Income Tax (4 or 5 marks)

Question 1

What is Check Employment Status for Tax (CEST)?

Answer 1

Online tool from Gov to help employers and individuals determine tax status.

Question 2

What are the 4 categories for income?

Answer 2

Non savings

Savings

Dividend

Chargeable Gains

(Look at 1.2 to see what this includes specifically)

Question 3

From 2024/25, the new ‘tax year basis’ rules will apply in full. What is this?

Answer 3

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

Question 4

What is the ‘trading allowance’?

Answer 4

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.

Question 5

What are P11D benefits?

Answer 5

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

Question 6

What is a chargeable event?

Answer 6

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

Question 7

In what order is income tax calculated?

Answer 7

1. Non savings income
2. Savings income
3. Dividend income

4.Chargeable gains

Question 8

The order income tax is calculated in is as followed?

1. Non savings income
2. Savings income
3. Dividend income

4.Chargeable gains

Tell me the specific type of income that each category includes

Answer 8

1. Non savings income =
   Salary/bonus, self employed income, pension income, benefits in kind, Rental income
2. Savings income =
   Bank/building society Interest, Gilt/Corporate bond income & distributions from interest bearing collective investment schemes (60% or more in interest bearing securities)
3. 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

Question 9

What is a close company or close trading company?

Answer 9

A company that is owned/controlled by 5 or less shareholders or directors

Question 10

What are allowable loans?

Answer 10

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

Question 11

net pay arrangement

Answer 11

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’.

Question 12

The personal allowance for the current tax year is £12,570.

When is the Personal allowance reduced

Answer 12

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)

Question 13

What is adjusted net income?

Question 14

READ KEY POINT ON 1.2 PRIOR TO EXAM

Question 15

What is ‘relief at source’?

Answer 15

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

Question 16

LOOK AT 1.4 FOR COMPLETE TAX CALC

Question 17

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

Answer 17

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.

Question 18

What is taxable income

Answer 18

income after deductions and allowances

Question 19

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

Answer 19

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%.

Question 20

What are the steps to calculating income tax.

Ive included the specifics of what to take into account in each step..

Answer 20

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

Question 21

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

Answer 21

£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.

Question 22

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

Answer 22

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

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

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.

Question 25

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

Answer 25

£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.

Question 26

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

Answer 26

£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

Question 27

A contract of service indicates WHAT employment, while a contract for services indicates WHAT.

Answer 27

Contract of service indicates employment, while a contract for services indicates self-employment.

Question 28

there is only a taxable benefit generated if the beneficial loan exceeds £10,000.

True or false

Answer 28

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

Question 29

What is the difference between the relief at source method and net pay method ?

Answer 29

Both are ways of giving tax relief on pension contributions.

The differences are as followed:

Question 30

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?

Answer 30

Employees can personally contribute a maximum of £5000. This lowers the taxable BIK value of the car

This only applies to company cars.

Question 31

What taxes are UK resident subject to?

What taxed are UK domiciled individuals subject to?

Answer 31

What taxes are UK resident subject to? Income tax and CGT

What taxed are UK domiciled individuals subject to? Inheritance tax

Question 32

Are NICS paid before or after corporation tax is calculated on profits by employers?

Answer 32

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.)