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F6 Taxation (UK) > Income Tax > Flashcards

Income Tax Flashcards

1
Q

How is income classified for a personal income tax computation?

A

In an income tax computation we bring together, for each tax year, income from all sources - split into NS, S and D.
All income received must be classified according to the nature of the income because different rules apply to different types of income. Main groups:
TRADING INCOME
EMPLOYMENT INCOME
PROPERTY INCOME
INVESTMENT INCOME

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2
Q

What are the dates for the tax year/fiscal year?

A

6 April 2014 - 5 April 2015

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3
Q

Why do we gross up the bank or building society income in an income tax computation?

A

The income from a bank or building society (interest) is taxed at source, therefore received net of 20%.
This is because the HMRC assume that all tax payers are only liable to BR of 20%. Bank/Building society deduct 20% at source and pay to HMRC on behalf of the taxpayer. It eliminates the need for a large no of taxpayers having to fill out a tax return.
If taxpayer is in fact a HR or AR, there may be further tax to pay on the savings income.

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4
Q

What consequence does a taxpayer’s residence have?

A

A taxpayer’s residence has important consequences in establishing tax treatment of his UK and overseas income and capital gains.
Statute sets out a test to determine whether or not and individual is a UK resident in a tax year.
Generally, a UK resident is liable to UK income tax on his UK and overseas income whereas a non-UK resident is liable to UK income tax only on income arising in the UK.

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5
Q

Income tax computation
Gross up
Bank or building society interest by?
Dividends by?

A

Bank or building society interest by 100/80

Dividends by 100/90

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6
Q

What is income tax charged on?

A

Taxable income

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7
Q

What income is exempt from income tax?

A

NISAs New Individual Savings Accounts
Savings certificates
Premium bonds
Child benefit*

*charge applies if taxpayer or partner has an ANI of £50k plus

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8
Q

What are the reliefs in the income tax computation?

A

Deductible interest is deducted from Total Income to compute Net Income.

An individual who pays interest on a loan in a tax year is entitled to relief in that tax year often loan is:

  • to buy P+M for use in a partnership
  • to buy P+M for employment use
  • to buy shares in an employee controlled company
  • to invest in partnership
  • to invest in a co-operative
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9
Q

How do you calculate ANI?

A

Adjusted net income

Net income
Less: GROSS gift aid donations
Less: GROSS personal pension contributions

Equals: ANI

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10
Q

If a taxpayer has a net income between £100k and £120k, what is the calculation to calculate their personal allowance?

A

Calculate ANI and if this exceeds £100k…

REDUCE PA BY: 50% x (ANI - 100000)

Also applied to older person who is receiving a higher PA, but their ANI exceeds £27000.

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11
Q

Where in the income tax computation is the personal allowance deducted?

A

It is deducted after the reliefs (interest paid on specific loans) from Net Income to give you Taxable income.

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12
Q

Where in the income tax computation are the reliefs deducted?

A

Reliefs (interest paid on specific loans) are taken from Total Income to give Net Income.

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13
Q

What is the income tax liability?

A

The amount of income tax charged on the individual’s Taxable Income.
Tax rates applied on NS -> S -> D

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14
Q

What is the savings income starting rate?

A

There is a tax rate of 10% for SAVINGS income up to £2880.

NB that NS income comes first and is included.

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15
Q

What is deducted from Income Tax Liability to calculate Income Tax Payable?

A

TAX SUFFERED AT SOURCE

First (always) tax credit on Dividends
= dividend x 10/90
NB. This cannot be repaid.

Secondly 
Bank/building soc interest 
= interest x 20/80
AND Paye on employment income. 
NB. These can be repaid if exceed tax liability.
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16
Q

Briefly explain the gift aid scheme and relief at source for taxpayers.

A

Taxpayers who make one off or regular charitable gifts qualify for the Gift Aid Scheme, provided the donor gives the charity a gift aid declaration.

A gift aid donation is treated as if it is paid net of BR tax at 20%. Therefore if want to gift £1000, donate £800 as the charity will claim the 20% from HMRC.

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17
Q

How is additional relief given to HR and AR taxpayers in their income tax computations who make charitable donations?

A

Additional relief is give to HR and AR taxpayers in the income tax computation by increasing their BR and HR limits by the GROSS amount of the donations.
NB. gross up by x 100/80

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18
Q

What is the child benefit income tax charge?

