Introduction to income tax Flashcards
What are two broad types in which income can be divided?
1.Income which is chargeable to income tax – this may be called taxable income or chargeable income.
2.Income which is exempt from income tax – this may be called non-taxable income or exempt income
What are the six main sources of chargeable income?
1.income from employment
2.income from trading
3.income from renting out property
4.income from investments such as interest on loans, bank and building society accounts
5.income from investments such as dividends
6.income from other sources (pensions income, some social security benefits, income from casual work)
What is the treatment for income where tax is deducted at source?
Some income, mainly employment income, is received with tax already deducted at source and must be included gross in the income tax computation.
What are the three types of income?
1.Non-savings income: Employment income, Trading profits, Property income, Miscellaneous income. Income that is not categorised as from a specific source is taxed as miscellaneous income.
2.Savings income: Interest from investments
3.Dividend income: Dividends from UK and overseas companies
Are pension income and jobseeker’s allowance taxable?
Note that income received from a pension (pension income) and taxable social security benefits such as jobseeker’s allowance (social security income) are taxed in the same way as employment
income.
Define net income
Net income: The total chargeable income before deducting the personal allowance
Define taxable income
Taxable income: Net income after deduction of the personal allowance.
What is the personal allowance for 2023/24?
£12,570
In which order is the personal allowance deducted?
The personal allowance is deducted from the different types of income in the following order:
1.Non-savings income
2.Savings income
3.Dividend income
Define tax liability
Tax liability: The total amount of income tax due from a taxpayer.
What is a basic rate taxpayer?
A taxpayer whose income is only taxed in the BRB is known as a basic rate taxpayer (BRTP).
what is a higher rate taxpayer?
A taxpayer whose income is taxed in the BRB and HRB is known as a higher rate taxpayer (HRTP).
what is a additional rate taxpayer
A taxpayer whose income is taxed in the BRB, HRB and ARB is known as an additional rate taxpayer (ARTP).
Define tax payable or repayable.
PAYE is deducted from income tax liability to give income tax payable/repayable
What is marriage allowance?
a spouse or civil partner can stansfer £1,260 of the personal allowance for the tax year 2023/23 if they have no tax liability
What are the conditions when electing for a marriage allowance?
cant be a HRB or ARB
what should an individual do if they haven’t received a tax return but needs one?
Must notify HMRC by 5 october following the end of the tax year
what is the filing deadline for a paper return?
31st October
what is the filing deadline for a online return
31st January
What are the two types of chargeable income?
1) Taxed at source eg PAYE
2) Taxed by direct/self assessment eg Self Employed
Give 5 examples of Exempt incomes
- Income from ISAs
- Interest from National Savings Certificates
- Winnings eg Lottery
- Some social security benefits
- Scholarships
- Income tax repayment interest
- Apprenticeship bursaries paid to individuals leaving authority care
- Compensation made under qualifying payment schemes eg Windrush scheme
What is ANI?
Adjusted Net Income
How to calculate PA deductions for high earners?
(ANI - £100,000) x ½
if PA > 125,141 then PA is 0
What are the three tax rate bands for non-savings income?
- Basic Rate Band (BRB) - £0-£37,700 - 20%
- Higher Rate Band (HRB) - £37,701-£125,140 - 40%
- Additional Rate Band (ARB) - £125,141+ - 45%
What are the four tax rate bands for savings income?
- Starting Rate Band (SRB) - £0-£5,000 - 0%
- Basic Rate Band (BRB) - £0-£37,700 - 20%
- Higher Rate Band (HRB) - £37,701-£125,140 - 40%
- Additional Rate Band (ARB) - £125,141+ - 45%
When does the starting rate apply?
Starting rate applies if savings income falls into the first £5,000 of taxable income. This can be reduced or fully eliminated by non-savings income since this is taxed before savings income.
Does the Starting Rate apply as well as the BRB?
No, if the SRB applies then it comes out of BRB
Where is Savings Nil Rate Band applied and to whom is it applicable?
- Between SRB and BRB
- Basic Rate taxpayers (@£1,000) and Higher Rate taxpayers (@£500)
What are the three tax rate bands for dividend income?
- Basic Rate Band (BRB) - £0-£37,700 - 8.75%
- Higher Rate Band (HRB) - £37,701-£125,140 - 33.75%
- Additional Rate Band (ARB) - £125,141+ - 39.35%
What is the nil rate rule for dividend income?
The first £1,000 is taxed at 0% for all taxpayers, but uses the basic or higher rate bands.
How much is the transferable marriage allowance?
£1,260
When is the transferable marriage allowance applicable?
If the transferor has no tax liability or will only be a basic rate taxpayer after the transfer
Does the recipient of a transferable marriage allowance get an increase in their personal allowance?
No, taxable income is calculated as normal, and then the receiver can reduce their tax liability by a maximum £252 (£1260 x 20%)
When must an individual notify HMRC by, if they believe they are required to submit a tax return but do not receive one?
5th October following the end of the tax year
What are the two ways of submitting a tax return?
- Electronically - (tax liability calculated automatically)
- Paper Return - (tax liability to be calculated by individual, or requested to be done by HMRC)
Which of the returns have an earlier due date?
Paper Return
How long do HMRC have to make an amendment to the tax return?
Within 9 months of the actual filing date
How long does an individual have to make an amendment to the tax return?
Within 12 months from the due date (Later of 31 Jan or 3 months from issue of return)
How long does an individual have to claim for overpayment relief?
Within 4 years of the end of the tax year it relates to
What is repayment interest and when is it paid from?
- Interest paid to taxpayers from HMRC on the overpayment of income tax and penalties
- Later of
The due date
The date of actual payment
To the day before repayment. - Repayment income is income tax exempt
When are penalties charged based on?
- Length of delay in payment
- Amount of unpaid tax
When does interest run from late payments/penalties?
Due date to the date of payment. HMRC does not recognise the actual due date or the date of payment here.
Who is responsible for the tax return where a taxpayer uses an agent such as an accountant?
The Taxpayer
How are penalties raised and when are they due?
- Raised by HMRC via assessment
- Due within 30 days
- They can be appealed and suspended for up to 2 years
What is the difference between prompted and unprompted disclosure?
Prompted disclosure means that HMRC raises the concern (e.g. through a discovery assessment) and the taxpayer recognises and declares the error they have made, whereas unprompted means the taxpayer declares it after the return. (prompted is worse)
What are the three reasons for penalty, in order of severity?
- Careless action
- Deliberate but not concealed action
- Deliberate and concealed action
What are penalties based on?
Potential Lost Revenue (PLR) - Essentially the amount of tax that HMRC would have lost out on
Can penalties for Failure to Notify be issued even if reasonable care has been taken?
Yes, although this can be reduced to £Nil if the failure is rectified within 12 months through unprompted disclosure
When can an officer of a company (e.g. a director) be personally liable for a penalty?
When deliberate action can be attributed to that individual
What is a reasonable excuse defined as, and give some examples:
A reasonable excuse is an issue that prevents a taxpayer from meeting an obligation despite having taken reasonable care to comply
1.The death of a close relative shortly before the due date
2. Unexpected illness / hospital stays
3. Delays relating to taxpayer disability, flooding, fire, postal delay
4. Issues with software or HMRC’s online services
For which taxes does the common penalty regime for late filing of tax returns currently apply?
- Income Tax
- Capital Gains tax
