lecture 4 - income tax Flashcards
are personal taxes likely to fluctuate in the near future? why/why not?
Since covid, there has been huge sums of borrowing, so changes to UK individual tax system bound to be seen over next few years.
what are the stages of computing taxable income?
- aggregating categories of income
- deductible reliefs
- personal allowances
- income tax rates
- tax borne
- tax reductions
7 additional tax - tax payable
how are categories of income aggregated?
property, trading and employment income - listed first. from employment usually has some income tax deducted by employer before paid via PAYE.
savings and investment income - bank deposit interest and building society interest
exempt income - see lec notes
Principle of aggregation - tax bands are function of net income that you have. Means that you can be pushed into another tax band via savings income or dividends, not just non-savings income.
what is the definition of net income?
income - deductible reliefs
what is tax borne?
outcome from applying tax rates to taxable income, and represents amount of tax taxpayer is liable for on their taxable income before reductions or additional tax on their income.
what is a tax reduction?
any entitlements to reduce tax borne
what falls under additional tax?
not much (as in fairly rare) but e.g. gift aid claimed where insufficient tax paid.
how is tax payable calculated in last stage of tax computation?
deduct from overall tax liability for the year any sums that form part of total liability but have already been paid or deemed paid to HMRC during tax year.
if taxpayer has paid more tax during year than final liability, will recieve refund
taxable income rounded down to nearest pound, tax due rounded down to nearest penny.
what are the options for basis of assessment for income tax?
cash or accruals
arising or remittance basis - where UK taxpayers have income or profit from other countries, need to decide when it will be taxed in the UK.
arising - overseas income taxed when accrues, even if money isn’t brought into the UK.
remittance - not subject to UK tax until brought into UK.
current year or preceding year basis - trading income computation. businesses used to be taxed on profit earned during previous tax year. now, profits taxed on current year basis. for self-employed this is linked to business year.
what are the income tax banks/brackets?
0-37700 = 20%
37701 - 125140 = 40%
more than 125140 = 45%
dividends:
8.75%
33.75%
39.35%
what is savings income? what are the two main allowances available?
includes - interest from bank account, building society, gilt edged securities, debentures and annuities.
starting rate - 5K at 0% only if taxable non-savings income (TATP) less than 5k. Good for pensioners living off savings.
personal savings allowance - 0% on £1000 (basic rate taxpayers) or £500 (higher rate taxpayers). nothing for additional rate.
Being taxed at 0% not the same as exempt!! Still adds to tax base, could push you into next tax band.
Once starting rate and PSA used, balance taxed at 20% then 40 then 45. PSA counted when determining when basic rate band and higher rate bands have been used up.
how is dividend income taxed?
rates are ordinary, upper and additional. Dividends allowance available to all - 1000. Rates lower because businesses have already paid some tax on them.
order in which different income are included in the computation affects amount of tax paid because of these various tax rates. not allowed to pick the order, must always calculate: non savings, savings, dividends.
dividends therefore considered the top part of anyone’s income for income tax computation (after savings and non-savings). this means only able to apply 0% on savings if there’s not more than £5k of taxable non-savings income as NSI must come first in computation. general reliefs and personal allowances do not have to be deducted in same order, they should be applied to taxable income in way that best suits circumstances of the taxpayer.
why is it important to make distinctions between income tax classifications?
different rules apply to taxpayer having income classified under one category or another and can significantly affect overall amount of tax paid.
what does it mean for income to be taxed at source?
income taxed by direct assessment paid to recipient gross, while taxed at source paid after deduction of some income tax.
administratively efficient as payer of income can then be partly reponsible for tax due not just recipient.
if you’ve been taxed at source but you aren’t liable can reclaim it. people who are higher or additional rate taxpayers may have to pay more at end of tax year to make up full amount they should have paid on this income.
how is tax on income from employment earnings and pensions collected?
tax on employment collected using PAYE. employer deducts tax due on income of employees before payment made to them.
income from earnings and pensions must be included in step 1 as a gross amount. if PAYE has been paid already, amount paid is deducted from tax computation at the very end of tax due calculation.
