Income Tax (4 or 5 marks) Flashcards
What is Check Employment Status for Tax (CEST)?
Online tool from Gov to help employers and individuals determine tax status.
What are the 4 categories for income?
Non savings
Savings
Dividend
Chargeable Gains
(Look at 1.2 to see what this includes specifically)
From 2024/25, the new ‘tax year basis’ rules will apply in full. What is this?
Applies to self employed people as they self declare there tax.
Means all profits generated in a tax year will be taxed in that tax year
READ 1.2
What is the ‘trading allowance’?
Trading income is exempt, and does not need to be declared, if the income before the deduction of expenses is less than £1,000.
If trading income exceeds £1,000 then the allowance is still available, but ONLY as an alternative to claiming expenses. In reality, this means that it will only benefit businesses with expenses less than £1,000.
What are P11D benefits?
benefits in kind such as company cars/fuel, beneficial loans (This is where an employee receives an interest-free, or discounted, loan from their employer) , In-house benefits and so on
Read 1.2 for more detail
What is a chargeable event?
Chargeable events (is something that prompts HMRC to check if there is any tax due) include: DAMPS
DEATH
ASSIGNEMENT
MATURITY
SURRENDER
PART SURRENDER
relates to life assurance products, such as investment bonds
Following following a ‘chargeable event’ the a ‘chargeable gain’ could be due
In what order is income tax calculated?
- Non savings income
- Savings income
- Dividend income
4.Chargeable gains
The order income tax is calculated in is as followed?
- Non savings income
- Savings income
- Dividend income
4.Chargeable gains
Tell me the specific type of income that each category includes
- Non savings income =
Salary/bonus, self employed income, pension income, benefits in kind, Rental income - Savings income =
Bank/building society Interest, Gilt/Corporate bond income & distributions from interest bearing collective investment schemes (60% or more in interest bearing securities) - Dividend income = Direct share dividends, distributions from equity based collective investment schemes (less than 60%)
4.Chargeable gains from life policies, such as Investment bonds
What is a close company or close trading company?
A company that is owned/controlled by 5 or less shareholders or directors
What are allowable loans?
Interest payments can be treated as allowable deductions from income if the loan the individual takes out for ‘qualifying purposes
if the loan is qualifying, the gross amount of interest paid in the tax year can be deducted from the persons gross income in the income tax calculation. This is subject to certain restrictions, such as a maximum deduction of £50,000
Example of Qualifying loans: partner takes out loan to buy machinery for the partnership’s business
net pay arrangement
Relates to a way of contributing to your occupational pension
Where the pension contributions are deducted from pay before tax is applied.
Tax is therefore just applied to their ‘net pay’ (i.e. gross pay minus the pension contribution), hence the term ‘net pay arrangement’.
The personal allowance for the current tax year is £12,570.
When is the Personal allowance reduced
The personal allowance is reduced at a rate of £1 for every £2 of adjusted net income that exceeds the £100,000 threshold.
This means that an adjusted net income of £125,140 would wipe out the personal allowance totally. (12570 x 2 = 25140)
What is adjusted net income?
READ KEY POINT ON 1.2 PRIOR TO EXAM
What is ‘relief at source’?
basic rate tax relief of 20%
Most pension contributions that are NOT made via an employer’s occupational scheme through payroll (ie net pay arrangement) qualify for ‘relief at source’. In other words, if an individual personally contributes £80, they will have to get £100 invested on their behalf in a personal pension scheme.
NOTE: Also, in these situations as well as receiving relief at source, they can claim back tax at their highest marginal rate. ( why pensions are so desirable)
This uses a ‘grossing up’ calculation; divide the net contribution to the pension by 0.8 (80%) to arrive at the gross figure. Then extend their basic rate tax bracket by this gross figure, (ie the ‘grossed up pension contribution’ )
This then extends their basic rate tax bracket which in turn reduces the amount of tax payable at their highest marginal rate
LOOK AT 1.4 FOR COMPLETE TAX CALC
Peter Gold is trading as an electrician. He has chosen a financial year ending on 30 September. Under the new arrangements that came in to effect from 2024/25, his tax bill will be based on profits made between…
1 October and 30 September
6 April and 5 April
1 October and 31 January
6 April and 31 January
1 October and 5 April, (so answer is 6 April and 5 April)
This is the year where self-employed profits are moving to being taxed on a tax year basis, regardless of when the business choses to end its accounts.
