Income Tax Flashcards
What is an income receipt?
Money received on a regular basis
eg trading profits of business/profession; interest bank pays on savings; and rent payments received by Landlord
What are capital receipts?
Receipt from transaction that is not a part of such regular activity ie receipts from one-off transactions
What is income expenditure?
Money spent as part of day-to-day trading
What is capital expenditure?
Money expended to purchase a capital asset as part of the business or as an enduring benefit for the business
One-off transactions
What are trading profits?
Income receipts less income expenditure = trading profits
What are capital allowances?
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
What is the tax year for individuals?
April 6th to April 5th
What is the financial year for companies?
1st April to 31st March
What the two methods by which HMRC collects income tax?
- self-assessment
- deduction at source ie PAYE
What steps are there for calculating income tax?
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
What personal savings allowance is available when?
- basic rate taxpayers - £1,000 nil rate
- higher rate taxpayers - £500 nil rate
- additional rate taxpayers - no nil rate band
What dividend allowance is available?
Nil-rate on first £500 of dividend allowance
Are benefits in kind to be treated as part of an individual’s income?
Yes - not normally subject to tax deduction under PAYE so must report benefit through self-assessment
What relief deductions are available for income tax?
- interest paid out on qualifying loans
- pension scheme contributions
What are qualifying loans for deduction of income tax purposes?
- 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
What relief is available on pension contributions for income tax purposes?
Amount equivalent to the pension scheme contributions made by a taxpayer during the tax year are deducted from their total for that year
How is taxable income calculated?
Take away personal allowance from net income
Currently £12,570
What happens to the personal allowance once income is over £100,000?
Personal allowance is reduced by £1 for even £2
So if you earn £125,140 you will have no personal allowance
What three categories must income be split into?
- non-savings
- savings
- dividend income
Why must income be split into non-savings, savings, and dividend income?
Because different rates apply to each type of income
What is the cake method as to how the three different categories of income should be tax?
- 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
What are the current tax rates for non-savings?
- basic rate - 20%
- higher rate - 40%
- additional rate - 45%
What are the current tax rates for savings?
- basic rate - 20%
- higher rate - 40%
- additional rate - 45%
What are the current tax rates for dividends?
- basic rate - 8.75%
- higher rate - 33.75%
- additional rate - 39.35%
What are the tax bands?
- basic rate - £0 -£37,700
- higher rate - £37,701 - £125,140
- additional rate - over £125,140
