Individual Taxation Flashcards
Describe the difference between a receipt and an expense.
A receipt is money paid to the business, often referred to as income, while an expense is money the business pays out.
How can income receipts be distinguished from capital receipts?
Income receipts are typically regular payments received by the business, while capital receipts are usually one-time payments or funds received from the sale of assets.
Define income expenditure and capital expenditure.
Income expenditure refers to costs that can be deducted from income receipts, while capital expenditure refers to costs that can be deducted from capital receipts.
How does case law influence the definitions of income and capital?
There is no statutory definition of income or capital, but general guidelines have been established through case law.
What characterizes income receipts?
Income receipts are characterized by money received on a regular basis, such as trading profits, interest from savings, or rent.
Is interest received from a bank account considered
Interest received from a bank account is considered an income receipt for individuals or businesses.
How would the sale of a business asset be classified?
The sale of a business asset, such as property, would be classified as a capital receipt.
What type of transaction would likely result in a capital receipt?
A transaction that is not part of regular business activity, such as selling a business property, would likely result in a capital receipt.
How can one differentiate between income and capital expenditure?
Income expenditure is related to the regular operational costs of running a business, while capital expenditure involves one-off purchases of assets that benefit the business over a longer term.
How does interest payable on loans classify in terms of expenditure?
Interest payable on loans is classified as income expenditure because it is a regular payment made to the lender.
Give examples of capital expenditure.
Examples of capital expenditure include purchasing large items of equipment, machinery, property, or enhancing a capital asset beyond routine maintenance.
What is the impact of capital expenditure on a business’s financial statements?
Capital expenditure impacts a business’s financial statements by increasing assets on the balance sheet and affecting cash flow.
Give an example of income expenditure for a retail business.
Examples of income expenditure for a retail business include the cost of purchasing stock, as well as expenses for lighting, heating, and insurance.
Define capital allowances in the context of capital assets.
Capital allowances allow a proportion of the cost of certain capital assets to be set off against the trading profits of a business each year during the asset’s life.
How can an individual reduce their tax bill when selling a capital asset?
An individual can reduce their tax bill by deducting the original cost of the capital asset from the gain or profit realized upon its sale.
What happens to the initial cost of capital assets when calculating tax on income receipts?
The initial cost of capital assets cannot be set off against income receipts to reduce an individual’s tax bill.
Discuss the timing of capital expenditure deductions for tax purposes.
Deductions for capital expenditure are typically realized only when the capital asset is sold, not during the asset’s ownership.
When is the tax year for individuals and when is the financial year for companies?
The tax year for individuals runs from 6 April in one calendar year to 5 April in the next, while the financial year for companies runs from 1 April in one calendar year to 31 March in the next.
Define the term ‘net of tax’.
‘Net of tax’ refers to the amount received by the recipient after tax has been deducted from the gross amount.
How does the recipient of a taxable sum receive their payment when tax is deducted at source?
The recipient receives the payment net of tax, meaning the amount received is after the tax has already been deducted by the payer.
What must employers do regarding benefits in kind (perks from employers eg health insurance gym membership) for tax reporting?
Employers must report the amount of the benefit to HMRC as well as to the employee.
Describe the tax bands for taxable income in the UK for the year 2024/25.
0 – 37,700 is Basic at 20%,
37,701 – 125,140 is Higher at 40%,
and above 125,140 is Additional at 45%.
What is the order for different types of income to be taxed?
Different types of income must be taxed in the order of Non-savings income first, followed by Savings income, and then Dividend income. (Never Say Die)
Describe the personal allowance reduction for individuals with Net Income of £125,140 and above
individuals with Net Income of £125,140 and above lose the personal allowance completely.
What happens to the Personal Allowance if a taxpayer’s Net Income exceeds £100,000?
The Personal Allowance is reduced by £1 for every £2 of Net Income above £100,000.
Identify the Taxable Income for a taxpayer with a Net Income of £50,500 and a Personal Allowance of £12,570.
The Taxable Income would be £37,930.
How do you calculate the taxable income from net income?
Taxable Income is derived by subtracting the Personal Allowance from the Net Income.
What is the Personal Allowance for the tax year 2024/25.
£12,570.
Define the limits associated with pension scheme contributions.
There are limits to the amount an individual can pay into their pension scheme each year, which may affect the tax relief they can claim.
How does interest paid on qualifying loans affect a taxpayer’s Total Income?
Interest paid on qualifying loans is deducted from Total Income to determine the taxpayer’s Net Income, thereby reducing the taxable income.
What falls under a qualifying loan?
• loans to buy an interest in a partnership;
• loans to contribute capital or make a loan to a partnership;
• loans to buy shares in (or make a loan to) a ‘close’ company (you will learn about these in more detail later); and
• loans to buy shares in an employee-controlled company or invest in a co-operative.
AKA LOANS TO OBTAIN AN INTEREST IN A COMPANY OR CONTRIBUTE CAPITAL
How should employees handle benefits in kind on their tax returns?
Employees must include the benefit sums on their tax return if they complete one.
Describe the two methods by which HMRC assesses and collects income tax.
The two methods are Self-Assessment and Deduction at source.
What was the dividend allowance prior to 6 April 2024?
Prior to 6 April 2024, the dividend allowance was £1,000.
