Income Tax Flashcards
What is meant by income tax being direct and progressive?
It is directly levied on the individual
Progressive in that the rates you pay get progressively higher
What is a regressive tax?
One that is the same for everyone, so the poor pay more as a percentage.
If you are richer, what happens when paying income tax?
You pay more in relative terms and absolute terms.
How often are income taxes set parliament?
Annually.
What is gross?
Pretax
In step 1, for calculating income tax, what should be done?
Calculate the gross amounts of earnings and split them into this order.
Earned income
Savings income
Dividends income
Chargeable gains from life assurance bonds
What happens in step 2 for calculating income tax?
Make allowable deductions in the order of
Earned income
Savings income
Dividend income
Chargeable gains from life assurance bonds
What happens in step 3 for calculating income tax?
Make reductions from personal allowances, then deduct them from the income.
What happens in step 4 when calculating income tax
Consider extentions to basic rate and higher rate bands.
What happens in step 5 of calculating income tax?
Apply tax rates and bands and calculate tax in order of
Earned income
Savings income
Dividend income
Chargeable gains from life assurance bonds
Consider personal savings allowance and starting rate for savings interest.
What happens in step 6 of calculating income tax?
Add child benefit high income tax charge and deduct tax reducers
What constitutes earned income?
Earnings
Pensions
Retail income
Anything not classed as savings or dividend income
How is trading income assessed?
Self assessment
How is employed, pensions, and social security bebefits income assessed?
PAYE
How is PAYE handled?
Calculated and paid by the employer/pension provider.
Is the person receiving responsibility to check if this is correct.
What is included in investment income?
Income from savings-
Interest on cash
Payments from life annuities
Gains from life assurance contracts
Income from investments-
Dividends
Equity based investments
What else may be included in income tax?
Intellectual property income
When must a tax be calculated between for a self-employed individual?
Whenever they like. Ie June to June or July to July
What is not allowed on savings and investment income?
Deductions
What is earned income sometimes referred to as?
Non savings income
What investment vehicles pay net?
Purchased life anuituties and other vehicles will still pay net for basic rate tax payers.
How can you work out gross income from the net figure?
Divide the net income by 0.8
to give back the 20% taken at source
What allowable deductions might be allowed?
Interest payments for certain qualifying loans
Charitable giving
Certain pension contributions
What is payroll giving?
A charitable giving deduction -
employer takes money from an individual before calculating tax and pays to a nominated charity.
What is gift aid?
A charitable giving deduction that is a basic rate band extender.
What are the rules for gift aid reciprocal benefits
Reciprocal benefits to the donor must not exceed
25% for gifts up to £100
£25 plus 5% of excess over £100
Overall limit of £2500.
What are the qualifying purposes for deductions of loan interest payments?
Investment in your own company
To buy plant and machinery for a partnership
To settle an inheritance tax liability
How long is the loan deduction relief period for inheritance tax?
12 months
What is the limit for qualifying loan deductions?
£50,000 or 25% of the individuals adjusted total income (whichever is higher.
What are the rules for payroll giving?
Employer does not have to offer
Employee does not have to join
Employee can nominate their own charity
What is a potential reason for the lack of uptake for payroll giving?
The administrative workload due to the potential of employees choosing different charities.
What are the 3 different pension schemes?
Net pay arrangements
Relief by claim
Relief at source
What are netpay arrangements often thought as?
Traditional ocupational pension schemes
How are net pay arrangements pension schemes taxed?
Employees’ contribution removed
Tax is calculated
Tax relief given upfront.
Allowable deduction.
What are relief by claim schemes usually?
Traditional retirement annuity contracts where contributions are paid gross and relief is given by claim.
How is the tax for the contribution to relief by claim handled?
The entire contribution is an allowable deduction to give the appropriate tax relief.
What is important to remember about retirement anuituties?
They can adopt the same treatment as personal pension schemes, so they should be looked at on a case by case basis.
What are relief at source schemes thought as?
Personal pension schemes
How are relief at source schemes taxed?
Contribution is paid net of basic rate tax from after tax pay.
Provider reclaims basic rate tax on behalf of the member.
Becomes a basic rate band extender due to not being able to deduct.
Who gets an income tax personal allowance?
All UK residents and currently EEA.
How is income tax for children considered?
They are given the personal allowance.
Income from their parents is considerexthe parents income unless it is under £100.
What might reduce the available personal allowance?
Employees benefits such as a company car.
Underpaid tax from the previous year
Adjusted net income over £100000
How are employee bebefits taxed?
On the market value of the benefit not the price the employer paid.
What did the case law from Pepper V Hart find?
Where an in-house benefit is provided, it is at a marginal cost to the employer, not the open market value of the benefit.
