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R03 - Amended > Module 1 - Income Tax > Flashcards

Module 1 - Income Tax Flashcards

1
Q

How often is income tax assessed?

A

Annually

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2
Q

Who sets Income Tax Rates and how often are they set?

A

Parliament, annually.

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3
Q

When calculating income tax - what is the first step?

A
  1. Add up all income that could be subject to income tax in tax year (gross income)
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4
Q

What are the four types of income and in what order are they calculated?

A
  1. Earned Income
  2. Savings Income
  3. Dividend Income
  4. Chargeable Gain from Life Assurance Bonds
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5
Q

When calculating income tax - what is the second step?

A
  1. Take off allowable deductions such as business and property losses to give net income
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6
Q

When calculating income tax - what is the third step?

A
  1. Calculate any reductions to personal allowances and then deduct personal allowance to give taxable income.
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7
Q

When calculating income tax - what is the fourth step?

A
  1. Extend basic / higher rate tax brackets (for personal pension contributions / gift aid)
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8
Q

When calculating income tax - what is the fifth step?

A
  1. Calculate tax (in correct order - tax tower)
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9
Q

When calculating income tax - what is the sixth and final step?

A

STEP 6 - ADD ANY CHILD BENEFIT HIGH INCOME TAX CHARGE & DEDUCT TAX REDUCERS (e.g. transferable personal allowance)

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10
Q

Thinking of the tax tower, what catagories should income be split into and what order should tax be applied? Hint: There are 4 in total.

A

1st - EARNED INCOME (earnings, pensions, rental income and anything not classed as savings or dividend income)
2nd - SAVINGS INCOME
3rd - DIVIDEND INCOME
4th - CHARGEABLE GAIN FROM LIFE ASSURANCE BONDS

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11
Q

There are 6 basic types of earned income, what are they?

A
  1. Trading Income = Self Assessment
  2. Employed Income = PAYE including from pensions & benefits. Income tax is deducted by employer / pension provider and paid to HMRC on your behalf.
  3. Income from Property = Rent
  4. Income from Savings = interest on cash savings, payments from purchased life annuities and gains from life assurance contracts.
  5. Income from Investments = dividends from equity based investments.
  6. Other = intellectual property, copyright, image rights, patents etc.
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12
Q

For the purposes of completing a tax calculation, what type of amount should be used for all savings and dividend incomes (i.e. gross or net)?

A

Gross

From April 16 interest from UK banks and building societies is paid gross.

This is due to the introduction of the tax-free personal savings allowance.

Since April 17, this also applies to unit trusts, investment trusts and OEICS’s

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13
Q

When calculating tax for savings - should we use gross or net figures?

A

Gross

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14
Q

When calculating tax for dividends - should we use gross or net figures?

A

Gross

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15
Q

What calculation will give us the gross amount from a net figure?

A

Simply take the net interest figure and divide by 0.8 to gross up by the 20% deducted at source.

For example:

Net interest of £800 / 0.8 = gross interest of £1,000.

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16
Q

Are allowable deductions calculated before or after personal allowances and tax rates?

A

BEFORE

Allowable deductions are amounts that we can deduct from our total income figure BEFORE we apply our allowances and our tax rates.

Being able to make such deductions effectively ensures that full relief for taxation is given upfront. Once deducted, we will have a ‘net income’ figure to carry forward to our next step.

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17
Q

Name 3 allowable deductions

A
  1. Interest payments for certain qualifying loans.
    (purchase shares in the borrower’s company, to pay an inheritance tax liability or to invest or buy plant and machinery for a partnership)
  2. Charitable giving (Payroll Giving)
  3. Pension Contributions (Net Pay Arrangement & Relief by Claim Schemes)
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18
Q

What is the limit for the tax relief for interest payments on qualifying loans?

A

£50,000 OR 25% of individuals adjusted income - whichever is higher.

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19
Q

How to calculate adjusted total income?

A

Adjusted Total Income = Total Income + Payroll Giving - All Types of Pension Contributions

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20
Q

When it comes to pension contributions and charitable giving they are either allowable deductions or rate extenders - which is which?

