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Business Law > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

What is income tax?

A

Annual tax which individuals have to pay to HMRC.

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2
Q

What is the statute for income tax?

A

Income Tax Act 2007

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3
Q

What is income?

A

Money will be regarded as income if there is an element of RECURRENCE - a salary received every month , or interest received on a bank account.

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4
Q

Who pays income tax?

A

Individuals
Partners
Personal representatives and trustees

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5
Q

When do individuals have to pay income tax?

A

If their tax earnings exceed a certain threshold.

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6
Q

When do sole traders have to pay income tax?

A

Based on an assessment of their trading profits.

Ascertain the business’s chargeable receipts, subtract from chargeable receipts any deductible expenditure and capital allowance. This is the trading profit, and is used for income tax.

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7
Q

When do partners have to pay income tax?

A

Repsonsible for tax due on their individual share of the partnership profits.

Same calculations s sole traders.

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8
Q

When must PRs pay income tax?

A

Pay the deceased outstanding income tax and income tax chargeable during the administration of the estate

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9
Q

When does trustees have to pay income tax?

A

Pay income tax on income produced by the trust

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10
Q

What is the tax year?

A

From 6 April until 5 April the following year.

This means that an individual will pay tax on all income earned between these dates.

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11
Q

How do you work out taxable income?

A

Allowances and reliefs are deducted from the income the individual earns.

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12
Q

What are the 3 categories of income?

A

Non-saving, non-dividend income (NSNDI)

Savings income

Dividend income

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13
Q

What are the 5 steps to calculate income tax payable?

A

Calculate total income

Deduct any reliefs (=net income)

Deduct any personal allowances (=taxable income)

Separate NSNDI, savings income and dividend income, and calculate tax on each time.

Add together the amounts, to give overall income tax liability

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14
Q

What are the sources of income?

A

Trading income
Property income
Savings and investment income
Employment and pensions income
Miscellaneous

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15
Q

Which incomes is not chargeable?

A

Interests on damages for PI or death
Interests on savings certificates
State benefits
Premium bond winnings
Income from investment in ISA

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16
Q

What is a qualifying loan relief?

A

Tax relief available for interest paid on money which the tax payer has borrowed

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17
Q

What is the personal allowance for 2023/24

A

12,570

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18
Q

What rank do you deduct personal allowance off ?

A

Firstly against NSNDI
If surplus, then savings income
If surplus, then dividend income

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19
Q

What happens if a taxpayers income exceeds 100,000?

A

Personal allowance is reduced by £1 for every 2 of income, above te 100,000 limit.

20
Q

How do you work out the adjusted personal allowance for peoples whose income is higher than 100,000

A

12,570 - (net income-100,000)
Divided by 2

21
Q

What is the marriage allowance?

A

Where a person does not have enough income to use up their personal allowance, they can transfer 1,260 of their personal allowance to their spouse or civil partner.

NOT available if recipient is a higher or additional rate tax payer

22
Q

What are property and trading allowances?

A

Allowances for small amounts of property income and trading income are available to al UK taxpayers.

Where individuals are in receipt of gross property income below 1,000, the income not be subject to income tax.

23
Q

What is the personal savings allowance?

A

Can be set against savings income, so that the first 1,000 of savings will be tax free.

Depends if taxpayer is basic or higher rate.

24
Q

What are the differnet personal savings allowances bands?

A

Basic rate (0-37,000) - 1,000 free
Higher rate (37,701-125,140) - 500 tax free
Additional rate taxpayer - none

25
Q

What is the dividend allowance?

A

1,000
First 1,000 will be tax free.
All taxpayers are entitled to this.

26
Q

What is the order of slices in income tax calculation?

A

NSNDI first
Savings
Then dividends.

27
Q

What are the rates of income tax for NSNDI?

A

Basic rate: 20%
Higher rate: 40%
Additional rate: 45%

28
Q

What is the income tax rates for savings?

A

Starting rate : 0%
Basic rate: 20%
Higher rate: 40%
Additional rate: 45%

29
Q

What are the income tax rates for dividends?

A

Ordinary rate: 8.75%
Upper rate: 33.75%
Additional rate: 39.35%

30
Q

What tax do sole traders have to pay?

A

Income tax
Potential capital gains tax
Inheritance tax, depending on circumstances

31
Q

What is the general rule on taxation of partnerships?

A

Any tax is through the individual.

Therefore, income tax and or capital gains tax.

32
Q

How is partnerships trading profit calculated?

A

Chargeable receipts

  • deductible expenditure
  • capital allowance

= trading profit/loss

33
Q

What is a qualifying loan

A

If an individual borrows money to buy a share in a partnership or to lend money to a partnership, they can deduce the interest they pay on this borrowing from total income.

34
Q

How do LLPs pay tax

A

Treated the same as a partnership

35
Q

How do shareholders pay tax?

A

When a CLOSE COMPANY makes a loan to a shareholder, there may be income tax consequences.

When a shareholder SELLS their shares back to the company, they will be charged to income tax as a divided, and potential CGT

36
Q

What are the 2 income tax reliefs for shareholders?

A

1: when an individual borrows money to purchase ordinary shares in a close company that carries on a trade, or lends money to a close company that carries on trade

2: EIS, Enterprise Investment Scheme. Allows the individual to deduct from their income tax liability for the year a sun equal to 30%.

37
Q

What do employees not have to pay tax on?

A

Accommodation, if necessary for job
Interest-free or low-interest loans
Employers pension contributions.
Share schemes

38
Q

How is income tax collected?

A

Either dedication of source

Or self assessment collection

39
Q

How can income tax be deducted at the source?

A

Payer of the income acts as a tax collector. They will deduct the correct amount of income tax for the income payment, and pay it to HMRC.

40
Q

What is the self assessment for collection of income tax?

A

Must complete a tax return, declaring all their income for the tax year.

41
Q

When does tax have to be paid?

A

There are different tax returns for differnet types of income, and they are issued soon after 5 April each ear.

Must be filed by 31 January following the tax year.

42
Q

What are penalties for default in declaring tax?

A

HMRC charges interest on any tax unpaid at the due date for payment.

There are also fixed penalties, fines for late or non-payment.

43
Q

What is tax avoidance?

A

Using the tax law to the taxpayers benefit to reduce their tax bill, in a way that is arguably lawful, but not within the spirits of tax legislation.

44
Q

What is tax evasion?

A

Using illegal methods to reduce tax payment, and which is targeting by domestic legislation and international treaties.

45
Q

What is GAAR?

A

General anti-avoidance rule.

This was brought into the system, and applies to income tax and CGt, corporation, IHT and NI.

Tax avoidance is acceptable, but abusive arrangements are NOT

46
Q

What are examples of abusive tax arrangements?

A

If it would be reasonable to conclude that obtaining of a tax advantage was the MAIN PURPOSE, or one of the main purposes of the arrangement.

Whether the effect of arrangement is consistent with the policy objectives, if it woudl result in abnormal steps.

47
Q

What is the procedure of GAAR?

A

HMRC will notify the taxpayer of why it considers that a tax advantage has arisen to the taxpayer, and set out the tax adjustments that the officer considers ought to be taken.

If counteraction is proposed by HMRC, the taxpayer is permitted to make written representations in their defence, and teh matter will then be referred to the GAAR panel.

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