What benefits are exempt tax?
Home working
Group income protection
Provision of meals
Mobile telephones
Removal expenses
Work related training
Long service awards
Workplace nurseries
What can be claimed with house hold working?
Additional costs up to £6
Discribe group income protection
Primiums paid by employer and income paid paid to the employee as taxed income.
Discribe group income protection
Primiums paid by employer and income paid paid to the employee as taxed income.
What are the rules for provided meals?
Includes light refreshments and Christmas party/ annual event costing no more than £150 per person
What are the rules regarding mobile phones
Only one per person and no tablets or other devices.
What are the rules for removal expenses?
Upto £8000 and the excess is taxable
What are the rules for long service awards?
20 or more years
Only tangible things or shares in the company
Cost to the employer must not exceed £50 for each year of service.
No similar award in the last 10 years
Cash awards are taxed as income via PAYE.
What is the tax on company cars based on?
The list price of the car, its emissions.
What is the surcharge placed on non hybrid desel cars?
4% to 37% unless the car meets real driving emissions 2
For R03, what are car accessories classed as?
Benefits in kind
Why are rates for cars registered after 6th April 2020 lower?
Calculation changed from this point to the worldwide harmonised light vehicle test procedure. (WLTP)
How is the company car chart used?
Registered before or after 6th April 2020
Find weight of emissions
Benefit in kind % taken from the list.
If weight is above 100 the percentage is 25% plus 1 for every 5g/km rounded up.
Max of 37%
What is the flat rate for taxing fuel provided by an employer?
£27,800
Up to how much can be deducted from the list price of a company car where the employee makes contributions?
£5000
How can the fuel charge be remited?
By the employee making good on all fuel charges.
How are beneficial loans from employers taxed?
When the interest on the loan is below the government base rate, the difference is charged as a tax.
Loans bellow £10,000 escape this charge as do qualifying loans such as for IHT up to the limit where it exceeds the deduction.
When an individual’s adjusted net income is over £100,000 how is there personal allowance adjusted?
£1 for every £2 above is removed from the allowance.
How much adjusted net income would wipe out the personal allowance?
Anything more than £125,140
When can the personal allowance be brought into the working out adjusted net income on gains within chargeable life assurance?
Only on the top slice caluclation and only if under £100,000
What tax code is given when deductions to an individuals personal allowance exceed their full allowance?
Tax code K.
No free-tax amount and is effectively taxed twice.
What additional amount of personal allowance do blind people get?
£2,870
What are the rates for personal saving allowance?
£1000 basic
£500 higher
What effective rate of reduction does the personal savings allowance give?
£200
What is important to remember about the personal savings allowance?
Interest will still use up part of thebasic or higher rate band for tax.
Besides saving interest, where else can the personal savings allowance be used?
Against chargeable gains on bonds.
How much is dividend allowance?
£1000
How much is the personal allowance?
£12,270
How much of the personal allowance can be transferred from a non-taxpaying spouse to a basic tax paying spouse?
10%
£1260
What rules apply to the transferable personal allowance?
All or nothing
Cannot give rise to a tax refund
What is transferable personal allowance also known as?
Marriage tax allowance or marriage allowance.
With no extensions, what is the higher rate threshold?
£37,700
How can the basic rate be extended?
Gift aid and relief at source pension scheme contributions
How are basic rate extensions applied?
Individual pays 20% tax
The scheme involved then reclaims the 20%.
For a higher rate tax payer, the gross figure is added to their tax band, extending it and allowing tax at 20%
What amount of income will receive no tax on interest and why?
Bellow 18,570 due to the 12,570 personal allowance, 1000 personal savings allowance, and £5000 zero rated band for savings income.
What income cancels out the zero rate savings band?
£17,570
What is the married couples’ allowance?
10% tax reducer for couples married before 6th April 1935
What is the maximum reduction through tax reducers that can be applied each year?
£10,376
Reduced by £1 for £2 above £34,600
Simplified step 6 point income tax
Step 1 - Gross up, Total,Split income
Step 2 - Deduct allowable deductions
Step 3 - Calculate allowances
Step 4 - Extend threshold
Step 5 - Apply tax in order
Step 6- Reducers
What are the tax bands for Scotland?
Starter £12,571-£14,732
Basic £14,733-£25,688
Intermediate £25,689-£43,662
Higher £43,663-£125,140
Additional £125,140
What are the tax rates for Scotland?
Starter 19%
Basic 20%
Intermediate 21%
Higher 42%
Additional 47%
Quick income calculation steps
Gross income
Deductions
Allowances
Extensions
Apply Bands
Tax reducers + Child benefit