A

Allowable Deductions = Payroll Giving, Net Pay Arrangement (Most common type of pension) & Relief by Claim Schemes

Basic Rate Band Extenders = Gift Aid & Relief at Source Schemes (Personal Pension Scheme)

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21
Q

Thinking about allowable deductions and where a loan is taken for a qualifying purpose, what amount of interest may be deducted from the gross income?

A

THE FULL AMOUNT OF INTEREST

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22
Q

When it comes to qualifying loans - name three qualifying purposes.

A
  • Investment in your own company
  • Buy plant & machinery for a partnership
  • Settle an inheritance tax liability (term of relief limited to twelve months)
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23
Q

Can entire qualifying loans be an allowable deduction?

A

No, only the interest.

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24
Q

How do you calculate ‘adjusted total income’?

A

Adjusted Total Income = Total Income + Charitable Donations via Payroll Giving - All types of pension contributions.

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25
Q

What is the Tax Relief Limit for interest payments for qualifying loans?

A

The limit here is £50,000 or 25% of the individuals ‘adjusted total income’ - whichever is higher.

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26
Q

What is payroll giving?

A

This scheme allows employees to make contributions to a nominated charity from their gross income, giving the effect of tax relief at their highest rate.

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27
Q

Does the employer have to offer payroll giving?

A

No

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28
Q

In payroll giving who nominates the charity?

A

The employee

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29
Q

In essence, there are three different types of pension scheme? What are they?

A

Net Pay Arrangement (Most common type)
Relief by Claim
Relief at Source Scheme (Personal Pension Scheme)

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30
Q

With a net pay arrangement - at what point is the employee’s pension contribution taken off - before or after tax?

A

BEFORE
The employee’s contribution is taken off before tax is calculated, meaning that the full benefit of tax relief is given upfront; this type of pension contribution is therefore an allowable deduction in calculating ‘net income’.

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31
Q

Thinking of interest payments on qualifying loans - when it comes to the tax limit, which type of adjusted income do we need to use - total or net?

A

‘adjusted TOTAL income’

BONUS - which is calculated how?

Total Income + Payroll Giving Contributions - All types of pension contribution

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32
Q

Residents of which countries are eligible for a UK personal allowance?

A

UK & EEA (European Economic Area = EU Countries + Lichtenstein, Iceland, Norway)

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33
Q

From when does the allowance apply?

A

From birth

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34
Q

For minors, where the source of funds producing the income is their parents’, it is treated as the parents income unless…

A

the income received is under £100 in which case it would be treated as the child’s.

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35
Q

Before off setting net income against the personal allowance, it is important to consider anything that might….

A

reduce the available personal allowance.

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36
Q

Name 3 things that may reduce the personal allowance

A

► Employee benefits, such as company cars
► Underpaid tax from previous years
► Adjusted Net Income over £100,000 reducing availability of personal allowance

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37
Q

How are employee benefits shown on an individual’s tax coding?

A

Employee benefits are shown on an individual’s tax coding as a reduction to the available personal allowance.
For example, if a car is deemed to have a taxable value of £4,300 this amount will be removed from the individual’s personal allowance.

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38
Q

For most benefits - are employees taxed on the market value of the benefit or the actual price paid by employer?

A

Market Value In the case of a company car, the list price.

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39
Q

When considering “in-house” benefits what is the value of the benefit in kind?

A

The value of the benefit in kind is the marginal cost to the employer, NOT the open market value of the benefit.

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40
Q

Certain employee benefits are tax-free. Name 7 of them.

A

► Home-working (Additional household costs of up to £6 can also be claimed)

► Group Income Protection – where premiums are paid by the employer and income is paid out to the employee as taxed income in the event of a claim

► Provision of meals including light refreshments and the Christmas party/annual event costing no more than £150 per person.

► Mobile telephones but only one per employee and not tablets or other devices.

► Removal expenses up to £8,000 with the excess taxable.

► Work-related training including first aid and health and safety

► Long service awards - 20 or more years and only for tangible things or shares in the company providing the cost to the employer is not more than £50 foreach year of service and a similar awards hasn’t been paid to the employee in the last 10 years. Cash awards are taxed as income via PAYE as normal.

► Workplace nurseries meeting certain requirements

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41
Q

How are company cars taxed?

A

On the list price and it’s fuel emissions. Broadly speaking, the more polluting the car, the higher the rate of taxation.