A

There is an income tax charge to recover child benefit if the recipient or their partner has an ANI of £50k+
The effect is to recover the child benefit from tax payers who have higher incomes (NB individuals can opt out altogether to save time consuming on self assessment system.

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19
Q

How is the child benefit income tax charge calculated?

A

YELLOW SHEET where the ANI is between 50k and 60k, the charge is 1% of the amount of benefit received for every £100 of income over £50k.

If the ANI is above £60k, the charge is equal to the full amount of benefit received.

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20
Q

Who is liable to the child benefit income tax charge?

A

The person with the higher ANI is liable to th charge.

If both partners have an ANI over 50k, the partner with the highest ANI is still liable.

NB the child benefit income tax charge is collected through the self assessment system.

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21
Q

Explain tax planning for married couples or civil partners.

A

Where a member of a married couple is a BR taxpayer and the other is a HR, income liabilities can be minimised by transferring income producing assets from the HR to the partner.

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22
Q

Explain how jointly held property is treated in an income tax computation.

A

Income on property jointly held between married couples and civil partners is treated as if it were shared equally unless the couple make a joint declaration to HMRC of the actual shares of the ownership.

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23
Q

What is the important distinction between employment and self employment?

A

Employment : contract OF service
Self employment : contract FOR services

Distinction between employment and self employment is decided by looking at all the facts of engagement.

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24
Q

List a few of the important factors when trying to distinguish between employment or self employment:

A
  • the degree of control exercised over the person doing the work (high = employed)
  • whether the individual must accept further work
    (yes = employed)
  • whether the individual provides his own equipment ( yes = self employed)
  • whether the individual is entitled to employment benefits - sick pay, holidays, pension plan (yes = employed)
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25
Q

REMEMBER

A

Employment receipts are taxed as earnings.

Self employment receipts are taxed as trading income.

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26
Q

On what basis is employment income taxed?

A

RECEIPTS BASIS

General employment earnings are taxed in the year that they are received.

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27
Q

On what basis are general employment earnings received?

A

General earnings are treated as received at the earlier of:
Time when the payment is MADE
Time when the person becomes ENTITLED to the payment

Pension income does not apply to received basis - it taxed on the amount accruing for the year.

28
Q

How do you calculate the Net Taxable Earnings of a tax year?

A

Net taxable earnings = total taxable earning less total allowable deductions

Deductions cannot create a loss, can only reduce the net taxable earnings to nil.
Separate calculations must be completed for each employment an individual has.

29
Q

What are deductions from employment income limited to?

A

Deductions from total taxable earnings (to provide relief on income tax) are limited to:

  • qualifying travel expenses
  • other expenses the employee is obliged to incur and pay which are incurred wholly, exclusively and necessarily in the performance of their employment.
  • some specific expenditure is deductible.
30
Q

What “other” expenses is an employee entitled to as a relief from income tax?

A

Those expenses the employee is obliged to incur wholly, exclusively and necessarily in the performance of their employment.

Exclusively = no private benefit to employee 
Necessarily = could the duties be performed without the expense?
31
Q

Define wholly, exclusively and necessarily.

A 
Exclusively = no private benefit to employee 
Necessarily = could the duties be performed without the expense?
32
Q

Define what travel expenses an employee is allowed to deduct.

A

Travel expenses are not available for normal commuting costs, but entitled to relief for travel expenses that they are obliged to incur and pay in travelling for the performance of their duties.

33
Q

What travel expenses is a site based employee is allowed to deduct.

A

Site based employees who do not have a permanent work place are entitled to relief for the costs of all journeys made from home to wherever they are working.

34
Q

Are any deductions allowable for an employee working on a secondment at a temporary workplace?

A

The 24 month rule applies, where:
Tax relief is available for travel, accommodation and subsistence incurred by an employee who is working at a temporary work place for up to 24 months.

35
Q

Are clothes deductible/relief from income tax on employment earnings?

A

Not deductible, unless for certain trades that require protective clothing where annual deductions are set.

36
Q

What deductions is an employee working from home allowed from income tax on employment income?

A

An employee working from home may be able to claim additional costs of working from home.
E.g. Expenditure from heating and lighting.

37
Q

What specific expenditure is deductible in computing Net Taxable Earnings?

