income tax

Question 1

Who is required to pay income tax?

Answer 1

Individuals, partners, personal representatives, and trustees may be required to pay income tax.

Question 2

Are charities required to pay income tax?

Answer 2

Charities are generally exempt from paying income tax.

Question 3

Do companies pay income tax?

Answer 3

No, companies do not pay income tax; they pay corporation tax instead

Question 4

Who is responsible for the tax on partnership profits?

Answer 4

Partners are responsible for the tax due on their individual share of the partnership profits.

Question 5

What is the responsibility of personal representatives regarding income tax?

Answer 5

Personal representatives pay the deceased’s outstanding income tax and any income tax chargeable during the administration of the estate

Question 6

Who pays income tax on income produced by a trust?

Answer 6

Trustees are responsible for paying income tax on income produced by the trust

Question 7

When does the tax year begin and end?

Answer 7

The tax year runs from 6 April until 5 April the following year.

Question 8

What are the three categories of income for tax purposes?

Answer 8

(a) non-savings, non-dividend income (‘NSNDI’). This is essentially all sources of income apart
from income from savings and income from dividends;

(b) savings income, which is interest from various sources, such as interest on money held in a
bank account;

(c) dividend income

Question 9

How do you calculate net income?

Answer 9

Step 1: Calculate total income
Step 2: Deduct any allowable reliefs
The resulting sum is net income

Question 10

How do you calculate taxable income?

Answer 10

Step 1: Calculate total income
Step 2: Deduct any allowable reliefs
The resulting sum is net income
Step 3: Deduct any personal allowances
= TAXABLE INCOME

Question 11

how do you calculate overall income tax liability?

Answer 11

After doing step 1, step 2 and step 3:

• Step 4: Separate NSNDI, savings income and dividend income, and calculate the tax on
  each type of income
• Step 5: Add together the amounts of tax from Step 4 to give the overall income tax liability

Question 12

How is income above the basic rate threshold taxed?

Answer 12

when applying the income rates (starting rate, basic rate, higher rate and additional rate.) if part of the taxable income is above the basic rate e.g., £40,000 - then you tax the first £37,700 at basic rate (20%) - anything above £37,700 => taxed at higher rate of 40%.

Question 13

What are the sources of income for income tax?

Answer 13

(a) trading income: profits of trade, profession or vocation.

(b) property income: rents and other receipts from land in the UK;

(c) savings and investment income: interest, annuities and dividends;

(d) employment and pensions income, including social security payments such as sick pay
and maternity pay

Question 14

What happens if income does not fall into the listed categories?

Answer 14

If income does not fall into one of the chargeable categories, it cannot be taxed as income.

Question 15

What types of income are not chargeable to income tax?

Answer 15

• Interest on damages for personal injuries or death.
• Interest on savings certificates.
• Certain state benefits.
• Premium bond winnings.
• Income from investments in an Individual Savings Account (ISA).

Question 16

How do you calculate a taxpayer’s total income?

Answer 16

Add all the income sums together.
Result: The total income.

Question 17

What is meant by income received “gross”?

Answer 17

Income is received “gross” when no tax has been deducted beforehand, such as rental payments where the tenant does not deduct income tax for the landlord

Question 18

How is employment income taxed?

Answer 18

Employment income (salary) is taxed at source through the Pay As You Earn (PAYE) system, where tax is deducted before the employee receives the net amount

Question 19

How does the PAYE system work?

Answer 19

Under the PAYE system, the employer deducts income tax from the employee’s salary and pays it directly to HMRC. The system also ensures the personal allowance is applied.

Question 20

What types of interest payments qualify as an ‘allowable relief’?

Answer 20

Interest payments may qualify for tax relief if they are on a “qualifying loan,” including:

• A loan to buy a share in a partnership or to contribute capital or make a loan to a partnership.
• A loan to invest in a close trading company.
• A loan to personal representatives to pay inheritance tax.

Question 21

What is the personal allowance in income tax?

Answer 21

£12,570

Question 22

When is the personal allowance fully eliminated?

