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FLK1 - Business Law & Practice > Income Tax > Flashcards

Income Tax Flashcards

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1
Q

What is income tax payable on?

A

income profits only (i.e. not capital profits)

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1
Q

Who pays income tax?

A

Individuals, STs, partners, PRs and trustees pay IT

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2
Q

What step must be taken prior to calculating income tax?

A

You need to work out the trading profit before you can assess IT payable

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3
Q

What is the assessment window for income tax?

A

income tax is paid on income received during a tax year (i.e. 6 April to 5 April)

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4
Q

Give an overview of an income tax calculation

A

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

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5
Q

re: step 1 - aggregating gross incomes

what income is aggregated?

A

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

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6
Q

re: step 1 - aggregating gross incomes

what is non-savings, non-dividend income?

A

all income apart from savings and dividend income

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7
Q

re: step 1 - aggregating gross incomes

what is savings income?

A

This is interest from various sources such as money held in a bank account

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8
Q

re: step 1 - aggregating gross incomes

what income is specifically exempt from income tax?

A

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

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9
Q

re: step 1 - aggregating gross incomes

what is gross income? Give an example.

A

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

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10
Q

re: step 1 - aggregating gross incomes

what happens if tax is deducted at source from the income?

A

it needs to be ‘grossed up’. This is common with salaries.

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11
Q

re: step 1 - aggregating gross incomes

what is employment income? Give examples.

A

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)

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12
Q

re: step 1 - aggregating gross incomes

what is not ‘employment income’? Give examples.

A

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

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13
Q

What does step 1 - calculating total income involve?

A

aggregating the gross totals of the relevant incomes

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14
Q

How is net income calculated?

A

Step 2: Total Income – Allowable Reliefs = Net Income

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15
Q

re: step 2 - deduct allowable reliefs

what are the allowable reliefs?

A

qualifying loan relief

enterprise investment scheme

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16
Q

re: step 2 - deduct allowable reliefs

explain qualifying loan relief

A

Interest paid on a qualifying loan is an allowable relief.

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17
Q

re: step 2 - deduct allowable reliefs

when will a loan qualify for relief?

A

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

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18
Q

re: step 2 - deduct allowable reliefs

when is the enterprise investment scheme relevant?

A

Relevant where the taxpayer has brought ordinary shares in a qualifying unquoted company

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19
Q

re: step 2 - deduct allowable reliefs

how is the enterprise investment scheme applied?

A
  • 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%)
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20
Q

How is taxable income calculated?

A

Step 3: Net Income – Allowances = Taxable Income

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21
Q

re: stage 3 - deduct allowances

what are the allowances?

A
  1. annual personal allowance
  2. marriage allowance
  3. blind person’s allowance
  4. trading allowance
  5. property allowance
21
Q

re: stage 3 - deduct allowances

explain annual personal allowance

A

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

22
Q

re: stage 3 - deduct allowances

where the taxpayer earns over £100k, how is their personal allowance calculated?

A

£12,570 – (net income - £100,000) / 2

22
Q

re: stage 3 - deduct allowances

when will someone not have a personal allowance?

A

If the income is £125,140+

23
Q

re: stage 3 - deduct allowances

when is the marriage allowance not applicable?

A

where the recipient is a high or additional rate taxpayer

23
Q

re: stage 3 - deduct allowances

in what order must the personal allowance be applied against?

A

o NSNDI
o Savings income
o Dividend income

23
Q

re: stage 3 - deduct allowances

explain the marriage allowance

A

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

24
Q

re: stage 3 - deduct allowances

explain the blind person’s allowance

A

Any person who is registered blind receives an additional £3,070 on top of their APA

25
Q

re: stage 3 - deduct allowances

explain the trading and property allowance

A

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

25
Q

re: stage 3 - deduct allowances

when would it be better for a taxpayer to claim deductible expenses over trading/property allowance?

A

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

26
Q

re: step 4 - calculating tax

what is the order of taxation?

A
  1. NSNDI
  2. Savings income
  3. Dividend income
26
Q

re: step 4 - calculating tax

how is NSNDI taxed?

A

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

27
Q

re: step 4 - calculating tax

how is taxable NSNDI calculated?

A

taxable income – (savings + dividend income) = taxable NSNDI

28
Q

re: step 4 - calculating tax

how is savings income taxed?

A

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

28
Q

re: step 4 - calculating tax

once taxable NSNDI is calculated, what are the tax bands?

A

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%

29
Q

re: step 4 - calculating tax

how is taxable savings income calculated?

A

savings income – PSA = taxable savings income

30
Q

re: step 4 - calculating tax

what are the personal savings allowances in relation to savings income?

A

 Basic rate taxpayer - £1,000 tax free
 Higher rate taxpayer - £500 tax free
 Additional rate taxpayer - no allowance

31
Q

re: step 4 - calculating tax

what are the tax bands in relation to savings income?

A

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%

32
Q

re: step 4 - calculating tax

how is dividend income taxed?

A

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

33
Q

re: step 4 - calculating tax

how is taxable dividend income calculated?

A

dividend income – dividend allowance = taxable dividend income

Everyone has £500 dividend allowance

34
Q

re: step 4 - calculating tax

what are the tax bands in relation to dividend income?

A

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%

35
Q

re: step 5 - overall tax liability

how is total income tax liability calculated?

A

Add together NSNDI, savings income and dividend income liability = total income tax liability (- any tax paid at source)

36
Q

to whom is tax payable to?

A

All tax is payable to HMRC

37
Q

how is income tax collected?

A

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

38
Q

how can tax returns be filed?

A

Tax returns can be filed online or by paper

39
Q

what is the deadline for filing a tax return online? Give an example.

A

31 January in the next year i.e. 2023/2024 - 31 January 2025

40
Q

what is the deadline for filing a paper tax return? Give an example.

A

31 October in the same year i.e. 2023/2024 - 31 October 2024

41
Q

when does a person’s first tax bill need to be paid?

A

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)

42
Q

what is payment on account?

A

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.

43
Q

re: payment on account

what happens if a person’s tax liability has increased?

A

If their tax liability has increase, they will need to also make a balancing payment for that year by 31 January

44
Q

give an example as to how income tax is paid (inc. any balancing payment)

A

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

45
Q

what happens if a taxpayer fails to pay by a given deadline?

A

If any deadlines are missed, HMRC charges interest

46
Q

what is the dividend income?

A

this was £1000 in 2023/2024, but reduced to £500 in 2024/2025

FLK1 - Business Law & Practice (17 decks)

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