Income Tax 2: Calculating Basic Flashcards
What is the overall process for income tax (whole general)?
- Calculate Trading Profit
- rev - expenses - AIA - write down - Calculate Net
- total inc. - qualifying loans - Calculate Taxable
- Net - PA - Marriage All.
- this determines your band - Calc Non-Saving
- PA, at each band - Calc Savings
- Exemption if basic or higher
- same bands as non-savings - Calc Dividend
- 2k exempt amount
- at bands
What are the types of taxable income?
Non-Saving
- earnings and pensions
- trading income
- property income
Saving income
- interest from UK bank accounts/building societies
- government or company bonds
Dividend Income
- from dividends
When is income arising outside the UK taxable?
UK Residents
- on all uk and foreign income
Non-UK Resident
- only on income arising in the UK
When is someone a UK resident?
Spend 183+ days in UK during tax year
What income is exempt from income tax?
- interest from Nations Savings Certificates
- interest on dividends from Individual Savings Account
- Winnings on Premium Bonds
- income from betting, gambling and lotteries
- social security benefits
- child benefits
- tax credits
- income from ISA
How to calculate trading profit general?
- gross income from accounting period
- subtract revenue related expenses (wholly and exclusive test)
- subtract amount of AIA used (plant and machinery)
- subtract write down allowance (if exceeded AIA or car, land & buildings)
What is a revenue related expense?
Not one time capital purchase.
Rather:
- salaries
- electricity bills
- cost of goods sold
Wholly and Exclusively
- if used for business and personal purposes
- can use only amount used for business purposes
- eg. petrol use in van just for delivery not personal errands
What is eligible for AIA?
Plant and Machinery
- tools
- machinery
- computers etc.
NOT
- cars, land, buildings
Is currently set at £1m
What assets can you write down? How much can you write down?
Plant and Machinery
- if AIA does not cover all of them
Cars, land and buildings
Rates
- 18% most assets
- 6% long life assets
- depreciates over time (so write down percentage of the reduced amount the next year and so on)
How much of a business’s trading profits go to a partner?
Set out in PA or equal
- must first subtract any income given to a partner or interest given to partner on their capital account before dividing remaining
- partner with income will pay income tax on full amount of their share plus their income or interest
How is the overlap profit problem for business dealt with?
If business accounting period is same as tax year they will be taxed twice on share of first years trading income.
Reclaim
- when they cease to trade; or
- if sole trader they changes basis period to closely aligned with with tax year
How to calculate net income?
Gross income:
- non savings
- plus savings
- plus dividend
Subtract interest on qualifying loans
- loan for capital contribution to partnership
- loan for a loan to a partnership
- loan for investment in close trading company
- loan for payment of IHT for PRs
How do you calculate taxable income?
(Net income) minus (personal allowance) minus (marriage allowance)
Note: these will be subtracted from income in order (non-saving, saving then dividend)
What is the personal allowance
£12,570
Tapered
- by £1 for every £2 taxable income is above £100k
What is the marriage allowance?
SUBJECT to requirements
Can transfer part of your personal allowance to spouse (up to £1,260)
- donor’s PA will be reduced by amount given
- recipients will receive TAX REDUCTION of 20% of transferred amount
- MEANS you should calculate tax as normal and then subtract the allowance
Note: these will be subtracted from income in order (non-saving, saving then dividend)