Sets of account will have to have profits split into the tax years that they cover, so profits can be taxed in the right tax year.
What is taxable income
income after deductions and allowances
Wendy, 41, earns £105,000 per annum in her role as finance director of a large UK manufacturing company. In the current tax year, she has also received £2,800 from her ISA investments and £7,000 from her share portfolio. Wendy has contributed £8,000 to her employer’s occupational pension scheme during the tax year.
What is her taxable income (her income after deductions and allowances)?
£112,930
£100,430
£93,430
£92,430
Wendy’s gross income for tax purposes is £105,000 + £7,000 = £112,000.
You can ignore her ISA income. Deduct her pension contribution of £8,000 (without grossing up because this is the gross contribution and tax relief is via the net pay arrangement for an occupational pension scheme) = £104,000.
As her income exceeds the £100,000 threshold, her personal allowance is reduced by £1 for every £2 over £100,000, so £4,000 over equals a £2,000 reduction. This means her personal allowance is £10,570. £104,000 - £10,570 = £93,430 taxable income.
You don’t deduct the Dividend Allowance – it just means that the first £500 of Wendy’s dividend income is taxed at 0%.
What are the steps to calculating income tax.
Ive included the specifics of what to take into account in each step..
Step 1: Calculate gross amount
Non savings, savings, dividends, chargeable gains
Step 2: Make Allowable deductions (IA)
Allowable loans, Pension contributions via ‘net pay arrangement’
& Charity contributions via ‘payroll giving’ scheme
Step 3: Deduct the Personal Allowance
Step 4: Extend the tax bracket (IA)
Pension contributions via relief at source method & Charity contributions via gift aid
Step 5: Apply the tax at appropriate rates
(remember Personal Savings Allowance , Dividend allowance, starting rate & that interest/dividends is taxable at individuals highest marginal rate)
This calculates total tax liability. Then,
Step 6: Give credit for any previous tax paid (IA)
REITS, certain annuities & discretionary trusts
Step 7: Deduct any tax reducers (IA)
Marriage allowance, married couples allowance, EIS/SEIS & VCTs
Jonas, a higher-rate taxpayer, owns 5,000 shares in a public limited company.
If the company declares a dividend of £3.00 per share, what amount of tax is due on these dividends alone, assuming they are the only dividends he received?
£6,000.00
£5,062.50
£4,893.75
£4,725
£4,893.75
5000 shares x £3.00 = £15,000.
Jonas can offset his £500 Dividend Allowance against this income, meaning only £14,500 is subject to tax at the higher rate dividend tax rate of 33.75%. £14,500 x 33.75% = £4,893.75.
Jason is an additional rate taxpayer contributing to a personal pension plan.
Which of the following best describes how he will receive income tax relief on his contribution?
His contribution will benefit from 20% tax relief at source; the remaining 25% is deducted from his income tax liability as a tax reducer
He will receive 45% tax relief at source
He will receive the full 45% tax relief through the net pay arrangement
His contribution will benefit from 20% tax relief at source; he will then receive further tax relief by extending his basic rate tax band
His contribution will benefit from 20% tax relief at source; he will then receive further tax relief by extending his basic rate tax band
Personal Pension Plans benefit from relief at source, but only at a basic rate of 20%.
Any additional tax relief owing to the pension holder is obtained via self-assessment by effectively extending the basic rate tax band using the ‘grossing up calculation’ (meaning the threshold for paying additional rate tax is also increased)
Note: Occupational pension schemes benefit from the Net Pay Arrangement
REMEMBER: FOR personal pension contributions, people can claim relief at source and ALSO at highest marginal rate by adding the ‘grossed up pension contribution’ (calculated by using the grossing up calculation) to their basic rate bracket
After deducting the personal allowance, an individual has taxable non-savings income of £1,800 and £4,800 savings income in the 2019/20 tax year. How much income tax is due on their savings income only?
