Income Tax

Question 1

Calculate Income Tax

Answer 1

1. Calc Gross Income for the year
2. Make deductions to determine ANI (reduce by gross net pay / charity giving and gross relief at source / gift aid
3. Deduct any PA lost
4. Calculate any extended BRT band
5. Apply tax at appropriate rates
6. Credit for tax reducers (EIS, VCT/SEIS/Marriage allowance/CBTC)

Question 2

Starting Rate Band

Answer 2

The starting rate is 0% and applies to the first £5,000 of taxable savings income BUT it only applies where savings income falls within the first £5,000 of taxable income, which is the amount after the personal allowance has been deducted.

Earned income (eg pension or salary) is taken into account before savings income in any income tax calculation, so if someone has earned income of more than £16,500 then the 0% savings rate is not going to be available for that person (this is £11,500 personal allowance plus the £5,000 starting rate band). The starting rate band is in addition to the personal savings allowance (PSA), so let’s look at how these interact: (remember that the PSA is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers with additional rate taxpayers not eligible).

Question 3

Products in Battle Against Income Tax

Answer 3

VCT (Tax Free Income)
EIS / SEIS / VCT (Tax Reducers)
ISA / JISA (Tax Free Income)
Pension Contributions / Charity (Deduction / BRB Extender / PA Retrieval)
Investment Bonds (Tax deferred Withdrawals / Top Slicing)

Question 4

Detail and Justify why income should come from couples investment portfolio rather from pensions

Answer 4

Strategy

• Inherited FAD - at what age did owner die?
• Any SIPP could give PCLS but using pension reduces the value of IHT exempt assets
• Take tax free funds from ISAs which will reduce the funds that need to be used to provide income
• Encash share portfolio in subsequent years to give tax free income within CGT exemptions
• take 5% withdrawals of original capital invested from Bonds
• Switch ownership of savings/UTs/Shares to make use of PA
• Switch investments into income funds to generate more income
• Take funds from investments to reduce estate for IHT purposes and so reduces IHT on 2nd death

Question 5

Income Tax Advice

Answer 5

• Utilise stocks and shares ISA allowance for both via existing collectives / feeder in 2020/21 current year if not utilsied
• If person retired and not SPA age will be non tax payer
• Claim the marriage allowance to obtain tax reducer of 10% of Barbara’s unused PA
• Transfer Unit Trust to non earning person in full as can use Starting Rate Band from when state pension starts