Income Tax Flashcards
When does the taxation of onshore and offshore bonds occur?
Onshore bonds are taxed as the top part of income, so after dividend income. They benefit from a non-reclaimable 20% tax credit, reflecting the fact that the life company will have paid corporation tax on the funds.
Offshore bond gains are aggregated with all other savings income and taxed after earned income but before dividends.
Offshore bonds are able to use PA, PSA, SRA
What is EDSL
Order of how income is taxed:
E = earnings (Non-savings income)
S = Savings Income
D = Dividend income
L = Life assurance gains
There are several reasons why it is often preferable to be self-employed rather than employed. The two main factors are:
The treatment of expenses: the criterion for allowability for tax purposes is that the expense has to be wholly and exclusively incurred for the purposes of the business.
Employees have to meet a much stricter standard – that expenses must be wholly, exclusively and necessarily incurred in the performance of the employee’s duties.
Lower levels of NICs: self-employed people pay class 4 NICs at 6% on profits between £12,570 and £50,270 a year whereas employees pay class 1 NICs at 8% for same level of earnings.
What are the test of status for being self employed?
- The degree of control that the ‘employer’ exercises over the worker.
- Is there a contract of service (employment) or a contract to provide services (self-employment)?
- Set hours, holiday and overtime pay, and supervision of the work done tend to indicate employment, as does an ongoing and dependent ‘master/servant’ relationship.
- An agreement for a specific amount of money, or perhaps commission, for the work to be done, rather than regular weekly or monthly pay, as well as the freedom to accept or refuse the work that is offered and to accept work elsewhere.
- If the worker can substitute (or sub-contract) someone else rather than being obliged to provide a personal service.
- If the worker takes business risks, but can profit from greater efficiency, this indicates self-employment.
- A long engagement working for the same person is typical of employment, although this factor is not conclusive.
A salaried member of a limited liability partnership (LLP) is taxed as an employee of the LLP unless the member meets any one of the following conditions:
- More than 20% of the member’s remuneration is based on the profitability of the LLP as a whole.
- The member has a significant say in the running of the business as a whole.
- The member has made a significant capital contribution to the LLP – this condition is met if the member has invested the equivalent of at least 25% of their expected income from the LLP for a particular tax year.
Payments from a purchased life annuity comprise two separate elements:
A capital element. This is a return of part of the original capital used to purchase the annuity and is free from tax.
An income element. This is treated as savings income and is paid net of basic rate tax (20%).
When are interest payments allowable deductions from total income?
If the loan is taken out for qualifying purposes. The main qualifying purposes are:
- the purchase of shares in the borrower’s company or to finance loans to the company;
- investment in a partnership;
- the purchase of plant and machinery for use in a partnership;
- the payment of inheritance tax (IHT).
What level is tax deductible qualifying interest capped at?
The amount of interest plus allowable business losses that can be deducted is capped at the higher of £50,000 or 25% of a person’s adjusted total income.
For 2023/24, Sally has a share of partnership profits of £260,000. During the year, she made gross personal pension contributions of £30,000 and paid interest of £65,000 on a loan taken out to finance the partnership.
What is her adjusted total income and the amount of interest which she can deduct from her taxable income?
Sally’s adjusted total income is £230,000 (£260,000 – £30,000), so the cap is £57,500 (£230,000 × 25%).
What are Tax reliefs? (Explain and provide examples)
In the main, these are items that are taken off by the payroll department for employees, or before arriving at profits for self-employed individuals.
*pension payments; paid via the ‘net pay arrangement’
*childcare vouchers
*payroll giving
*self-employed trading expenses
*rental costs (except the mortgage payments)
*interest on qualifying loans.
Conditions for interest to be an allowable expense if it is payable on a loan to pay IHT?
- Relief is restricted to a period of one year from the making of the loan.
- Relief is at the borrower’s top rate, but is subject to the cap of £50,000 or 25% of adjusted total income, whichever is the higher.
- The borrower must be a personal representative of the deceased.
How is tax relief provided via Relief At Source?
- The payer gets basic rate tax relief by deduction from the payments, which is reclaimed by the pension provider.
- Higher- and additional-rate tax relief is given by extending the individual’s basic- and higher-rate tax limits by the amount of the gross pension payment, in the same way as relief for gift aid donations to charity. The individual must claim the relief either on a self assessment tax return or separately.
How is tax relief applied via net pay arrangement?
The pension contributions are deducted from their pay before they get the chance to spend them or, perhaps more importantly in this context, before tax is applied to their pay.
Tax is therefore just applied to their ‘net pay’ (i.e., gross pay minus the pension contribution), hence the term ‘net pay arrangement.’
How is tax relief given via child care vouchers?
It allowed part of an employee’s salary to be sacrificed (in a similar way to salary sacrifice for pensions) in exchange for the employer paying into a childcare voucher account. These vouchers could then be used to pay for any Ofsted-registered childcare setting, including out of school clubs.
The maximum amount of salary that could be sacrificed in this way for Childcare vouchers is £55 a week.
This limit is per parent, so two working parents were able to get £110 of vouchers a week.
How does charitable giving via payroll provide tax relief?
The same method as for salary sacrifice or net pay arranegement.
