Income Tax Flashcards
Types of Income
- employment income
- trading income
- property
- investment income
- other income.
What is the Tax year basis?
From the tax year 2024/25 onwards, self-employed individuals are taxed on profits made within the tax year (6 April to 5 April), regardless of their accounting date.
What are the Income Tax Reliefs given by deduction from income?
- Qualifying Interest Payments
- Allowable business Losses
- Gifts to Charities of shares and securities
- Qualifying contributions to occupational pension schemes
What are Qualifying interest payments? How do they relive income tax
Gross Interest payments can be deducted from total income if the loan is used for qualifying purposes:
- Purchasing shares in the borrower’s company or financing loans to the company
- Investing in a partnership
- Buying plant and machinery for use in a partnership
- Paying inheritance tax (IHT)
The deductible amount of interest plus allowable business losses is capped at the higher of £50,000 or 25% of a person’s adjusted total income.
4 methods of gifting to charity
- gift aid - gift treated as already taxed and charity can claim extra 20% - increase basic and higher rate bands by grossed up gift.
- payroll giving - regular giving from deduction of salary before PAYE calculated.
- gifts of certain assets - CGT exemption and reduce income tax by MV of gift (Shares or property)
- Gifts of pre-eminent objects - Reduce income tax OR CGT by 30% of value of gift.
Pension Contribution Rules
Age, max amount
- below 75 y/o
- max of £3,600 or individuals relevant earnings
- Annual allowance of £60,000 for tax relief, tapered to min. £10,000 by £1 for every £2 over £260,000 income
Types of Pension Relief
Relief at source:
- Most common
- Pay net value and scheme claim extra 20% from HMRC
- Higher rate and additional rate increase bands for gross amount
Net Pay:
- deducted from pay before tax calculated
Explain Marriage allowance
- Transfer 10% of Personal Allowance to Spouse rounded up to £1,260.
- Only if spouse is basic rate tax payer.
- All or nothing.
- Remains in force till cancelled.
- Can be back dated 3 years
Explain Marriage Couples Allowance
- Can claim if either spouse born before 6 April 1935
- One of the couple must be a non-tax-payer and other basic rate
- allowance of £11,080
- 10% of allowance is deducted from tax liability
- allowance reduced by £1 for ever £2 of adjusted net income over £37,000
How are Children Taxed?
- Own allowances and tax
- unless Parents put sum on money into account for child
- Then taxed as parents income if over £100
Explain the High Income child benefit charge
- If parent receives Child benefit
- If a parent has >£60,000 adjusted net income its reduced at 1% for every £200
- Tax collected through self assessment
How are bare trusts taxed (Income Tax)?
- Treated as the beneficiaries income and taxed at their marginal rate
- Beneficiary liable for the tax (not trustee)
How are Trusts for Vulnerable Beneficiaries taxed (Income Tax)?
- Work out tax in normal manner
- Work out tax on beneficiary
- difference between two is the amount of relief - deducted from tax liability
How are IIP/Life interest Trusts Taxed? (Income Tax)
- Trustees liable for basic rate tax received
- savings income 20%
- Dividends 8.75%
- Beneficiary entitled to 20% tax credit when distributed
- Beneficiary may have to pay additional tax
- Income keeps its classification on distribution
- If direct payment to beneficiary, not tax in trust and just taxed on beneficiary
How are Discretionary Trusts Taxed? (Income Tax)
- Tax at 39.35% on Dividends
- Tax at 45% on other income
- Trustee expenses are allowable - but still charged at 20%/8.75%
- Distributions are classed as trust income
- Beneficiary receives 45% tax credit
- If dividends distributed, Trustees have to pay extra tax to account for the tax credit.
