted Personal Allowance?

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

(round up to nearest £1)

3. Deduct any personal allowances

What is the blind person’s allowance?

Registered blind taxpayers receive £2,870 extra allowance

*3. Deduct any personal allowances* What is the property & trading allowance?

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**

*4. Separate NSNDI, savings income & dividend income → calculate tax on each type* What order are the different types of income taxed?

I. NSNDI (taxed first) II. Savings income (taxed next) III. Dividend income (taxed last)

*4. Separate NSNDI, savings income & dividend income → calculate tax on each type* What are the tax rates for NSNDI?

Basic (**20%**) - £0 - **£37,700** Higher (**40%**) - £37,701 - **£125,140** Additional (**45%**) - **Over** £125,140

*4. Separate NSNDI, savings income & dividend income → calculate tax on each type* How do you calculate the tax on savings income?

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 2. 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%***

*4. Separate NSNDI, savings income & dividend income → calculate tax on each type* How do you calculate the tax on dividends income?

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

*5. Add together amounts from (4) to give overall income tax liability* How do you calculate the overall income tax liability?

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

What are the two ways income tax can be collected?

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

When must taxpayer pay income tax?

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**

What is GAAR?

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**

What is start-up loss relief?

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

When can a loss be set against capital gains?

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

What is carry-across relief?

In **any** year of trading, loss set against **total income** from the **same tax year** Cap = £50,000 or 25% of taxpayer's income

What is carry-forward relief?

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)

What is carry-back terminal relief?

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

What is carry-forward relief on incorporation of business?

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

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

Start-up loss relief Carry-across relief Carry-forward relief Carry-back terminal relief Carry-forward relief on incorporation of business