Answer 22

Personal allowance is fully eliminated when the taxpayer’s income reaches £125,140, as the allowance is reduced to zero - they have NO personal allowance.

Question 23

How is the personal allowance reduced for high-income taxpayers?

Answer 23

If a taxpayer’s net income exceeds £100,000, their personal allowance is reduced by £1 for every £2 of income above £100,000.

Question 24

How do you calculate the adjusted personal allowance for a taxpayer with an income of £100,000 or above?

Answer 24

£12,570 – ((Net Income – £100,000) ÷ 2)

Question 25

What is the Marriage Allowance?

Answer 25

If a person does not fully use their personal allowance, they can transfer £1,260 of their allowance to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer.

Question 26

Who can claim the Blind Person’s Allowance?

Answer 26

Any taxpayer who is registered blind can receive a £3,070 allowance, which is subtracted from their net income, just like the personal allowance.

Question 27

What happens if a taxpayer earns gross property income or gross trading income below £1,000?

Answer 27

If gross property income or gross trading income is below £1,000, it is not subject to income tax, and no tax return is required.

Question 28

What can a taxpayer do if their gross property income or gross trading income exceeds £1,000?

Answer 28

If income exceeds £1,000, the taxpayer can take a £1,000 allowance as a deduction from gross income instead of deducting actual expenses to calculate taxable income.

Question 29

What is the Personal Savings Allowance (PSA)?

Answer 29

he PSA allows a taxpayer to have up to the first £1,000 of savings income tax-free, depending on their tax rate.

Question 30

How does the PSA amount vary for basic rate and higher rate taxpayers?

Answer 30

Basic rate taxpayer (income between £0 and £37,700): £1,000 of savings income is tax-free.

Higher rate taxpayer (income between £37,701 and £125,140): £500 of savings income is tax-free.

Question 31

Do additional rate taxpayers receive a PSA?

Answer 31

No, additional rate taxpayers (income over £125,140) do not receive a PSA.

Question 32

What is the Dividend Allowance?

Answer 32

The Dividend Allowance is £500, meaning the first £500 of a taxpayer’s dividend income will be free from tax.

Question 33

What is deducted when calculating taxable income?

Answer 33

Only the personal allowance is deducted when calculating taxable income.

Question 34

How are PSA and dividend allowance used in the calculation of taxable income?

Answer 34

The PSA and dividend allowance are not used to reduce taxable income - If the PSA and dividend allowance apply, it just means that savings and dividend income will be taxed at 0%.

Question 35

Who is eligible for the £500 Dividend Allowance?

Answer 35

All taxpayers, including basic, higher, and additional rate taxpayers, are entitled to the £500 dividend allowance.

Question 36

how to calculate taxable NSNDI?

Answer 36

Taxable income less savings and dividend income = taxable NSND

Question 37

what are the tax rates?

Answer 37

1. Basic rate = 20% - £0 to £37,700
2. Higher rate = 40% - £37,701 to £125,140
3. Additional rate = 45% - over £125,140

Question 38

What types of payments are taxable for employees?

Answer 38

Salaries, non-cash benefits, bonuses, and tips are taxable.

Question 39

Are personal gifts taxable?

Answer 39

No, personal gifts are not taxable because they are not a reward for services.

Question 40

Is compensation for unfair dismissal taxable?

Answer 40

Yes, compensation for unfair dismissal is taxable, but the first £30,000 of the compensation or damages is tax-free.

Question 41

Are non-cash benefits taxable?

Answer 41

Yes, non-cash benefits are taxable. Examples include the use of a company car for private and business use, and private medical insurance.

Question 42

How is the value of non-cash benefits determined for tax purposes?

Answer 42

The value of non-cash benefits is generally deemed to be the cost incurred by the employer in providing the benefit.

Question 43

If an employer pays for an employee’s gym membership, is this taxable?

Answer 43

Yes, the cost of the gym membership paid by the employer is taxable.

Question 44

When will no tax be charged on accommodation benefits?