A
  • contributions to registered occupational pension schemes
  • subscriptions to professional bodies, if relevant to line of work
  • payments for certain liabilities relating to employment
  • capital allowances on plant and machinery
38
Q

In computing Net Taxable Earnings from employment, what liabilities are deductible?

A

If a director or employee incurs a liability related to his employment, or pays insurance against such a liability, the cost is a deductible offence (even for negligence)

If employer pays such amounts, no benefit.

39
Q

What are the statutory approved mileage allowances?

A

Employers pay a mileage allowance to employees who use their own car on business journeys.
Allowance for 2014/15 is 45ppm on first 10000 miles and 25ppm thereafter.
If employers pay less, employees can claim tax relief up to the levels.
If employers pay more, the excess will be a taxable benefit and subject to income tax.
Tax and NIC free payments of 5ppm can be made by employer for carrying a passenger, but this cannot be claimed for if not paid.

40
Q

What is the payroll deduction scheme?

A

Employees can make tax deductible donations to charity under the payroll deduction scheme. The donations is an allowable deduction from the employees earnings for tax purposes.
Tax relief is given at source as the employer must deduct the donation from GROSS pay before calculating PAYE.

41
Q

What is a P11D?

A

P11D is a statutory form required by HMRC from all UK based employers detailing the cash equivalents of benefits and expenses that they have provided during the tax year to their employees earning more than £8500 pa and/or are a director.

42
Q

What is an “excluded employee”?

A

An excluded employee is an employee lower paid employment (ie less than £8500) who is either not a director or is a director but has no material interest in the company (ie material = control of more than 5% of ordinary share capital)

£8500 must include total earnings and benefits!

43
Q

What benefits are all employees taxed on?

A

All employees, including excluded employees, are taxable on the provision of vouchers and living accommodation.

44
Q

How are employees taxed on the provision of vouchers?

A

NB. All employees including excluded employees are taxed on vouchers and living accommodation.

Any employee who receives vouchers, uses credit tokens and receives exchangeable vouchers is taxed on the COST to the employer who provided the benefit.

45
Q

How are employees taxed on the provision of living accommodation?

A

NB. All employees including excluded employees are taxed on vouchers and living accommodation.

Any employee who receives living accommodation is taxed on the annual value of the accommodation.
There is an additional charge if the property cost over £75k.

46
Q

What is the annual value in relation to living accommodation benefits?

A

The annual value is the taxable benefit imposed on an employee who is provided with living accommodation.

If owned by the employer, the annual value is the rent that would have been payable if the premises has been let at its rateable value.

If the property is rented by the employer, the taxable benefit is the higher of the rent paid by the employer and the annual value.

47
Q

What is the additional benefit charge in relation to taxable benefits of employees provided with living accommodation?

A

The additional benefit charge is the taxable benefit imposed on an employee who is provided with living accommodation where the property cost more than £75k.

48
Q

In relation to living accommodation provided to employees, how do you calculate the additional benefit charge?

NB. That the additional benefit charge is imposed on employees who are provided with living accommodation which cost more than £75k.

A

(Cost of providing living accommodation - 75k) x official rate of interest as provided in yellow sheet.

Cost of providing living accommodation is total cost of purchase + any subsequent improvements made before the start of the tax year.
If property was bought 6 years before provided to employee then it is the market value when provided plus any subsequent improvements.

49
Q

What is job related accommodation?

A

No taxable benefit is charged in relation to job related accommodation.

It is job related if:
Necessary
Will improve performance
Or for security of employee

50
Q

List what benefits are P11D employees taxed on?

A

NB. All employees, including excluded employees, are taxed on vouchers and living accommodation benefits.

P11D employees are also taxed on: general business expenses (unless exempted in claim to HMRC), expenses related to living accommodation, cars - private use car benefit, fuel benefits, vans, beneficial loans, private use of other assets, scholarships, childcare, and some specific other benefits.

51
Q

Explain when an P11D employee is taxed on general business expenses.

A

If business expenses, such as travel or hotel stays, are reimbursed by an employer the reimbursed amount is a taxable benefit for P11D employees.
To avoid being taxed on this, the employee must make a claim to deduct it as an expense.
A P11D dispensation may be obtained from HMRC to avoid the need to report expenses.

52
Q

Are private incidental expenses a taxable benefit?

