Income Tax Computation- Overview

Question 1

What are the 7 types of income that go into the computation?

Answer 1

1. Employment Income
2. Trading Profits
3. Pension income (Received)
4. Furnished Holiday Letting - Treated as a trade
5. Savings
   ______ • Bank & building society interest received (Gross- that is what you’ll be given)
   _______ • NS & Investment Accounts and gilt edged bonds interest received
6. Property income
7. Dividend Income (Gross- given.)- This income is from shares in a limited company

Question 2

List of exempt income?

Answer 2

✓ Interest from NS&I certificate accounts
✓ Interest on Save As You Earn (SAYE) sharesave accounts.
✓ Premium bonds and winnings
✓ Betting and gambling
✓ Interest and Dividends received from ISA’s
✓ Interest on delayed income tax repayments.
✓ Damages for personal injury or death
✓ Scholarships and educational grants
✓ Statutory redundancy pay

*NOTE DOWN THESE ARE EXEMPT FOR MARKS

Question 3

What are the two types of reliefs you can get?

and what is the maximum relief for losses?

Answer 3

• Qualifying loan interest
• Trading losses

Higher of;
£50,000 or 25% of adjusted total income

Question 4

What is qualifying loan interest and give examples and how is the relief given

Answer 4

If an individual obtains a loan for
✓ Employee: Purchase of plant and machinery by an employee for use in their employment
✓ Partners: Interest on Business loan to inject capital in to a business

Relief is given by deducting the amount paid in the relevant tax year.

Question 5

What is Trading losses and how are the relief allocated

Answer 5

If there is a trading loss in the tax year this can be relieved against total income in the tax year of the loss and or carried back against total income.

The reliefs are allocated first to other income, then savings income and then dividend income.

Question 6

what is Net income?

Answer 6

Total income - Reliefs

Question 7

what is taxable income?

Answer 7

Net income- Personal allowance

Question 8

What is the net income of a high earner?

Answer 8

£100,000

Question 9

What is ANI formula?

Answer 9

Net income X
Gross Personal Pension S (X)
Gross gift aid payment (X)

Question 10

Personal Allowance Abatement formula for high income earners

Answer 10

PA £12,500

ANI-£100,000)*50% (X

Question 11

When is an adjusted net income required?

Answer 11

• Personal pension scheme
• Gross gift aid scheme

to use to calculate child benefit charge

Question 12

If Adjusted net income is above____ Personal allowance is nil?

Answer 12

£125,000

Question 13

What is marriage allowance?

Answer 13

spouse or civil partner can elect to transfer a fixed amount of the personal allowance to their spouse/civil partner.

Question 14

Criteria for marriage allowance?

Answer 14

Neither of the spouse or civil partner is a higher rate or additional rate tax payer. So only basic rate people are allowed (20%)

Question 15

For Marriage Allowance what % of fixed transfer is allowed?

Answer 15

10% of £12,500= £1,250

Question 16

For Marriage Allowance what is the maximum relief allowed ?

Answer 16

20% (Basic rate tax) X £1,250 (allowable)

Question 17

How is Marriage Allowance relief given?

Answer 17

As an income tax reducer, to give a lower income tax liability

Question 18

What is the starting rate band?

Answer 18

This rate only applies where your savings income falls in the first £5000. So if you have other income and they are more that £5000, you don’t get this extra limit

Question 19

What is the dividend nil rate band and what must you remember when applying it?

Answer 19

£2000, everyone gets it regardless of your tax bracket

IT EATS UP THE BASIC RATE BAND

Question 20

What is the formula to extend the tax bands?

Answer 20

(Personal Pension Contribution + GROSS gift aid) X 100/8

Question 21

What two things does Gift aid scheme and personal pension scheme affect?

Answer 21

• Personal allowance abatement

* Rate bands

Question 22

What is child benefit income tax charge?

How must the tax charge be paid?

Answer 22

+ When ADJUSTED NET INCOME income is between £50k-£60k, the charge is 1% of the amount of benefit received for every £100 of income over £50k. (ANI means deduct any GGA or GPAPC

For people whose ANI exceeds £60,000, the amount of the income tax charge is equivalent to the amount of child benefit received

The taxpayer must complete a tax return and pay the charge through the self assessment system. The tax charge can be avoided by choosing not to claim benefit.

Question 23

Is an individual taxed on the gross or net savings income received in a tax year?

Answer 23

An individual is taxed on the grossed up amount of the savings income received in a tax year.

Question 24

What is the definition of Gross?

Answer 24

No tax is deducted at source

Question 25

What type of interest is received gross? (Savings income)

Answer 25

▪ Interest from National Savings and Investments bank (‘NS&I’) accounts, including income from direct saver accounts and NS&I Investments Accounts

▪ Interest from gilt-edged securities, or gilts, including Treasury stock, Government stock and Exchequer stock.

▪ Interest from quoted company loan stock

▪ Bank and building society income

Question 26

ISAs are exempt but what is the exception limit?

Answer 26

+ Annual subscription/investment limit of £20,000

• Cash ISA- Interest: Exempt
• Stock/Shares ISA- Dividend: Exempt

Question 27

What is accrued income scheme? and the value of the security/bond before this rule is applied

Answer 27

This occurs when an individual sells a bond/security that is worth more than £5,000 in life. The disposal of a bond is exempt under capital gains tax, but the interest received is taxable under income tax.

Interest is normally paid on securities at regular intervals. As the interest payment gets nearer, the capital value of the securities increases. This rule is taking in to account this increase. Without this scheme the increase in the value of the gild will be included as part of the exempt gain.

With this scheme, the interest accrued up to the date of the sale will be treated as savings income for the individual selling the gilt.

Question 28

what is accrued income formula?

Answer 28

Accrued income r’ecd + Interest accrued (no of months up to sale date that the seller will not receive) - LESS Interest accrued prior to purchase (no of months from the payment date to the bought date that the buyer missed out on.

Question 29

How are dividend income charged to income tax and/or how is it decided whether a dividend will be taxed this year or the next?

Answer 29

Dividends received from a company are charged to income tax in the tax year in which they are received.

The receipt date is taken as the date on the dividend voucher

As with savings income dividends are received gross.

Question 30

In which order should reliefs and personal allowance be deducted from?

Answer 30

1) Non savings
2) Savings
3) Dividends

The order of calculation should be this as well

Question 31

How is personal pension contribution relief given in the computation given?

Answer 31

• Paid net of basic rate tax (20%)

- Basic and higher rate bands are extended by the gross amount: (Amount paid x 100/80)

Question 32

How is occupational pension contribution relief given ?

Answer 32

Contributions deducted from employee’s gross pay before PAYE is applied

Question 33

How is gift aid scheme relief given in the computation given?

Answer 33

• Paid net of basic rate tax (20%)

- Basic and higher rate bands are extended by the gross amount: (Amount paid x 100/80)

Question 34

How is payroll deduction scheme of charitable giving relieved?

Answer 34

The donations are deducted from the employees gross pay before PAYE is applied