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Level 5 Business Tax Planning > Lecture 1B > Flashcards

Lecture 1B Flashcards

1
Q

What is income tax levied on

A

In the UK, income tax is a tax levied on an individual’s earnings

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2
Q

What is the income tax system like

A

The system is progressive, meaning the tax rate increases as income increases

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3
Q

How much earnings is tax free

A

The first £12,570 of income is tax-free

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4
Q

What is the tax rate between £12,571 - £50,270

A

For income between £12,571 and £50,270, the tax rate is 20%

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5
Q

What is the tax rate for income between £50,271 - £125,140

A

For income between £50,271 and £125,140, the tax rate is 40%

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6
Q

What is the tax rate for income over £125,140

A

For income over £125,140, the tax rate is 45%

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7
Q

What does national insurance fund

A

Fund state benefits like pensions and the NHS

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8
Q

What are some tax free allowances

A

Tax free allowances are:
- Marriage Allowance
- Blind Person’s Allowance

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9
Q

How does marriage allowance work

A

If you’re married or in a civil partnership and one partner earns below the personal allowance (£12,570), you can transfer £1,260 of your allowance to the higher-earning partner

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10
Q

What is blind persons allowance

A

An additional allowance is available for those who are registered blind

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11
Q

What is the dividends allowance tax free

A

Dividend allowance: £1,000 tax-free

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12
Q

What are the different dividend tax payer rates

A
  • Basic rate taxpayers: 8.75%
  • Higher rate taxpayers: 33.75%
  • Additional rate taxpayers: 39.35%
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13
Q

How is saving interest taxed for different tax rates

A

The first £1,000 of interest is tax-free for basic rate taxpayers, £500 for higher rate taxpayers, and no savings allowance for additional rate taxpayers

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14
Q

What must self employed individuals submit

A

Self-employed individuals or those with income not taxed at source must submit a Self-Assessment tax return

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15
Q

What does a self assessment tax return do

A

This allows them to declare income and claim any eligible deductions or allowances

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16
Q

What is personal allowance

A

Personal Allowance refers to the amount of income you can earn before you start paying income tax

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17
Q

How much can marriage allowance reduce the tax bill by

A

This reduces the tax bill by up to £252

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18
Q

How much additional allowance can you claim under the blind persons allowance

A

If you’re registered blind, you can claim an additional allowance of £2,870 for the 2024/25 tax year

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19
Q

When do you lose your personal allowance

A

If your income is above £125,140, you won’t have a Personal Allowance

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20
Q

What happens to your personal allowance when your wage is bellow £100,000

A

If your income is below £100,000, you’ll typically have the full Personal Allowance of £12,570

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21
Q

What happens to your personal allowance when you earn between £100,000 and £125,140

A

If your income is between £100,000 and £125,140, your Personal Allowance will be gradually reduced

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22
Q

Over £100,000 for every £2 how much is personal allowance reduced

A

For every £2 of income above £100,000, the Personal Allowance is reduced by £1

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23
Q

Reduction =

A

Reduction=
incomeabove£100,000
2

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24
Q

How does the tapering of personal allowance create a tax rate of 60% for incomes between £100,000 and £125,140

A

The tapering of the Personal Allowance creates an effective tax rate of 60% on income between £100,000 and £125,140 because:
- You pay the 40% higher rate tax on income in this range
- You effectively lose £1 of tax-free allowance for every £2 earned, which incurs an additional 20% tax

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25
Q

How can you avoid or mitigate reductions

A

To avoid or mitigate the reduction:
- Increase pension contributions to reduce adjusted net income
- Make donations to charity to lower taxable income
- Defer income or spread bonuses across tax years

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26
Q

How do self employed people pay their income tax

A

As a self-employed person, you pay Income Tax on your profits

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27
Q

What types of national insurance do self-employed individuals pay

A

Self-employed individuals pay two types of National Insurance:
- Class 2 National Insurance
- Class 4 National Insurance

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28
Q

When is class 2 national insurance paid

A

Paid if your profits are £6,725 or more

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29
Q

What is the rate of class 2 national insurance

A

Flat rate: £3.45 per week

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30
Q

When is class 4 national insurance paid

A

Paid on profits over £12,570

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31
Q

What is the rate of class 4 national insurance

A
  • 9% on profits between £12,570 and £50,270
  • 2% on profits over £50,270
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32
Q