£120
£220
£320
£960
The non-savings income, which is taxed first, uses up part of the ‘special’ savings rate band of 0%; £1,800 of the £5,000 band to be precise.
That leaves £3,200 of the savings income to be taxed at 0% = £0.
Of the remaining £1,600, a basic rate taxpayer also has their Personal Savings Allowance of £1,000 to offset, meaning that only £600 of the amount is taxed at 20%. £600 x 20% = £120.
Jemma and Anthony would like advice on investing money for their daughter, Hattie, who is currently 16 years old.
Which of the following statements is correct regarding potential income tax implications for the settlor of the gift?
Hattie’s grandparents could invest on her behalf and there will be no tax implications
Jemma and Anthony can invest an unlimited amount on behalf of Hattie and, as they are her parents, there will be no tax implications
Jemma and Anthony can invest up to £100 per annum on Hattie’s behalf with no tax implications
Jemma and Anthony can invest the maximum amount into a cash ISA on Hattie’s behalf and there will be no tax implications
Hattie’s grandparents could invest on her behalf and there will be no tax implications
Investments on behalf of a child, if the capital derives from the parents, are at danger of being taxed on the parents if the income produced (not the capital invested!!!) exceeds £100 pa.
There are no such possible implications where the capital derives from a grandparent.
Jasmine, a P11d employee, is a school teacher at a private school and has been offered a place at the school for her son Alfie when he starts his education next year. The school advertises places at £15,000 per school year and Jasmine qualifies for a 50% discount. If the marginal cost to the school of educating each child is £8,000 per school year, how much will the benefit in kind be classified as for Jasmine
£500
£7,500
£8,000
£15,000
£500
The P11d value is based on the marginal cost which in this case is £8,000.
However, the individual contribution of £7,500 (50% of the standard fees) can be deducted from this marginal cost, so the benefit in kind is limited to £500; the difference between what it costs the school and what she pays.
Calculate the taxable charge:
This benefit is taxable, so Jasmine would pay tax based on her income tax bracket.
For example, if Jasmine is in the basic rate tax bracket (20%), the taxable charge would be: £500×20%=£100
If Jasmine is in a different tax bracket (e.g., higher rate or additional rate), the taxable charge would be calculated accordingly.
Rochelle, who earns £18,000, has a loan of £12,000 from her employer which she used to purchase a car. Her employer only charges a rate of 1.25%. What is the taxable benefit arising from this arrangement in this tax year?
£120
£210
£270
£390
£12,000 x 1% (2.25% - 1.25%) = £120
2.25%= HMRC loan rate for the current tax year. Read bock on ‘allowable loans’ if unsure of this
For allowable loans:
Calculate the difference between the official rate and the actual rate charged, then Calculate the taxable benefit by multiplying the difference by the allowable loan
NOTE: the max allowable loan is £50,000
A contract of service indicates WHAT employment, while a contract for services indicates WHAT.
Contract of service indicates employment, while a contract for services indicates self-employment.
there is only a taxable benefit generated if the beneficial loan exceeds £10,000.
True or false
True
The taxable benefit is based on the difference between HMRC’s official rate of interest and the actual rate paid by the employee (if they pay anything at all). The official rate is set each tax year, and is currently 2.25%.
The max is £50000
What is the difference between the relief at source method and net pay method ?
Both are ways of giving tax relief on pension contributions.
The differences are as followed:
A employee receives a company car worth £90k
Employees can contribute themselves toward this. What is the max that they can contribute towards a company car P11D benefit?
Employees can personally contribute a maximum of £5000. This lowers the taxable BIK value of the car
This only applies to company cars.
What taxes are UK resident subject to?
What taxed are UK domiciled individuals subject to?
What taxes are UK resident subject to? Income tax and CGT
What taxed are UK domiciled individuals subject to? Inheritance tax
Are NICS paid before or after corporation tax is calculated on profits by employers?
NICS are paid before (remember they are deductible expenses)
In contrast, Employees pay NICS and income tax on entire earnings (ie, they are not deducted before income tax is calculated- if this was the case they would pay less income tax. Hence how they are motivated deductible expenses. Hence how it contrasts with employers.)