A

When an individual has to spend one or more nights away from home, his employer may reimburse expenses on items incidental to his absence (ie laundry and private phone calls).
Such expenses are exempt if incurred NECESSARILY in the performance of duties.

53
Q

What expenses related to living accommodation are a taxable benefit?

A

In addition to the benefit of living accommodation itself (all employees including excluded employees are taxed on), P11D employees are also taxed on related expenses paid by the employer:
- heating, lighting and cleaning
- repairs and decorating
- provision of furniture (20% use of an asset)
-council tax and water charges
However, if the accommodation is job related, the taxable amount is restricted to 10% of employee’s net earnings.

54
Q

What taxable benefit is charged in relation to the provision of company cars?

A

Employees who have a company car are taxed on a % of the car’s list price (plus any accessories), where the % is dependent on the cars CO2 emissions.

Employees are also taxed if private fuel is provided - the same % is applied to a base figure of £21,700

55
Q

What is a company car?

A

A car provided by reason of the employment to a P11D employee or member of his family for private use gives rise to a taxable benefit.

Private use includes travel from home to work.

56
Q

How do you calculate a car benefit for private use of a company car?

A

The benefit charge for a company car is:
List price + accessories when car was provided + accessories since car provided.

% of this taxable - dependent on the car’s CO2 emissions
% maximum is 35%
Diesel cars have a supplement of 3% of the list price

But capital contributions made my employee up to max £5000 are deducted before % calculated.

57
Q

When is the car benefit reduced?

A

The car benefit charge is time apportioned where:

  • the car is made available during a tax year
  • the car is taken away during a tax year
  • the car is unavailable for use for a continuous period of more than 30 days (eg for repairs)
58
Q

What is exempt from a car benefit?

A

Pool cars are exempt.

No extra taxable benefit arises from ancillary benefits associated with the provision of cars, including:
Insurance, repairs, car parking at work.

59
Q

When are employees taxed on a fuel benefit?

A

Where fuel is provided, there is a further taxable benefit in addition to the car benefit.
But, no taxable benefit arises where either:
All fuel provided was made available only for business travel
Or the employee has made good the whole cost of any fuel provided for his private use.

60
Q

How is the taxable benefit of private fuel calculated?

A

The taxable benefit is a % of a base figure (£21700 given).

The % is the same used to calculate the car benefit.

Fuel benefit is time apportioned in the same way as car benefit. But, if the fuel benefit is stopped some point in the tax year and then started again the benefit is charged in full - no reduction!

61
Q

What benefit is charged if an employee is given a van?

A

If a van is made available for an employee’s private use, there is an annual scale charge of £3090.

The charge is time apportioned if not available for a full year.

Where fuel is provided an additional charge of £581 is added - this is also time apportioned if unavailable.

62
Q

What benefit is taxed on employees for private use of other assets?

A

When assets are made available for private use to employees or members of their family, the taxable benefit is 20% of the market value when first provided. This is time apportioned when provided during the year.
After the charge is time apportioned, it’s reduced by any contribution made by the employee.
There is an additional benefit of any amounts to of employer pays during the tax year relating to provision of the assets such as running costs.

63
Q

What benefit is charged if an asset mad available for private use is subsequently acquired by the employee?

A

If am asset made available for private use is subsequently acquired by the employee, the taxable benefit on the acquisition is the greater of:

  • current market value less price paid by the employee
  • market value when provided less amounts already taxed less price paid by the employee.
64
Q

Is childcare a taxable benefit?

A

Workplace childcare is an exempt benefit.

A £55 per week limit applies to BR employees who use employer supported childcare and childcare vouchers. Therefore, tax relief is £55x20% = £11 per week.
HR and AR employees have their tax relief restricted so that it is the equivalent of that received by the BR individual.
HR up to £28 per week, AR £25 per week so that all have £11 per week.

65
Q

List the benefits that are exempt from tax.

A

LOOK THEM UP!! 😝

66
Q

What is a P11D dispensation?

A

Expense payments to P11D employees should be reported to HMRC. They form part of the employee’s employment income and a claim to HMRC must be made to deduct the expenses in computing net employment income.
To avoid this procedure, the employer and HMRC can agree for a dispensation to avoid the need to report expenses.
The dispensation can only apply to genuine business expenses.

F6 Taxation (UK) (1 decks)

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