Income Tax

Question 1

What is an income receipt?

Answer 1

Money received on a regular basis

eg trading profits of business/profession; interest bank pays on savings; and rent payments received by Landlord

Question 2

What are capital receipts?

Answer 2

Receipt from transaction that is not a part of such regular activity ie receipts from one-off transactions

Question 3

What is income expenditure?

Answer 3

Money spent as part of day-to-day trading

Question 4

What is capital expenditure?

Answer 4

Money expended to purchase a capital asset as part of the business or as an enduring benefit for the business

One-off transactions

Question 5

What are trading profits?

Answer 5

Income receipts less income expenditure = trading profits

Question 6

What are capital allowances?

Answer 6

Form of tax relief for capital expenditure whereby cost of some of capital assets can be set off against trading profits of the business each year during the life of asset concerned

Question 7

What is the tax year for individuals?

Answer 7

April 6th to April 5th

Question 8

What is the financial year for companies?

Answer 8

1st April to 31st March

Question 9

What the two methods by which HMRC collects income tax?

Answer 9

• self-assessment
• deduction at source ie PAYE

Question 10

What steps are there for calculating income tax?

Answer 10

Step 1 - calculate total income

Step 2 - deduct available tax reliefs (interest on qualifying loans and pension contributions) = net income

Step 3 - deduct personal allowance (reduced by £1 for every £2 of net income above £100,000) = taxable income

Step 4 - split the taxable income into non-savings, savings and dividend income

Step 5 - calculate whether the personal savings allowance is available (looking at taxable income figure to see which income band it ends in)

Step 6 - Apply relevant tax rates

Step 7 - add together the amount of tax calculated at step 6 to give total tax liability

Question 11

What personal savings allowance is available when?

Answer 11

• basic rate taxpayers - £1,000 nil rate
• higher rate taxpayers - £500 nil rate
• additional rate taxpayers - no nil rate band

Question 12

What dividend allowance is available?

Answer 12

Nil-rate on first £1,000 of dividend allowance

Question 13

Are benefits in kind to be treated as part of an individual’s income?

Answer 13

Yes - not normally subject to tax deduction under PAYE so must report benefit through self-assessment

Question 14

What relief deductions are available for income tax?

Answer 14

• interest paid out on qualifying loans
• pension scheme contributions

Question 15

What are qualifying loans for deduction of income tax purposes?

Answer 15

• loans to buy an interest in a partnership
• loans to contribute capital or make a loan to a partnership
• loans to buy shares in or make a loan to a ‘close’ company
• loans to buy shares in an employee-controlled company or invest in a co-operative

Question 16

What relief is available on pension contributions for income tax purposes?

Answer 16

Amount equivalent to the pension scheme contributions made by a taxpayer during the tax year are deducted from their total for that year

Question 17

How is taxable income calculated?

Answer 17

Take away personal allowance from net income

Currently £12,570

Question 18

What happens to the personal allowance once income is over £100,000?

Answer 18

Personal allowance is reduced by £1 for even £2

So if you earn £125,140 you will have no personal allowance

Question 19

What three categories must income be split into?

Answer 19

• non-savings
• savings
• dividend income

Question 20

Why must income be split into non-savings, savings, and dividend income?

Answer 20

Because different rates apply to each type of income

Question 21

What is the cake method as to how the three different categories of income should be tax?

Answer 21

• Non-saving income is the bottom layer - it should be use up personal allowance and basic rate band first
• Savings income is then stacked on top of non-savings income
• dividend income is then stacked on top so it is the top layer

Question 22

What are the current tax rates for non-savings?

Answer 22

• basic rate - 20%
• higher rate - 40%
• additional rate - 45%

Question 23

What are the current tax rates for savings?

Answer 23

• basic rate - 20%
• higher rate - 40%
• additional rate - 45%

Question 24

What are the current tax rates for dividends?

Answer 24

• basic rate - 8.75%
• higher rate - 33.75%
• additional rate - 39.35%

Question 25

What are the tax bands?

Answer 25

• basic rate - £0 -£37,700
• higher rate - £37,701 - £125,140
• additional rate - over £125,140