Income Tax Flashcards
Chapter 9
What is the main statute for income tax in the UK?
The Income Tax Act 2007 (ITA 2007), as amended by later Finance Acts. Other important statutes include the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
What constitutes income for income tax purposes?
There’s no single statutory definition, but tax legislation lists what is regarded as income. Generally, money is considered income if it has an element of recurrence, such as a salary or interest. Key sources of income include:
○Trading income
○Property income
○Savings and investment income
○Employment and pensions income
Who pays income tax in the UK?
Individuals, partners, personal representatives, and trustees. Charities are generally exempt, and companies pay corporation tax.
What is the UK tax year?
The tax year runs from 6 April to 5 April the following year.
What are the main steps to calculate income tax?
- Calculate total income.
- Deduct allowable reliefs to get net income.
- Deduct personal allowances to get taxable income.
- Separate NSNDI, savings income, and dividend income, and calculate tax on each at the applicable rate.
- Add the tax amounts to get the overall income tax liability
What are the three categories of income for tax calculation?
(a) Non-savings, non-dividend income (NSNDI): all income except savings and dividends.
(b) Savings income: interest from bank accounts, etc.
(c) Dividend income
What is a personal allowance?
The amount of income a person can earn each year before paying income tax. For 2024/25, it’s £12,570. It is reduced by £1 for every £2 of income above £100,000, and is reduced to zero if income reaches £125,140.
What are allowable reliefs?
Certain sums deducted from total income to arrive at net income. The most significant example is interest payments on qualifying loans. Examples of qualifying loans include those used to buy a share in a partnership, invest in a close trading company, or pay inheritance tax.
What is the Personal Savings Allowance (PSA)?
An allowance that reduces the tax rate on savings income to 0% for the first £1,000 for basic rate taxpayers and the first £500 for higher rate taxpayers. Additional rate taxpayers do not receive a PSA.
What is the dividend allowance?
An allowance that reduces the tax rate on dividend income to 0% for the first £500. All taxpayers, regardless of their tax band, are entitled to the dividend allowance.
How is NSNDI taxed?
NSNDI is taxed first, using the main income tax rates:
○Basic rate: 20%
○Higher rate: 40%
○Additional rate: 45%
How is savings income taxed?
The PSA is applied first, potentially taxing the initial portion at 0%. Remaining taxable savings income is then taxed at savings rates:
○ Starting rate for savings: 0%
○ Savings basic rate: 20%
○ Savings higher rate: 40%
○ Savings additional rate: 45%
How is dividend income taxed?
The dividend allowance is applied first, potentially taxing the initial portion at 0%. Remaining taxable dividend income is then taxed at dividend rates:
○ Dividend ordinary rate: 8.75%
○ Dividend upper rate: 33.75%
○ Dividend additional rate: 39.35%
What is the general anti-avoidance rule (GAAR)?
A rule designed to target abusive tax avoidance schemes. It allows HMRC to counteract tax advantages arising from abusive arrangements. An arrangement is considered abusive if it cannot reasonably be regarded as a reasonable course of action.
What are the payment deadlines for income tax?
○ Online tax return and payment: 31 January following the tax year
○ Paper tax return: 31 October following the tax year
○ First payment on account: 31 January in the tax year
○ Second payment on account: 31 July after the end of the tax year
○ Balancing payment: 31 January after the end of the tax year