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42
Q

Are diesels and petrol taxed the same?

A

No Diesel is considered to be more harmful to the environment and a higher rate of tax will be due than for petrol. There is a surcharge on diesel cars (not diesel hybrid cars) set at 4% up to a maximum 37% unless the car meets the ‘Real Driving Emissions 2’ (RDE2) standards.

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43
Q

Employee Benefits - beneficial loans. When is an employee taxed on a beneficial loan?

A

Where an employer makes a beneficial loan to the employee at a rate which is cheaper than the government’s actual official rate of interest (2.0% as at May 2022, the employee is taxed on the difference. Loans of up to £10,000 escape this charge. In the event that the loan is used for a qualifying purpose for deductions (IHT, investment in business etc) then no benefit in kind occurs until the loan exceeds the limits allowed for deduction.

44
Q

How much can an employer loan an employee with an interest rate cheaper than the official rate before the employee is taxed as a benefit in kind on the difference in interest?

A

£10,000

45
Q

Is rent free or virtually rent free accommodation tax free?

A

No, it will normally incur a tax charge. An occupation can be exempted from this rule if theaccommodation is either necessary to the role orenables them to perform the role to a higher standard.Directors of a company may not claim to be exempt.

46
Q

Is it possible for previous years underpaid tax to be reclaimed by reducing the personal allowance?

A

Yes, in certain cases

47
Q

How much adjusted net income must an individual earn to being reducing the availability of personal allowance?

A

£100,000

48
Q

At what rate is the personal allowance reduced for those earning over £100k adjusted net income.

A

£1 for every £2

49
Q

How much ANI wipes out the personal allowance?

A

£125,140

50
Q

How to calculate Adjusted Net Income - Not to be confused with Adjusted Total Income!

A

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:

To find net use gross…

  • trading losses
  • donations made to charities through Gift Aid - take off the ‘grossed-up’ amount
  • pension contributions paid gross (before tax relief)
  • pension contributions where your pension provider has already given you tax relief at the basic rate - take off the ‘grossed-up’ amount
51
Q

When is the tax code K used?

A

The letter K is used in an employee’s tax code when deductions due for company benefits, state pension or tax owed from previous years are greater than their Personal Allowance.

Multiply the number in their tax code by 10 to show how much should be added to their taxable income before deductions are calculated.

52
Q

How much is the blind persons allowance?

A

£2600 - and is a flat rate.

53
Q

What are the 4 allowances? (not inc. blind persons allowance)

A
  • Personal Savings Allowance
  • Dividend Allowance
  • Transferable Personal Allowance
  • Personal Allowance
54
Q

When was the personal savings allowance introduced?

A

Apr-16

55
Q

What is the personal savings allowance against savings income (interest) for a basic rate tax payer?

A

£1000

56
Q

What is the personal savings allowance against savings income (interest) for a higher rate tax payer?

A

£500

57
Q

What is the personal savings allowance against savings income (interest) for an additional rate tax payer?

A

There is none

58
Q

Does the interest still use up part of the basic or higher rate band for tax?

A

Yes - but rather than resulting in tax at the basic or higher rate, it will be subject to a special tax of 0%.

There is no allowance for an additional rate taxpayer.

This allowance allows us to deduct the first £1,000 of interest from the tax calculation for a basic rate taxpayer and the first £500 for a higher rate taxpayer, but we do still have to take it into account when looking at how much basic or higher rate band we have left for income to be taxed later (dividend or chargeable gains).Where not used elsewhere, the allowance can also be offset against chargeable gains made on bonds.

59
Q

When was the rate of tax on dividends significantly increased?

A

Apr-16

60
Q

Which taxpayer does the dividends allowance of £2000 apply?

A

All of them

61
Q

What is the transferable personal allowance? AKA Marriage allowance or marriage tax allowance.

A

The transferable personal allowance allows a non-taxpaying spouse to transfer up to 10% of the £12,570 personal allowance (£1,260 rounded up) to a basic rate taxpaying spouse.

Does not apply to higher or additional rate taxpayers.

There must be £1260 of the allowance remaining to qualify for total relief. Meaning the non taxpaying spouse must have earned less than £11,310.

62
Q

Name two basic rate extenders

A

Gift Aid or Relief at Source pension scheme contributions.

