Income Tax

Question 1

List the 5 different types of income

Answer 1

Trading income
Employment income
Income from property
Investment income
Other

Question 2

When are self employed individuals taxed?

Answer 2

Annual accounts can be made up to any date. It doesn’t have to coincide with the tax year.

Question 3

What are the special rules regarding a business start and end?

Answer 3

Tax for the first year is based on the tax year.

The second year will be taxed on a full years trade. This may result in double taxation.

Question 4

What is the trading allowance?

Answer 4

£1000. This can be claimed against earnings over £1000 instead of deducting expenses. Only relevant for the smallest businesses.

Question 5

What are the allowable expenses for a landlord?

Answer 5

Maintenance and repairs
Rates and rents
Replacing furniture, furnishings, appliances and kitchenware
Other wholly and exclusively occurred in the course of letting

Question 6

What constitutes savings income?

Answer 6

Interest
Purchased life annuity payments
Gains from life assurance contracts

Question 7

What constitutes dividend income?

Answer 7

Stock dividends and overseas holdings dividends

Question 8

What are the terms for employed vs self employed status?

Answer 8

Contract of service (employed)

Contract for service (self employed)

Question 9

How do you ‘gross up’ a net payment?

Answer 9

Multiply by 1.25 or divide by 0.8. E.g. £1000 x 1.25 = £1250

Question 10

List the tax relief deductions from income.

Answer 10

Qualifying interest payments
Allowable business loans (maximum of £50,000 or 25%of total income, whichever is higher)
Gifts to charities of shares and securities
Contributions to registered pension plans

Question 11

Tax relievable pension contributions can be given through 3 means;

Answer 11

Relief at source
Net pay arrangements
Relief by making a claim

Question 12

How do you calculate the taxable car benefit?

Answer 12

As a percentage of the list price of the car. This is determined by its CO2 emissions. 23% is the base percentage charge. This rises by 1% for every 5g/km over 95.

Question 13

List the steps taken to avoid the personal allowance trap.

Answer 13

Calculate gross income
Deduct gross personal pension contribution
Deduct personal allowance from gross income
Increase basic rate tax band by gross pension contribution

Question 14

What is taxable income?

Answer 14

This is all sources of income e.g. salary, savings and investments combined. PSA is then removed to calculate tax brackets.

Question 15

How do you calculate tax on savings income if earnings are below £5000?

Answer 15

Deduct any earnings from £5000 savings allowance to find 0% band.
Deduct savings allowance dependant on income tax bracket.
Subtract both from overall savings income and multiply by tax bracket.

Question 16

List the steps of calculating a tax charge.

Answer 16

1. Calculate all pre-tax income
2. Deduct reliefs deductible from total income e.g. business losses.
3. Deduct the personal allowance
4. Calculate band extensions due to gross pension contributions
5. Calculate the tax in the correct brackets in the following order;
   Income
   Savings
   Dividends
   Chargeable gains
6. Deduct tax reducers

Question 17

Who does the asset belong to in a bare trust?

Answer 17

The beneficiary who is also liable for the tax unless gifted to a minor by a parent.

Question 18

What is an interest in possession trust?

Answer 18

Where beneficiaries have a right to income as and when it arises.

Question 19

How is an IIP trust taxed?

Answer 19

Trustees must pay 20% on savings and 7.5% on dividends (there is no dividend allowance). This will be taken from the trusts earnings.
Beneficiaries can be subject to higher and additional rate tax on top of that already charged. i.e. a further 20 or 25%.