What is the deadline for self assesment

A

Deadline for submitting tax returns:
- Paper tax return: 31st October
- Online tax return: 31st January

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33
Q

What are the self assessment payment deadlines

A

Payment Deadlines:
- 31st January: Pay any tax owed for the previous year.
- 31st July: Pay your second payment on account (if required)

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34
Q

What are some allowable expenses to reduce taxable income

A

Common allowable expenses include:
- Office costs
- Travel expenses
- Vehicle expenses
- Home office
- Professional fees
- Employee costs

35
Q

How can you claim for the business use of your vehicle

A

You can claim for the business use of your vehicle, either through actual costs or using a flat rate mileage allowance

36
Q

When must you register for VAT with HMRC

A

If your business turnover exceeds £85,000 in a 12-month period, you must register for VAT with HMRC

37
Q

What are the different VAT rates

A

VAT rates:
- Standard rate: 20% on most goods and services
- Reduced rate: 5% on some goods and services
- Zero rate: 0% on things like food, children’s clothes, books

38
Q

What must you submit once registered for VAT

A

Once registered, you must submit quarterly or annual VAT returns and pay any VAT due

39
Q

What can you reclaim VAT on once registered for VAT with HMRC

A

You can also reclaim VAT on business-related purchases, so it’s important to keep proper records

40
Q

What are some essential accounting records to keep

A

Some essential records include:
- Sales invoices and receipts
- Bank statements
- Receipts for business expenses
- Details of any money you withdraw from your business

41
Q

How long does HMRC require accounting records to be kept for

A

HMRC requires these records to be kept for at least 5 years after the relevant tax year

42
Q

What is the UK government moving towards for income tax and VAT

A

The UK government is moving towards Making Tax Digital for VAT and Income Tax

43
Q

What does MTD mean for self employed individuals and businesses

A

This means that self-employed individuals and businesses must keep their records digitally and submit tax returns through approved software

44
Q

When is MTD being rolled out from

A

MTD for Income Tax is being rolled out from 2026 for self-employed people earning over £10,000 a year

45
Q

When may HMRC ask for payments on account

A

If your tax bill is more than £1,000, HMRC may ask for Payments on Account

46
Q

What are payments on account

A

These are advance payments toward the next year’s tax bill, typically due on 31st January and 31st July

47
Q

How much is paid on payment of account

A

50% of the previous year’s tax bill is paid in two instalments, one in January and one in July

48
Q

When can you claim capital allowance to reduce your tax bill

A

If you purchase significant business assets you can claim capital allowances to reduce your tax bill

49
Q

What are some allowable expenses for UK tax

A

Allowable expenses for UK tax is:
- Office Costs
- Travel Costs
- Vehicle and Mileage Expenses
- Stock and Materials
- Working from Home Expenses

50
Q

What are HMRCs approved milage rates

A

HMRC’s approved mileage rates:
- 45p per mile for the first 10,000 business miles
- 25p per mile for additional miles

51
Q

What are HMRCs flat rates for home working

A

HMRC’s flat rates for home working:
- £10 per month: 25–50 hours/month used for business
- £18 per month: 51–100 hours/month
- £26 per month: 101+ hours/month

52
Q

What is bad debt

A

If a customer fails to pay you, you can write off the debt and claim it as an expense

53
Q

What are some non allowable expenses

A

Some expenses are not deductible, even if they are partially related to your business:
- Personal expenses
- Commuting costs
- Fines and penalties
- Client entertainment

54
Q

What are key tips for claiming expenses

A

Key Tips for Claiming Expenses:
- Keep Detailed Records
- Wholly and Exclusively Rule
- Consult HMRC Guidance

55
Q

What does wholly and exclusively rule mean

A

The expense must be entirely for business purposes to qualify

56
Q

What are benefits in kind

A

Benefits in Kind (BIK) in the UK are perks or non-cash benefits provided by an employer to an employee

57
Q

Are benefits in kind considered taxable

A

These benefits are considered taxable income if they offer personal benefit beyond work purposes

