Income Tax Flashcards
What is income tax payable on?
income profits only (i.e. not capital profits)
Who pays income tax?
Individuals, STs, partners, PRs and trustees pay IT
What step must be taken prior to calculating income tax?
You need to work out the trading profit before you can assess IT payable
What is the assessment window for income tax?
income tax is paid on income received during a tax year (i.e. 6 April to 5 April)
Give an overview of an income tax calculation
Step 1: Calculate total income
Step 2: Deduct any allowable reliefs to give net income
Step 3: Deduct any allowance to give taxable income
Step 4: Calculate the tax at the applicable rate(s) for:
NSNDI
Savings income
Dividend income
Step 5: Add together the amounts of tax from Step 4 to give the taxpayer’s overall tax liability and deduct any IT deducted at source
re: step 1 - aggregating gross incomes
what income is aggregated?
gross income which is recurring in nature (i.e. not capital) and is specified in statute, i.e.:
o Non-savings, non-dividend income
o Savings income
o Dividend income
re: step 1 - aggregating gross incomes
what is non-savings, non-dividend income?
all income apart from savings and dividend income
re: step 1 - aggregating gross incomes
what is savings income?
This is interest from various sources such as money held in a bank account
re: step 1 - aggregating gross incomes
what income is specifically exempt from income tax?
o Interest on damages for personal injury or death
o Interest on saving certificates
o Certain state benefits
o Premium bond winnings
o Income from investment in an ISA
re: step 1 - aggregating gross incomes
what is gross income? Give an example.
the amount before tax, expenses etc
i.e. if a landlord was receiving income from a rental property, this would be the gross income because no tax has been paid yet
re: step 1 - aggregating gross incomes
what happens if tax is deducted at source from the income?
it needs to be ‘grossed up’. This is common with salaries.
re: step 1 - aggregating gross incomes
what is employment income? Give examples.
Employment income is anything which derives from their salary or employment as a reward for their services, whether paid by the employer or third party. This includes:
o Salary
o Non-cash benefits i.e. company car, private medical insurance
o Bonuses and tips
o Compensation for unfair dismissal and damages for wrongful dismissal (the first £30k is tax free)
re: step 1 - aggregating gross incomes
what is not ‘employment income’? Give examples.
Employees aren’t taxed on:
o Accommodation is necessary for their work (i.e. police officers)
o Interest-free or low interest loans that do not exceed £10k
o Employer’s pension contributions, if paid into a HMRC approved scheme
What does step 1 - calculating total income involve?
aggregating the gross totals of the relevant incomes
How is net income calculated?
Step 2: Total Income – Allowable Reliefs = Net Income
re: step 2 - deduct allowable reliefs
what are the allowable reliefs?
qualifying loan relief
enterprise investment scheme
re: step 2 - deduct allowable reliefs
explain qualifying loan relief
Interest paid on a qualifying loan is an allowable relief.
re: step 2 - deduct allowable reliefs
when will a loan qualify for relief?
A loan will be qualifying if:
o It is to buy a share in a partnership, contribute to capital or make a loan to a partnership (this is capped at the greater of either £50k or 25% of the taxpayer’s total income minus pension contributions)
o It is to invest in a close trading company; or
o It is a loan to PRs to pay IT
re: step 2 - deduct allowable reliefs
when is the enterprise investment scheme relevant?
Relevant where the taxpayer has brought ordinary shares in a qualifying unquoted company
re: step 2 - deduct allowable reliefs
how is the enterprise investment scheme applied?
- The taxpayer can deduct 30% of the amount they have invested
- The annual investment limit is £2m per year
- Two years prior and three years’ post-investment, the taxpayer must not be connected with the company (i.e., the the taxpayer and their associates shareholdings must not exceed 30%)
How is taxable income calculated?
Step 3: Net Income – Allowances = Taxable Income
re: stage 3 - deduct allowances
what are the allowances?
- annual personal allowance
- marriage allowance
- blind person’s allowance
- trading allowance
- property allowance
re: stage 3 - deduct allowances
explain annual personal allowance
Everyone has an APA, this is currently £12,570 (unless they earn of £125,140)
If the taxpayer has over £100k, there APA is reduced by £1 for every £2 of gross income over £100k
APA must be applied to income in the following order:
o NSNDI
o Savings income
o Dividend income
Any unused APA cannot be carried forward
re: stage 3 - deduct allowances
where the taxpayer earns over £100k, how is their personal allowance calculated?
£12,570 – (net income - £100,000) / 2
re: stage 3 - deduct allowances
when will someone not have a personal allowance?
If the income is £125,140+
re: stage 3 - deduct allowances
when is the marriage allowance not applicable?
where the recipient is a high or additional rate taxpayer
re: stage 3 - deduct allowances
in what order must the personal allowance be applied against?
o NSNDI
o Savings income
o Dividend income
re: stage 3 - deduct allowances
explain the marriage allowance
If a person has unused APA, they can transfer up to £1,260 to their spouse/CP
This is not applicable where the recipient is a high or additional rate taxpayer
re: stage 3 - deduct allowances
explain the blind person’s allowance
Any person who is registered blind receives an additional £3,070 on top of their APA
re: stage 3 - deduct allowances
explain the trading and property allowance
These are separate allowances but the rules are the same:
If your gross trading/property income is £1,000 or less, then this does not need to be declared and so is not taxable
If your trading/property income is more than £1,000, you can either:
o Use the £1,000 trading/property allowance; or
o Deduct business expenses (when calculating trading profit)
A taxpayer cannot claim the allowance and deduct expenses
re: stage 3 - deduct allowances
when would it be better for a taxpayer to claim deductible expenses over trading/property allowance?
if they have more than £1,000 of business expenses, then it would be better to deduct business expenses rather than claim the allowance because more money would be tax free
re: step 4 - calculating tax
what is the order of taxation?