Answer 44

No tax will be charged on rent-free or low-rent accommodation if:

1. It is necessary for the employee to live on the premises to perform their duties (e.g., caretakers).
2. The accommodation is provided to help the employee perform their duties better and is customary for that type of employment

Question 45

When is there no tax charge on interest-free or low-interest loans from an employer?

Answer 45

There is no tax charge if the total amount outstanding on any loans to the employee does not exceed £10,000 at any time during the tax year.

Question 46

Are employer’s pension contributions taxable for employees?

Answer 46

No, directors and other employees are not taxed on the employer’s pension contributions if they are paying into an HMRC approved scheme.

Question 47

What is the rule for deductible expenditure for employees?

Answer 47

Employees can deduct expenses incurred wholly, exclusively, and necessarily in the performance of their duties from their income.

Question 48

Are traveling expenses deductible for employees?

Answer 48

Yes, traveling expenses can be deducted, but they must be wholly and exclusively incurred in performing the employee’s duties. Travel from one place of work to another is deductible, but travel to the regular workplace is not.

Question 49

Can employees deduct expenses that have been reimbursed by their employer?

Answer 49

No, employees cannot deduct any expenses that have already been reimbursed by their employer.

Question 50

Are employee contributions to pensions deductible?

Answer 50

Yes, contributions to an occupational pension scheme or a personal pension scheme are deductible from the employee’s income.

Question 51

Who collects income tax in England and Wales?

Answer 51

HMRC

Question 52

How is income tax typically collected?

Answer 52

Income tax can be collected through deduction at source or self-assessment.

Question 53

What is deduction at source?

Answer 53

Deduction at source means that the payer of the income (e.g., employer) acts as a tax collector, deducting the correct amount of income tax from the payment and paying it directly to HMRC. The taxpayer receives the income net of tax.

Question 54

When is self-assessment used to collect income tax?

Answer 54

Self-assessment is used when income has not had tax deducted at source (e.g., rental income). The taxpayer must complete a tax return declaring all income for the tax year.

Question 55

When must a taxpayer notify HMRC about their income?

Answer 55

A taxpayer must notify HMRC about their taxable income within 6 months of the end of the relevant tax year.

Question 56

When are tax returns issued?

Answer 56

Tax returns are issued soon after 5 April each year, with deadlines for submission in the following year.

Question 57

What is the deadline for filing an online tax return?

Answer 57

The online tax return and any payments must be filed by 31 January following the end of the tax year.

Question 58

What is the deadline for filing a paper tax return?

Answer 58

the deadline for submitting a paper tax return is earlier, by 31 October following the end of the tax year.

Question 59

What is a tax arrangement according to the Finance Act 2013?

Answer 59

A tax arrangement is defined as any arrangement where obtaining a tax advantage is one of the main purposes, or the main purpose, of the arrangement.

Question 60

What factors are considered to determine if a tax arrangement is abusive?

Answer 60

A tax arrangement is abusive if it cannot reasonably be seen as a reasonable course of action under the relevant tax provisions.

Question 61

What happens when a taxpayer appeals the proposed counteraction of tax advantages under the GAAR?

Answer 61

The taxpayer can make written representations in their defense. The matter is referred to the GAAR advisory panel, which will issue an opinion. HMRC will then decide whether to proceed with counteraction.

Question 62

Who can be an enabler of abusive tax arrangements?

Answer 62

An enabler is any individual, company, or partnership that facilitates abusive tax arrangements as part of their business activities. Employees are not considered enablers, but their employers may be liable.

Question 63

Can a taxpayer appeal HMRC’s decision if they are subject to tax adjustments under the GAAR?

Answer 63

Yes, a taxpayer has the right to appeal to a tax tribunal if they disagree with HMRC’s decision regarding abusive tax arrangements.

Question 64

who is the burden on to show that an arrangement is abusive?

Answer 64

burden is on HMRC

Question 65

what if taxpayer is in breach of GAAR?

Answer 65

HMRC may request the taxpayer to make just and reasonable adjustments to the
amount of tax paid.