Income Tax Flashcards
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)
What is the tax year?
6 April - 5 April
What are the 3 categories of income?
(a) Non-savings, non-dividend income
(b) Savings income
(c) Dividend income
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
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
1. Calculate total income
Is compensation for unfair dismissal chargeable to income tax?
Not the first £30,000 - anything after is
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
1. Calculate total income
Are premium bond winnings income tax?
No (gaming / betting prizes are not chargeable)
1. Calculate total income
Are non-cash benefits (eg. company car for private & business use; medical insurance) taxable?
Yes
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
1. Calculate total income
Are low-interest or interest-free loans to employees taxable?
Yes above £10,000
1. Calculate total income
Are an employer’s pension contributions taxable?
Not taxable if paying into an HMRC-approved scheme
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
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
When calculating trading profits, what are the three main capital allowances?
Writing Down Allowance
Annual Investment Allowance
Full Expensing (companies only)
What is Writing Down Allowance?
Deduct 18% of the value of plant & machinery
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?
- Set personal savings allowance against savings income
- Basic rate taxpayer: PSA £1,000
- Higher rate taxpayer: PSA £500
- Additional rate taxpayer: zero PSA available
- 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?
- Set the dividends allowance (first £1,000) against dividends income
- 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