58
Q

What are some examples of benefits in kind

A

Examples of benefits in kind are:
- Company cars
- Private medical insurance
- Accommodation provided by the employer
- Interest-free loans

59
Q

Where must most benefits in kind be taxed to

A

Most Benefits in Kind are taxable and must be reported to HMRC

60
Q

What is the taxable benefit in kind

A

The taxable value of a benefit is its cash equivalent

61
Q

What are some not tax benefits in kind

A

Certain benefits are exempt from tax, including:
- Workplace parking
- Mobile phones
- Bicycle schemes
- Meals
- Trivial benefits

62
Q

What are the rules for non taxable travel benefits

A

Trivial benefits:
- Must cost £50 or less
- Cannot be cash or a cash voucher
- Must not be part of a contractual obligation

63
Q

How is tax on benefits in kind typically paid

A

The tax on Benefits in Kind is typically paid through one of the following methods:
- Pay As You Earn (PAYE)
- Self-Assessment

64
Q

How do employers report benefits in skind

A

Employers report Benefits in Kind using the following methods:
- P11D Form
- Payrolling Benefits in Kind

65
Q

Where do employers submit the P11D

A

Employers submit a P11D form annually to HMRC detailing taxable benefits provided to employees

66
Q

How does payrolling benefits in kind work

A

Employers can opt to “payroll” benefits, meaning the value of the benefit is added to the employee’s monthly taxable income

67
Q

What is the national insurance rate for benefits in kind

A

Employers must pay Class 1A NICs on the value of taxable Benefits in Kind at a rate of 13.8%. Employees do not pay NICs on BIK

68
Q

How can employers reduce their benefits in kind

A

Employees can reduce their tax burden on Benefits in Kind by:
- Choosing benefits with lower tax implications
- Opting for salary sacrifice schemes

69
Q

How do benefits in kind affect your tax code

A

Benefits in Kind can affect your tax code, as HMRC adjusts it to account for taxable benefits

70
Q

What does a lower tax code mean

A

A lower tax code means a greater portion of your salary is taxed through PAYE

71
Q

What is national insurance

A

National Insurance (NI) is a tax paid by workers and employers to fund various state benefits

72
Q

Who is required to contribute to national insurance

A

Both employees, self-employed individuals, and employers are required to contribute

73
Q

Who plays national insurance

A
  • Employees: On earnings above a certain threshold
  • Employers: On wages paid to employees above a certain threshold
  • Self-Employed Individuals: Based on their profits
74
Q

Who doesn’t have to pay national insurance

A

NICs are not payable:
- By individuals under 16 years old
- By individuals who reach the State Pension age

75
Q

What are the four national insurance classes

A
  • Class 1: Employees
  • Class 2: Self-Employed
  • Class 3: Voluntary Contributions
  • Class 4: Self-Employed
76
Q

How is class 1 national insurance paid

A

Paid by employees and employers:
- Based on weekly earnings or salary
- Deducted automatically through Pay As You Earn (PAYE)

77
Q

National insurance rates

A

Employee Rate Employer Rate
Below £242 0% 0%
£242–£967 12% 13.8%
Above £967 2% 13.8%

78
Q

How is class 2 national insurance paid

A

Paid by self-employed individuals:
- Flat rate of £3.45 per week
- Payable if annual profits exceed £6,725

79
Q

What is the voluntary contribution rate for national insurance

A

Rate: £17.45 per week

80
Q

What are the class 4 national insurance rates

A

Based on annual profits:
- 9% on profits between £12,570 and £50,270.
- 2% on profits above £50,270.

81
Q

What do national insurance contributions pay for

A

NICs fund various state benefits and services, including:
- State Pension
- NHS services
- Statutory Sick Pay (SSP)
- Maternity and paternity benefits
- Jobseeker’s Allowance
- Bereavement benefits

82
Q

What do you need to qualify for a full state pension

A

To qualify for the full State Pension, you need at least:
- 35 qualifying years of NIC contributions for the full pension

83
Q

Who do employers pay a reduced NIC rate for

A

Apprentices under 25 and employees under 21: Employers pay a reduced NIC rate

Level 5 Business Tax Planning (3 decks)

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