Income Tax Flashcards
Qualifying Interest Payments
Amount of interest that can be deducted
4 qualifying purposes
- HIGHER of £50,000 or 25% of Adjusted Total Income (total income + payroll giving minus pension costs)
- Buying shares or finance loans in borrowers company. (Close - controlled 5 or fewer shareholders /directors) - must own 5% or more of shares, unless work for or manage most of time
- Invest in partnership
- Buy plant & machinery
- Pay IHT
Six step calculation
5 deductions
Tax reducers
- Total income
- Deduct. a) qualifying int b)expenses c) net pay pension contribution inc AVC d)payroll giving e)RAC- Gives net income
- Personal allowance
- Expand tax band > Gross pension contribution RAS & Gift aid
- Calculate tax
- Deduct tax reducers
married couples allowance, marriage allowance, VCT/EIS/SEIS, property finance cost, tax paid at source -PLA
Adjusted Net Income calculation
Step 1 - Add together total taxable income
Step 2 - Deduct gross value of ALL pension contributions paid by INDIVIDUAL
Net pay contribution > amount paid was gross
RAC > Gross contribution
RAS > amount paid would have been net so gross up (x/0.8)
**REMEMBER MEMBER CONTRIBUTIONS ONLY*****
Step 3 - Deduct gross value of gift aid
Define the following:
- Total Income
- Adjusted Net Income
- Adjusted Total Income
- Net income
- Taxable income
Total income - total amount of income received that could be liable to tax (not ISA, maintenance)
- Adjusted Net Income
- Adjusted Total Income - Total income plus charitable donations via payroll giving minus pension contributions
- Net - where all possible deductions in step 2 are taken off total income
- Taxable income - Total income - deductions-personal allowance
- Flags for Employed /Self Employed
- Contract for service / of service(employee)
- Employer high level of control
- Set hours, pay, holiday
- supervised
- Worker can be suspended or dismissed
- Typically works for one employer
- Integral part of firm
Difference between traditional partnership and LLP
- Traditional partnership = taxed as S/E ie sole trader under self assessment
- LLP taxed as employee (PAYE)
- More than 20pc of pay based on profits of LLP
- Significant say in running company
- Made significant (at least 25%) of LLP income for tax year) capital contribution to the company
Employee benefit
What’s taxable value
- Goods sold at discount?
- Subsidised school fees?
- Professional fees?
- Rail or bus travel?
Taxable value = Marginal cost ie additional cost of providing item (less any employee contribution)
Goods sold at discount - No value if wholesale price paid by employee
School fees - No val;use if at least 15% of usual fee
professional fees - No value if employee pays for disbursements ( costs) as long as no extra staff
Rail or bus - provided fare paying passengers do not miss out
What’s taxable value
- Use of an item eg laptop
- Use of rented item
- Gifted item to employee
- Employee previously had use of an item, now been gifted
Item eg laptop - 20% of market value + expenses paid by employer
Rented item - Higher of annual value (20% of market value) or rent paid
Gifted item - ,market value at time of gift or cost if new
Previous use, now gifted - Higher of market value at time of gift and market value when the item was first made available to employee
Living Accommodation
- WHAT’S TAX CHARGE BASED ON
- What if property owned by employer and more than £75k
When is employee occupation exempt (3)
What is situation for furnished
- Tax charge based on annual value of the rent that could be obtained or rent actually paid if greater
- Property over £75k = additional charge of 2.5% (HMRC official rate) on excess
- Exempt = Necessary for duties (caretaker), perform better (manage a pub), security
Part time directors or directors owning +5% can ‘t benefit from exemptions 1 and 2 - Furnished = 20% of market value of furniture and equipment provided
If property was bought more than 6 years ago before provided to employee = market value of property when first provided is used
- what benefits are wholly/largely exempt? (12)
- Group IP
- Meals
Mobiles
-Long service awards = tax free 20+ years - maximum £50 per year of service. Gifts or shares not cash - Suggestion scheme = £25 or less tax free. Up to £5k if imp,emerged and award is no more than 50% of net financial benefit to employer in 1st year of implementation
- Work related training
- Relocation, removal expenses - £8,000
- Home working
Workplace nursery - Trivial benefits - no more than £50
- Pension advice
What are the main tax reducers (5)
Marriage allowance Married couples allowance Tax paid at source eg Purchased life annuity property finance costs High income child benefit charge
What are IR35 rules
- What sort of company does it apply to
- How does it work
- What’s HMRC term for these contractors
Aimed to stop contract workers (freelancers) setting up as ltd company (personal service)
Client pays Ltd co. A fee (services bought from company not contractor) - Fee goes towards profits
Contractor then pays themselves dividend or salary
HMRC term - Disguised employee
Aimed to stop contractors leaving profits in company or pay dividends rather than salary
If deemed paid less salary than fees, IR35 applies and deemed to be paid salary on 5th April (end tax year)
Whats the taxable benefit of a beneficial loan
What limit applies
Taxable benefit is HMRC official rate (2.5%) and amount of interest actually paid
- Loans under £10,000 not taxable
- Cumulative cheap loans are added together for purpose of limit
What are the special rules that apply to a new self employment in first two years
Year one - profits made in first tax year - from start date of new business until following 5th April ( X / 12 if full year)
Year two - If year 2 is a full year, taxed on profits made in The accounting period ending in tax year, if not full year, based in first 12 months
Year three onwards - taxed on profits made in accounting period ending in tax year
Where year 2 isn’t full year-
Year 1 X/Y where x is no months trading to April 5th: y is months in total in first trading year
Eg Starts 1st November, accounts made up to 31 July. Year 1 - 5/9 x profits to July 31
Year 2 - First 12 months : So profit as above to July 31, then 3/12 of next year
Dividends
- What’s 0% band
- WHat are the three main sources of dividends
- How is all dividend income paid
- £ 2,000 nil rate allowance
- Main sources - Shares, Investment Trust and OEICS & Unit Trusts that distributes Divs
- All paid gross
What is Trading & property allowance
WHen trading and property income is less than £1,000 before expenses, exempt from taxes under trading and property allowance and does not need to be declared to HMRC
When income is > £1,000, taxpayer has choice of claiming £1,000 against income or deducting actual expenses
What non residents are eligible for a personal allowance
- Non resident who are UK citizen
- EEA national
Current and former crown or missionary society employees - Employed under service of territory under HM protection
- IOM & Channel Islands
- Ex UK for health reasons
Marriage allowance
- How much of personal allowance can be transferred
- What % of this is used as tax reducer
- What are the key point around eligibility
- 10% can be transferred (£1,250) ie Donor PA gets reduced by £1,250
- 20% used as tax reduce eg £250
- Full 10% must be transferred
- Transfer can’t give rise to tax refund
- Allowance needs to be elected for (current tax year covers future , otherwise election made within 4 years but only apply to tax year elected for). Claim can be backdated for any year to 5/4/2015
Can’t claim if already claiming Married Couples allowance - Lower earner make claim (transferor)
Married Couples Allowance
- Who available to
- How given
- What happens if income is over the the limit (£29,600 19/20)
- Married couplecivil married before 6 April 1935 (now 85)
- Given as tax reducer at 10%
If income over £29,600, full allowance (£8,915 19/20) is reduced by £1 for every £2 over. This is to floor of £3,450 19/20.
What three instances would you use Adjusted Net Income
- in relation to calculating Married couples allowance
- Calculating child benefit
- CAlculating personal allowance for ANI over £100,000
