Income Tax

Question 1

What are the Different Types of Income?

Answer 1

Non-Saving Income (NSI) -
Employment income (salaries/bonuses)
Trading income
Property income
Miscellaneous income (pensions)

Savings Income (SI) -
Interest receipts from Bank savings account
Interest on investment

Dividend Income (DI) -
Dividends from UK & overseas companies

Question 2

What is the Process of Income Tax Computation?

Answer 2

Step 1, Calculate Net income.
Step 2, Calculate Taxable Income.
Step 3, Find Appropriate Tax Rate.
Step 4, Calculate Tax Liability.

Question 3

What are the Income Tax Bands?

Answer 3

Basic Rate Taxpayer (BRT), TI: <= £37,700.
Higher Rate Taxpayer (HRT), TI: £37,700 < x < £125,140.
Additional Rate Taxpayer (ART), TI: >£125,000

Question 4

What is Taxable Income?
What is Income Tax Liability?

Answer 4

Income remaining after PA has been deducted. Determines what tax rate band you are in.

Net amount of tax owed for that year after all deductions + income tax charges.

Question 5

What are the Appropriate Tax Rates?

Answer 5

BRT band: £0 - £37,700
NSI = 20%, SI = 20%, DI = 8.75%

HRT Band: £37,700 - £125,140
NSI = 40%, SI = 40%, DI = 33.75%

ART Band: £125,000<
NSI = 45%, SI = 45%, Di = 39.35%

SI allowances taxed @0%:
BRT, first £1k. HRT, first £500.
DI allowances taxed @0%:
First £1k.

Question 6

How Does Personal Allowance Work?

Answer 6

Full amount = £12,570.
Income > £100k, suffer a claw back. Reduce by £1 for every £2 above £100k.
PA = £0 if net income >£125,140

Question 7

Reduction in PA =

Answer 7

Reduction in PA = ½(net income – 100,000)

Question 8

What are Examples of Chargeable Income?

Answer 8

Employment income.
Trading income.
Property income.
Miscellaneous income.
Dividend income.
Savings income.
o Interest from banks, investment account, government securities (‘gilts’), loan between friends or relatives.

Question 9

What are Examples of Exempt Income?

Answer 9

• “Winnings” from betting/lottery/premium bonds
• Income from National Savings Certificate (NSC)
• Income from Individual Savings Accounts (ISA)
• Income tax repayment interest
• Some social security benefits (e.g. housing benefits)
• Educational grants & scholarships

Question 10

What is the Transferable Marriage Allowance?

Answer 10

Partner with no income or BRT after transfer, can transfer £1,260 (10% of PA) to spouse.
Not add, but deduct amount as credit on tax bill.
Can only take what they can use.

Transferee must also be BRT, and be elected.