63
Q

With Gift Aid & Source pension scheme are contributions paid gross or net of 20% basic rate tax?

A

Net of 20%

meaning the contributions are paid from post tax income - so 20% has already been taken.

The scheme, be that the charity or the pension scheme then reclaim the basic rate.

However, for a higher rate taxpayer who has paid 40% tax - an additional 20% is due. Which I believe is reclaimed via self assessment.

To achieve this, the individual’s basic rate band is extended by the amount of the GROSS contribution.

64
Q

How much is the zero rated band for savings income?

A

£5000

65
Q

How does the zero rated / starting rate band get wiped out? Relating to savings

A

If earned income exceeds the personal allowance and then eats into the zero rated band of £5000. N.B The £5000 is only useable against savings income (interest)After the £5000 is wiped out, only the £1000 personal allowance is still available.

66
Q

Does the dividend allowance still use part of the basic or higher rate bands?

A

Yes, as does the personal savings allowance.

67
Q

When does married couples’ allowance apply and how much is it for?

A

At least one of the spouses needs to have been born before 6th April 1935.10% reductionMax reduction is £9,415Allowance reduced by £1 for every £2 that an individual’s income exceeds £31,400.

68
Q

In relation to benefit in kind and company cars - any monthly employee contribution is deducted from where?

A

The established Benefit in Kind NOT the List Price

69
Q

What is the diesel surcharge?

A

4% up to the max total 37%

70
Q

What is the max UPFRONT contribution an employee can make towards a car? And from where does it get deducted?

A

£5000 - the list price

71
Q

From what does any monthly employee contribution get deducted?

A

The established benefit in kind NOT the list price as with an upfront contribution.

72
Q

What is an occupational money purchase scheme?

A

A defined contribution, or money purchase, pension scheme is the most common type of workplace pension these days. It is built up through your own contributions, those of your employer and tax relief from the government.

73
Q

Furnished accommodation adds an additional how much taxable benefit?

A

20%

74
Q

When living accommodation is provided when is there an exemption to tax?

A
  • Accommodation is necessary for performance of duties e.g. caretaker- Accommodation helps employee perform duties better / customary e.g. publican- Special threat to employee’s security e.g. Judge
75
Q

What is living accommodation benefit assessed on?

A

Annual value of rent that could be obtained or rent actually paid if greater.

76
Q

What is the difference between married couples allowance and marriage tax allowance.

A

Married Couples Allowance - One spouse must be born before April 6th 1935 (relieved at 10%?)- Max reductions is £9,415- Allowance is reduced by £1 in £2 where individual’s gross income exceeds £31,400.Transferable Personal Allowance (Marriage Allowance)- non-taxpaying spouse can transfer 10% of their personal allowance to BASIC tax rate payer spouse.

77
Q

Milage Allowance - is tax/NI due if employee’s use their own car?

A

No

78
Q

What is the taxable benefit on beneficial loans?

A

Taxable benefit is the difference between HMRC official interest rate (2%) and amount actually paid. Beneficial loans below £10,000 are not taxable.

79
Q

How are cash vouchers taxed?

A

Treated as earnings for tax purposes

80
Q

How are Non-Cash Vouchers taxed?

A

Taxed on amount equal to cost incurred by employer

81
Q

How are credit tokens taxed?

A

treated as benefit equal to cost incurred by employer

82
Q

How are employee liabilities taxed? e.g rent

A

Fully taxable

83
Q

How is medical insurance taxed?

A
  • Group premiums apportioned on reasonable basis- Cost of treatment is taxable- £500 annual exemption per employee
84
Q

Married Couples Allowance - how much does it reduce tax by?

A

10%

85
Q

Married couples allowance - what is the max amount tax liability can be reduced by?

A

£9,415

86
Q

Married Couples Allowance - gets reduced at a rate of £1 in every £2 over what amount of total income?

A

£31,400

87
Q

Should the interest from a purchased life annuity be grossed up?

A

Yes

88
Q

When establishing if something is interest or dividend… anything in an exam that mentions equity is referring to…? Regardless of the fund if it mentions equity they are talking about…?

A

Dividends

89
Q

When establishing if something is interest or dividend… if they are talking about an Investment Trust they are referring to…?

A

Dividends

90
Q

Should I worry about Top Slicing?