- NSNDI
- Savings income
- Dividend income
re: step 4 - calculating tax
how is NSNDI taxed?
Stage 1: taxable income – (savings + dividend income) = taxable NSNDI
Stage 2: apply tax bands
o Basic rate taxpayer £0 - £37,700 @ 20%
o Higher rate taxpayer £37,701 - £125,140 @ 40%
o Additional rate taxpayer over £125,140 @ 45%
Stage 3: add up the sums for each tax bracket = NSNDI IT liability
re: step 4 - calculating tax
how is taxable NSNDI calculated?
taxable income – (savings + dividend income) = taxable NSNDI
re: step 4 - calculating tax
how is savings income taxed?
Stage 1: savings income – PSA = taxable savings income
o Personal savings allowances (PSA):
Basic rate taxpayer - £1,000 tax free
Higher rate taxpayer - £500 tax free
Additional rate taxpayer - no allowance
Stage 2: apply tax bands:
o Starting rate for savings - £0 - £5,000 @ 0%
o Basic rate taxpayer - £5,001 - £37,700 @ 20%
o Higher rate taxpayer - £37,701 - £125,140 @ 40%
o Additional rate taxpayer - over £125,140 @ 45%
Stage 3: add up the sums for each tax bracket = savings income IT liability
re: step 4 - calculating tax
once taxable NSNDI is calculated, what are the tax bands?
o Basic rate taxpayer - £0 - £37,700 @ 20%
o Higher rate taxpayer - £37,701 - £125,140 @ 40%
o Additional rate taxpayer - over £125,140 @ 45%
re: step 4 - calculating tax
how is taxable savings income calculated?
savings income – PSA = taxable savings income
re: step 4 - calculating tax
what are the personal savings allowances in relation to savings income?
Basic rate taxpayer - £1,000 tax free
Higher rate taxpayer - £500 tax free
Additional rate taxpayer - no allowance
re: step 4 - calculating tax
what are the tax bands in relation to savings income?
o Starting rate for savings £0 - £5,000 @ 0%
o Basic rate taxpayer £5,001 - £37,700 @ 20%
o Higher rate taxpayer £37,701 - £125,140 @ 40%
o Additional rate taxpayer over £125,140 @ 45%
re: step 4 - calculating tax
how is dividend income taxed?
Stage 1: dividend income – dividend allowance = taxable dividend income
o Everyone has £500 dividend allowance
Stage 2: apply the tax bands:
o Dividend ordinary rate - £0 - £37,700 @ 8.75%
o Higher rate taxpayer - £37,701 - £125,140 @ 33.75%
o Additional rate taxpayer - over £125,140 @ 39.35%
Stage 3: add up the sums for each tax bracket = dividend IT liability
re: step 4 - calculating tax
how is taxable dividend income calculated?
dividend income – dividend allowance = taxable dividend income
Everyone has £500 dividend allowance
re: step 4 - calculating tax
what are the tax bands in relation to dividend income?
o Dividend ordinary rate - £0 - £37,700 @ 8.75%
o Higher rate taxpayer - £37,701 - £125,140 @ 33.75%
o Additional rate taxpayer - over £125,140 @ 39.35%
re: step 5 - overall tax liability
how is total income tax liability calculated?
Add together NSNDI, savings income and dividend income liability = total income tax liability (- any tax paid at source)
to whom is tax payable to?
All tax is payable to HMRC
how is income tax collected?
Deduction at source - when a person paying the income deducts tax from the income before it is paid to the recipient
Self-assessment - if tax is not deducted at source, a tax return must be completed
HMRC has the power to carry out audits, so tax payers should keep records
how can tax returns be filed?
Tax returns can be filed online or by paper
what is the deadline for filing a tax return online? Give an example.
31 January in the next year i.e. 2023/2024 - 31 January 2025
what is the deadline for filing a paper tax return? Give an example.
31 October in the same year i.e. 2023/2024 - 31 October 2024
when does a person’s first tax bill need to be paid?
A person’s first tax bill will need to be paid by 31 January of the following tax year, after this Payment on Account commences (if their tax liability is more than £1,000)
what is payment on account?
HMRC uses the previous year’s tax bill to estimate the next year’s tax bill.
This bill is then split into two instalments.
As the next year’s tax bill is just an estimate, this may change depending on the person’s income.
re: payment on account
what happens if a person’s tax liability has increased?
If their tax liability has increase, they will need to also make a balancing payment for that year by 31 January
give an example as to how income tax is paid (inc. any balancing payment)
By 31 January:
o balancing payment - payment for any outstanding tax bill from the last tax year
o First payment on account for next year’s estimated tax bill
By 31 July:
o Second payment on account towards next year’s tax bill
what happens if a taxpayer fails to pay by a given deadline?
If any deadlines are missed, HMRC charges interest
what is the dividend income?
this was £1000 in 2023/2024, but reduced to £500 in 2024/2025
