Income Tax

Question 1

Who pays income tax?

Answer 1

Individuals (including employees, sole proprietors and partners).

Question 2

What do shareholders pay income tax on?

Answer 2

Dividends on shares they own, this is reported through self-assessment and taxes paid. Electronically filed tax returns must be filed by 31 January the next year.

Question 3

What is the basis of charge?

Answer 3

No official definition of what constitutes income but generally thought of as money that may be received on a recurring basis. Distinguished from capital profits from the sale of an asset.

Question 4

Majority of income tax is collected by who and what system?

Answer 4

By employers via the PAYE system and sent to HMRC

Question 5

What are the three categories of income?

Answer 5

1. Non-savings income – from earnings (salary and bonuses), pensions, trading income, property income
2. Savings income – interest from UK banks and building society accounts, credit union accounts, government or company bonds and similar
3. Dividend income – money from companies for share ownership

Question 6

What happens if income from outside the UK?

Answer 6

Is foreign income and generally a UK resident must pay tax if they spent 183 days or more in the UK during the tax year.

Question 7

What income is exempt from tax?

Answer 7

• Interest from National Savings Certificates
• Interest from an individual savings account
• Winnings on premium bonds and any income from betting, gaming or lotteries
• Many social security benefits including universal credit, housing benefits, child benefit, working tax credit.

Question 8

Who calculates trading income?

Answer 8

Sole traders/partners will need to calculate their trading income in include in their tax return (they must also register with HMRC within 3 months of becoming self-employed/starting their business).

Question 9

How is trading income calculated?

Answer 9

Take gross income for businesses accounting period and subtract expenses of the business which are revenue related (such as employee salaries, electricity bills and cost of the goods sold).

Expenses only deductible to the extent it was used for business purpose.

Question 10

When is Annual Investment Allowance (AIA) used?

Answer 10

To deduct costs of plant and machinery (not cars, land or buildings) in the accounting period they were incurred up to allowance. Allowance varies was recently £1million.

Question 11

When is Writing Down Allowance available?

Answer 11

If costs exceed AIA, can deduct a fixed percentage of the cost of the asset each year 18% for most assets, 6% for life long assets. Assets of the same type can be pooled and the value of the asset pool is reduced by the amount taken and increased by new assets not coming within AIA.

Question 12

How is Partnerships trading profit calculated?

Answer 12

In a similar way as calculations for sole proprietors. Each partner’s share is set out in the partnership agreement, if not assumed that each partner has an equal share. Must include their whole share of the annual profits even if partners decide to retain part or all in the business.

Question 13

How does income tax work for partnerships?

Answer 13

The partnership doesn’t pay income tax but a nominated partner must file a partnership tax return with HMRC that declares the partnership’s income, expenses and deductions and shows the net income of the partnership and each partner’s share

Question 14

What is the income tax calculation?

Answer 14

Add up all income in each of three categories (non-savings, savings, dividends) subtract any allowances (personal, marriage) multiply the income in each category by the tax applicable to that category.

Question 15

What income tax allowances are there?

Answer 15

Personal allowance
Marriage allowance
Personal savings allowance
Dividend allowance

Question 16

What is the personal allowance in income tax?

Answer 16

Changes each year approx. £12,000. This is tapered so reduced by £1 for every £2 of income above £100,000.

Question 17

What is the marriage allowance in income tax?

Answer 17

Can transfer part of personal allowance to spouse (is approx. £1,250) the spouse transferring must have income less than the Personal Allowance and the recipient spouse must be a basic rate taxpayer. Only 20% of amount transferred is used.

Question 18

What is the personal savings allowance in income tax?

Answer 18

Basic rate taxpayer gets £1,000 and higher rate gets £500.

Question 19

What is the dividend allowance in income tax?

Answer 19

£2,000 available to all taxpayers (won’t bring person down a bracket)

Question 20

Why is personal savings allowance is applied first and taxed at 0%?

Answer 20

So can’t bring a person down a rate band

Question 21

What are the three income rate bands?

Answer 21

• Basic rate taxed at 20%
• Higher rate taxed at 40%
• Additional rate taxed at 45%

Question 22

When is loss relief available in income tax?

Answer 22

Available for sole trader or partnership who has had a loss in the tax year. Allows to offset the loss against income that otherwise would be taxed.

Question 23

In loss relief for income tax what are four alternatives to offset the loss?

Answer 23

1. Offset against taxpayer’s total income from the current year or prior year. No partial claims are permitted. May cause taxpayer to lose personal allowances if losses are great enough
2. Carry loss forward to set off against future profits of the same trade
3. If transfers business to a company and received shares in return can set off unused trading losses against salary or dividend payments received from the company for any year in which they own those shares
4. When trader ceases trading losses can be deducted from trading profits in the tax year of cessation then carried back to the three preceding tax years (working backwards)

Question 24

What is the purpose of General anti-abuse rule (GAAR)?

Answer 24

designed to deter taxpayers from entering schemes that abuse the tax system.

Question 25

What does General anti-abuse rule (GAAR) allow?

Answer 25

Allows HMRC to set aside a tax arrangement if it cannot reasonably to be regarded as a reasonable course of action (double reasonableness test).

If a tax arrangement is found abusive HMRC may make a tax adjustment which is just and reasonable – such as taxing the income in a legitimate way.

Question 26

What penalties are available under General anti-abuse rule (GAAR)?

Answer 26

Doesn’t provide for any penalties, but participants in an abusive scheme can be penalised under general tax laws for filing an inaccurate return.