A

Theory yes, calculation no.

91
Q

What classes as interest?

A

NAME?

92
Q

What can we use to offset tax liability for interest against?

A

Personal Savings Allowance & where applicable the starting rate

93
Q

What is the difference between salaried income and taxable income?

A

Salaried income is gross income - taxable income has had the personal allowance already deducted.

94
Q

On the tax table - it mentions trusts and a standard rate band - what type of trust is it relating to?

A

A discretionary trust only - no other type of trust.

95
Q

What rate of tax is used for the first £1000 of income (the standard rate band) for discretionary trusts?

A

Basic - so 20% for most things or 8.75% if relating to dividends.

96
Q

What happens in regards to the standard rate band if more than one discretionary trust is set up?

A

It gets split - i.e if there are 2 trust they each get £500.

97
Q

What is a discretionary trust?

A

These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital.Depending on the trust deed, trustees can decide:- what gets paid out (income or capital)- which beneficiary to make payments to- how often payments are made- any conditions to impose on the beneficiariesDiscretionary trusts are sometimes set up to put assets aside for:- a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life- beneficiaries who are not capable or responsible enough to deal with money themselvesBasically, beneficiaries don’t get automatic control at 18 and trustees remain in control.

98
Q

What is an interest in possession trust and what are the tax liabilities associated with them?

A

These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).ExampleYou create a trust for all the shares you owned.The terms of the trust say that when you die, the income from those shares go to your wife (life tenant) for the rest of her life. When she dies, the shares will pass to your children (aka remaindermen)Your wife is the income beneficiary and has an ‘interest in possession’ in the trust. She does not have a right to the shares themselves.From an income tax perspective, on the money coming into the trust the trustees only ever have to pay basic rate tax. Then, as the income is paid out to the life tenant, their tax position dictates what else is paid.As basic has already been paid on the way in, if the life tenant is a basic rate taxpayer, nothing else happens, if they are additional they will need to pay more or if they are not a taxpayer, they can reclaim it.

99
Q

What is a bare (aka absolute) trust and how does income tax relate to it?

A

Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.ExampleYou leave your sister some money in your will. The money is held in trust.Your sister is entitled to the money and any income (for example interest) it earns. She can also take possession of any of the money at any time.Liability for the tax falls directly onto the beneficiary - the trustees deal with paperwork etc if kids under 18.

100
Q

What is the parental settlement rule?

A

If parents put money into an investment / trust for a child and that trust / investment generates an income of £100+ annually, the whole amount (not just income over £100) gets treated and taxed as though if were belonging to the parents.

101
Q

Does the parental settlement rule apply to a junior ISA?

A

No it does not.

102
Q

At age 16/17 what two types of ISA can you hold simultaneously and how much can you put in them?

A

Junior ISA - £9KCash ISA - £20K

103
Q

How does the marriage allowance work? How does it get decreased?

A

You get the full 10% (£1260) unless the person who is giving the allowance earned more than £11,310 - so as long as they have £1260 of their personal allowance remaining, they can donate it in full.

104
Q

Tax Relief on Pension -What are the two ways you can get tax relief on pensions and how does it work?

A

If the exam tells you it is a net pay arrangement or if income is getting paid into an occupational pension scheme - that is where your pension contributions get deducted from your gross pay. The other way is relief at source - which is where you pay your pension out of your net income. The pension provider automatically gets 20% added to it and then if you’re a higher rate or additional rate taxpayer you can claim the additional 20% / 25% via your self assessment - but that money comes back to you - it doesn’t go into your pension.

105
Q

Benefits to the donor in relation to gift aid must not exceed…

A

25% of the donation for gifts up to £100

or

for gifts over £100 - £25 + 5% of the excess over £100 up to £2500 subject to an overall limit of £2500

106
Q

What’s the essential difference between basic rate band extender and an allowable deduction

A

From what I can gather, allowable deductions are for things that have not yet had any tax deducted (so gross) and extenders are for things that have (so net of tax)

107
Q

What is the difference between adjusted net income and adjusted total income? And when do we use them?

A

Adjusted Net Income is used to calculate whether there is a reduction to the personal allowance.

Adjusted Total Income is used when looking at interest on qualifying loans.

R03 - Amended (12 decks)

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