Income Tax Flashcards
What is income?
Although there is technically no statutory definition, money will be classed as income if it has a nature of recurrence e.g. a salary received every month
Who pays income tax?
-Individuals/Sole traders
-Partners
-Personal Representatives- on the outstanding income tax owed by the deceased and income tax chargeables
-Trustees
Individuals- they will have to pay income tax if their earnings exceed a certain threshold (this is paid directly to HMRC by the employer through PAYE)
Sole Traders- Sole traders will have to pay income tax based on an assessment of their trading profits.
Chargeable receipts- deductible expenditures- capital allowances = trading profit/loss
Partners- Partners are responsible for the tax due on their individual share of the partnership profits
PR’s- Personal Representatives pay the deceased outstanding income tax and income tax chargeable during the administration of the estate
Trustees- Pay income tax on income produced by the trust.
What are the three categories of income
-Non Savings, Non Dividends Income (NSNDI); Any income that’s not savings or dividends
-Savings income; Income produced by mainly interest on money in a savings account + other sources
-Dividend Income
How do you calculate the tax payable on income (IMPORTANT)
- Calculate Total Income
- Deduct allowable reliefs
- The resulting sum is NET Income
- deduct any personal allowance
- The resulting sum is called Taxable Income
- Separate NSNDI, savings income and dividends income, and calculate the tax rate on each type of income.
- Add together the amounts of tax to give overall income tax liability
What sources of income are contained in total income?
-Trading Income
-Property Income I.e. rent
-Savings and investment income- interest, dividends
-employment and pensions income: includes social securing payments like sick pay and maternity pay
What is gross pay?
Gross Pay- income in which tax hasn’t yet been deducted. A taxpayer will receive most types of income (save employment income), without any tax being deducted beforehand e.g. landlord received rental payments in full
What are some examples of allowable reliefs?
-A loan to buy a share in a partnership, to contribute capital or make a loan to a partnership
-A loan to invest in a close trading company (a business where control is held by a small group of ppl, usually directors and shareholders)
-A Loan to PR’s to pay inheritance tax
What is the personal allowance threshold?
-An individual can earn up to £12,570, before being liable for income tax
-However, for earnings over £100,000, the personal allowance is reduced. It will be reduced by half of the amount over £100,000 by which the person earns.
E.g. £120,000 salary
£12,570 (personal allowance) - £120,000 (income) -£100,00/2 = Personal Allowance Reduced to £2570
Adjusted personal allowance = £12,570 - (net income -£100,000)/2
What are 3 other types of personal allowances
-Marriage allowance: if you earn less than £12,570, £1260 of your unused personal allowance can be given to you spouse/civil partner.
-Blind person allowance- equivalent to £3070 which is subtracted from net income like the personal allowance
-Property & Trading Allowance- if individuals make below £1000 in gross property income or gross trading income they are not liable to income tax
-If they make above £1000 in gross property or trading income, the tax payer can choose to take £1000 allowance as a deduction against gross income to reduce income and pay less tax.
- However if a tax payers expenses (like repairs for property of costs of running a business) are more than £1000 it might be better for them to deduct these real expenses than use the £1000 allowance.
What is the Personal Saving Allowance (PSA)?
The PSA is the amount out of the income produced from savings i.e. interest from bank accounts, that you are allowed to keep tax free.
The PSA is £1000 which can be subtracted from savings income (interest from bank/building society accounts), so that the first £1000 of saving income is tax free.
How is PSA calculated?
The amount of PSA a tax-payer is entitled to depends on whether the tax payer is a basic or higher rate tax payer.
-It is calculated by looking at the income bands a tax-payer falls into
Basic rate taxpayer £0-£37,700 £1000 savings allowance tax free
Higher rate taxpayer £37,701-£125,140 £500 savings allowance tax free
Additional rate taxpayer Over £125,140 No savings allowance
Example of PSA calculation
A man has an Income of £75k, making a person a higher rate tax-payer. The man receives £650 annual interest from a building savings account i.e. savings income;
Calculate the amount of tax due on his saving income
-He is entitled to a PSA of £500
-The remaining £150 is taxed at 40%
-£150 x 0.4 = £60 tax on his savings income
What is the dividend allowance?
-Currently the first £500 of taxpayers dividend income is tax free
-The dividend allowance is the amount of income produced from dividends that you are allowed to keep tax free/the amount that can be set off against the income from dividends.
What personal allowances are deducted when calculating the taxable income?
-ONLY the personal allowance is deducted to calculate the taxable income NOT (PSA or dividend allowance)
-PSA and dividend allowance are taxed at 0%.
When calculating the income tax liability what is the order of taxation?
-NSNDI is taxed first
-Savings income is taxed second
-Dividends income is taxed last
What are the main tax rates for Non Savings Non Dividend Income?
Basic rate 20% tax- £0-£37,700
Higher rate 40% tax- £37,701- £125,140
Additional rate 45% tax- Over £125,140
How to calculate tax payable on SOLELY Non Savings Non Dividend Income (NSNDI)?
Taxable income - Savings & Dividend Income = Taxable NSNDI
Example calculation on calculating tax payable on solely NSNDI
Example: A man has a taxable income of 200k of which 30k is savings and dividend income calculate the NSNDI tax
£200k - £30k = £170k taxable NSNDI
-£0-£37,700 taxed at 20% (£7540)
-£37,700 - £125,140 taxed at 40%(£34,976)
-£125,140-£170,00 taxed at 45% (£20,187)
Total tax payable = £62,703
What are the savings income rates i.e., tax rates paid on income deriving from the interest on savings accounts
Taxable Income Savings income Tax Rates
£0- £5000: 0%
£5001-£37,700: 20%
£37,701-£125,140: 40%
Over £125,140: 45%
How to work out savings income subject to tax?
Calculating taxable savings income
Saving income - PSA (taxed at 0%) = Remaining Taxable Savings Income
How to calculate the tax on taxable savings income
To calculate what tax rates an individual will pay on savings income we add their PSA + Taxable NSNDI and determine what threshold/ the Remaining Taxable Savings Income falls into.
Example Calculation of working out savings income subject to tax
Colin has a taxable income of £140,000 of which £123,000 is NSNDI and £17,000 is interest. Colin is an additional rate tax payer so he is not entitled to a PSA. He will be liable to tax
A- On the NSNDI:
-basic rate of 20% on the first £37,700 (£7540)
-At the higher rate of 40% the remaining £85,300 (£34,120)
B- On the Interest (Savings Income)
- At the higher rate of 40% to the extend that it falls below the higher rate limit of £125,140, so £2140 of (£125,140-£123,000), will be taxed at 40% so £856
-At the savings additional rate of 45% on the remaining (£17,000- £2140) £14,860
* £14,860 x 0.45 = £6,687.00
What are the dividend income rates
Taxable Income Dividend Income Tax Rate
£0-37,700 8.75%
£37,701 - £125,140 33.75%
Over £125,140 39.35%
How to work out dividend income subject to tax?
Dividend Income - Dividend Allowance (taxed at 0%) = Remaining Taxable Dividend
