Individual taxation Flashcards
Difference between direct and indirect tax?
Direct tax = assessed by reference to individual’s chargeable gains on basis of individual’s circumstances e.g. income tax, CGT
Indirect tax = imposed by reference to transactions e.g. VAT, Corporation Ta
Difference between income receipt and capital receipt?
Income receipt = money received on regular basis (trading profits, interest on savings, rent received as landlord)
Capital receipt = from a transaction not part of regular activity; ‘one-off’ transaction (sale of business premises)
Difference between income expenditure and capital expenditure?
Income expenditure = money spent part of day-to-day trading (bills for heating, general repairs)
Capital expenditure = money expended to purchase capital asset as part of infrastructure of business (large machinery, enhancing a capital asset)
Enhancing a capital asset does not include routine maintenance
Why is income/capital distinction important?
Certain income expenditure can only be set off against income receipts to reduce tax bill - same rule for capital
How can cost of some capital assets (expenditure) be set off against trading profits (income receipts) of business each year during life of asset concerned?
Through system of capital allowances
What is the capital allowances regime?
Allows certain types of capital expenditure to be deducted when calculating income receipts - reducing tax bill
Exception to general rule
Spreads cost of capital expenditure on certain capital items over period of time - achieved by proportion of capital expenditure being deducted from income receipts over period
Is the tax equivalent of depreciation; allows cost of asset to be deducted in amounts over period of time (i.e. reduction on income receipt makes up for the money you are ‘losing’ on the value)
What are the tax years for individuals and companies? For individuals, when must self-assessmet tax return be filed?
Individuals - 6 April to 5 April
Companies - 1 April to 31 March
For individuals, self-assessment tax return must be filed by midnight 31 Jan
What are the two methods used by HMRC to collect income tax, and who uses each one?
- Self assessment - individuals calculate own tax bill (directors, high and additional rate taxpayers, self-employed)
- Deduction at source - payer of taxable sum obliged to decuct tax and account for it to HMRC - recipient of taxable sum receives net of tax (PAYE)
What is the difference between total, net and taxable income?
Total = taxpayer’s gross income from all sources
Net: total income less available reliefs
Taxable: net income less personal allowance
What are the 7 steps to calculating income tax?
See worked examples in conjunction
- Calculate total income
- Deduct available reliefs (interest on qualifying loans and pension contributions) = net income
- Deduct personal allowance (£12,570 subject to equation for those over £100,000) = taxable income
- Split taxable income into non-savings, savings and dividend income (non-savings income = taxable income - savings and dividend income)
- See whether personal savings allowance available
- Apply relevant tax rates
- Add together for total tax liability
T - total income
N - net income
T - taxable income
S - split incomes
P - personal savings allowance
A - apply rates
A - add up
What types of income are included?
- Income (if received after deduction at source - use gross amount in calculation)
- Savings
- Dividends
- Benefits in kind (health insurance, gym membership) - must report amount to HMRC
What is the personal savings allowance basic, higher, and additional rate taxpayers?
Basic rate taxpayers entitled to first £1,000 of savings
Higher rate taxpayers entitled to first £500 of savings
Additional rate entitled to none
Entitled to first = taxed at 0%
What is the dividend allowance and how does one get it?
No individual pays tax on first £1,000 on dividend income
No condition; same for all taxpayers!
What tax reliefs are available for income?
When calculating net income
- Interest paid on qualifying loans
- Pension scheme contributions (amount paid is deducted from total income)
- Certain charitable donations
Amount deducted from total income will be the amount paid on loan/scheme
What is a qualifying loan?
- To buy interest in partnership
- To contribute capital or make loan to partnership
- Loans to buy shares or make a loan to a close company
- Loans to buy shares in an employee-controlled company or cooperative
What is the personal allowance equation for those earning over £100,000?
For individuals with net income between £100,001 and £125,140:
£12,570 - (net income - £100,000)/2 = reduced allowance
If you earn over £125,140, what do you lose?
The whole benefit of personal allowance £12,570
What is the order differnt types of income are taxed in?
- Non-savings
- Savings
- Dividend income
Never Squash Donuts???!!!
Subject to personal savings allowance and dividend allowance
What is the difference between net and taxable income?
- Net = total income less available tax relief
- Taxable = net less personal allowance
How to figure out non-savings income?
Taxable income less savings and dividend income
What are the tax rates?
Tax bands are
* 0-37,700 (basic)
* 37,701-125,140 (higher), and
* 125,141+ (additional)
Non-savings and savings income both 20 (basic), 40 (higher) and 45 (additional).
Dividends are 8.75 (basic), 33.75 (higher), and 39.35 (additional)
Are personal savings allowance and dividend allowance applied before or after taxing?
Before obviously (see example)
NB when you apply it…
E.g. Taxpayer receives £5,000 on savings interest - already have taxable income of £35,000
- Available basic rate left is £2,700 (£37,700-£35,000)
- £5,000 taxed as follows:
- £2,200 (£2,700 - £500 PSA) @ 20% = £440
- £2,300 (remaining) @ 40% = £920
See cake method below if you don’t get this
What savings income is taxed at 0% for….
- Basic rate
- Higher rate
- Additional rate
- Basic = £1,000
- Higher = £500
- Additional = N/A
How are the different tax rates to different bands of income applied?
The cake method
See picture below but baso:
- Each type of income sits on top of one before (order as above: non-savings, savings, dividend)
- Each will exhaust the previous tax bracket and then move on to next one
- If one type of income rises through the band = must be apportioned accordingly (as with example in previous card)
How do National Insurance contributions affect individual’s personal income tax computation?
They don’t
Can a taxpayer reduce their income liability by making gifts of certain income-producing items e.g. shares to their children?
No - under legislation referred to as the ‘settlements’ legislation, the income is treated as remaining with taxpayer who made gift
When is capital gains tax charged?
When there is a…
- Chargeable disposal (sale of asset and gift of asset during taxpayer’s lifetime)
- Of a chargeable asset
- By a chargeable person
- Which gives rise to a chargeable gain
Charged on all gains made in relevant tax year (6 April - 5 April)