Income Tax

Question 1

Who pays income tax?

Answer 1

□Individuals (employed/sole traders on trading profits)
□partners on share of partnershsip profits based on trading profits
□PRS:outstanding income tax/during admin
□tustees on income produced by trust

Question 2

Who generally doesnt pay income tax

Answer 2

□ Charities
□ Companiess (pay corporation tax)

Question 3

What are the 5 steps for calculating income tax?

Answer 3

1. Calculate total income
2. Deduct allowable reliefs (=net income)
3. Deduct personal allowances (=taxable income)
4. Separate NSDI and savings and dividend income and calculate tax on each
5. Add taxes together to get income tax

Question 4

Step 1: Calculate TOTAL INCOME-what sources of income are charged to income tax?

Answer 4

1. Trading income
2. Property income (eg. rent)
3. Savings and investment income (eg. dividends)
4. Employment and pensions income (eg. sick/maternity pay/social security)

Question 5

Step 1: Calculate TOTAL INCOME- What types of income are not charged to income tax?

Answer 5

1. Interest on damages for PI/death
2. Interest on savings certifs
3. Certain state benefits
4. premium bond winnings
5. from investment in ISA

Question 6

Step 1: Calculate TOTAL INCOME-Formula for calculating trading profits?

Answer 6

Chargeable receipts LESS Deductible expenditure LESS capital allowances (inc AIA))

Question 7

Step 1: Calculate TOTAL INCOME when calculating trading profits, what are chargeable receipts?

Answer 7

£ from selling goods/services NOT capital

Question 8

Step 1: Calculate TOTAL INCOME when calculating trading profits, what is deductable expenditure? (+examples)

Answer 8

Everyday expenses, must be:
1. Income in nature
2. Incurred ‘wholly and exclusively’ for the trade
3. Not statute barred

Eg.
– Salaries
– Rent on commercial premises
– Utility bills
– Cost of buying furniture in first place
– Stock
– Contribs to an approved pension scheme for Dirs/employees
– Interest payments on borrowings

Question 9

Step 1: Calculate TOTAL INCOME- when calculating trading profits, what are capital allowances?

Answer 9

(on plant and machinery)
*Writing down allowance, existing pool=18% of value of existing plant/machinery
*Annual Investment Allowance for new expenditure in tax year=100% up to 1mill
*Full expensing for new expenditure in accounting period (Cos only)= 100% uncapped

Question 10

Step 1: Calculate TOTAL INCOME what should you do if deductions have been made at the source of the income?

Answer 10

It must be ‘grossed up’ to work out the gross income before the tax was deducted and use this number in the income tax calculation

Question 11

Step 2: Deduct ALOWABLE RELIEFS to get NET INCOME: what are allowable reliefs?

Answer 11

Interest on qualifying loans

’ qualifying loans’=
1. loan to buy share in a partnership, or contribute capital/ make a loan to a partnership
2. loan to invest in a close trading company
3. loan to PRs to pay IHT

Question 12

Step 3: Deduct PERSONAL ALLOWANCES to get TAXABLE INCOME: what are the personal allowances?

Answer 12

*Income £0-£100k: £12,570
*Over £100k= reduced by £1 for every £2 above £100k limit (will have reduced to 0 once income reaches £125,140)
(To calculate: £12,570 LESS ((net income - £100k)/2 )then round to nearest £1)
*Over £125,140=no personal allowance

• Marriage allowance-if dont use, can transfer £1260 of allowance to spouse/civil partner (N/A if recipient higher/additional rate taxpayer)
• Blind persons allowance-£2870 which is subtracted from net income
• Property and trading allowances- £1k allowance

Question 13

Step 3: Deduct PERSONAL ALLOWANCES in what order are personal allowances set against income?

Answer 13

1. NSNDI
2. Savings income
3. Dividend income

Question 14

Step 3: Deduct PERSONAL ALLOWANCES to get TAXABLE INCOME: what are other, personal allowances are there that but are only relevent at stage 4 (not deducted at this stage)?

Answer 14

*Personal savings allowance (PSA) (interest)
-Basic rate taxpayer=£1k
-Higher rate taxpayer=£500
-Additional rate=£0

*Dividend allowance-£1k

(because they mean the amount is taxed at 0% rather than being deducted to find taxable income)

Question 15

Step 4: calculate tax on each type of income: what order is income taxed in?

Answer 15

1. Bottom slice (taxed first): NSNDI
2. Middle slice (taxed next): Savings income (interest)
3. Top slice (taxed last): dividend income

Question 16

Step 4: How do you calculate NSNDI

Answer 16

Taxable income LESS savings income LESS dividend income

Question 17

Step 4: What rates are NSNDI taxed at?

Answer 17

Main rates:
*Basic rate: 20%
*Higher rate: 40%
*Additional rate: 45%

Question 18

Step 4: what are the income tax bands for NSNDI

Answer 18

Basic: £0-£37,700 (will always be £7540 of tax)
Higher: £37,701–£125,140
Additional: over £125,140

Question 19

Step 4: How do you work out ‘remaining taxable savings income’ to be taxed ?

Answer 19

Savings income LESS PSA (as the PSA is taxed at 0%)
(add PSA to NSNDI)

Question 20

Step 4: What rates are savings income taxed at?

Answer 20

Savings rates:
*Starting rate of 0%: £0– £5k
*Savings basic rate of: 20%£5,001– £37,700)
*Savings higher rate of 40%: £37,701– £125,140
*Savings additional rate of 45%: over £125,140

Question 21

Step 4: How do you calculate what TAX RATE the person will pay remaining taxable savings income at?

Answer 21

add PSA to taxable NSNDI

Question 22

Step 4: How do you work the remaining taxable dividend income to be taxed?

Answer 22

Dividend income LESS dividend allowance (£1k)

Question 23

Step 4: What are the tax rates for dividend income?

Answer 23

Dividend rates:
*Dividend ordinary rate of 8.75%: £0– £37,700
*Dividend upper rate: £37,701– £125,140
*Dividend additional rate: over £125,140

Question 24

Step 4: How do you work out which tax rate is to be used for dividend income?

Answer 24

Add dividend allowance to total taxable NSNDI total savings income)