Income Tax Computation - CH 1

Question 1

3 types of income

Answer 1

Non savings - Trading profits, Employment income, property and pension income

Savings - bank and building society interest

Investment - dividends

Question 2

Steps to calculating tax payable

Answer 2

Step 1: add up income from different sources to find total income

Step 2: deduct losses and interest to leave net income

Step 3: deduct personal allowance to leave “taxable income”

Step 4: calculate income tax at each applicable rate (see rates)

Step 5; add the income tax in step 4 together to find income tax liability for the year

Step 6: deduct tax suffered (eg PAYE, tax suffered on debenture interest) to find tax due/outstanding

Question 3

Rates for BRB, HRB and ARB

Answer 3

BRB - 0-37699
NS-20%
SI - 20%
Div-8.75%

HRB - 37,700
NS - 40%
SI-40%
Div-33.75%

ARB - 125140

NS - 45%
SI-45%
Div-39.35%

Question 4

Savings income relief

Answer 4

Starting rate of 0% applies to SI within the first 5k of taxable income

BRB - 1000 allowance
HRB - 500 allowance

Question 5

Dividend allowance

Answer 5

Dividend allowance of £1k regardless of taxable income or band

Question 6

Personal allowance rate

Answer 6

12570 until £100k then formula is 12570-((ANI - 100k)/2)

ANI - Adjusted net income = total income less loss relief, eligible interest, gross personal pension contributions and gross Gift Aid contributions

Key word is Gross figure not amount paid so have to gross up

Can’t carry forward or carry back any unused PA

Question 7

How to gross up gift aid and impact

Answer 7

X * 100/80

Extend the basic rate band and HRB limits by the gross donation

Question 8

Spouse/civil partnership ownership declaration

Answer 8

Basic assumption is that income such as jointly owned property is shared equally

A declaration must be made for the taxation of income from jointly held property to be based on actual % ownership

Question 9

Marriage allowance amount and criteria

Answer 9

Amount of 1260 can be transferred

MA is available provided neither spouse/civil partner are higher or additional rate tax payers

Effect of the election:
1. Transferors PA is reduced by 1260
2. Income tax liability is reduced by 252 (1260*20%) with no repayment if liability <252

Election to transfer must be made within 4 years of the end of tax year

Question 10

How is Qualifying loan interest deducted/treated

Answer 10

Relief for qualifying loan interest is achieved by deducting it from an individuals total income (NSI, SI THEN DIV)

Question 11

The types of loan which fit the criteria of qualifying loan interest ?

Answer 11

Qualifying loan interest is the interest paid on a loan taken out for:
- A partner to invest in or lend to a partnership
- a partner or employee to buy plant and machinery to use in the partnership/ employers business
- an employee to invest in/lend to a co-operative or employee controlled unquoted trading company in the EEA
- an employee shareholder or >5% shareholder to invest in or lend to a close* trading company in the EEA (not available if the company qualifies for EIS relief CH-27)

• a close company is a uk resident company controlled by its directors or 5 or fewer shareholders