Personal Income Flashcards
The income tax calculation
The tax year for 19/20 is the 6th April 2019 to the 5th April 2020. Total taxable income for the year goes into the income tax calculation
Income tax pro-forma
3 columns - non savings income, savings income and dividend income
Personal allowance
Only income in excess of the PA is taxable
The PA is £12,500 (in tax tables)
Usually set off in the order of non savings income, savings income and then dividend income.
PA is reduced if you earn over £100,000
The formula is ANI - £100k / 2
ANI is net income, less the gross amount of gift aid donations, less the gross amount of personal pension contributions
If ANI is over £125k there is no PA
All UK residents are entitled to a PA
Income tax pro forma - calculation of tax
Tax on : Non savings income x Savings income x Dividend income x Less : Tax reducers (VCT, EIS, SEIS, SITR, MCA, MA) Add : High income benefit charge x Annual allowance charge for pensions x
Total income tax liability X
Less :
Tax deducted at source x
Income tax payable/ repayable X/(X)
Tax deducted at source
Some income tax is deducted at source so the taxpayer receives an amount after tax is paid.
Gross amount of the income is included in the calculation of taxable income.
Tax deducted at source reduces the income tax liability to see how much tax is still payable or repayable.
Examples are salary (PAYE), interest on loans to UK company’s and income received from trusts
Exempt income (tell examiner if something is exempt)
- Income from ISAs
- gambling winnings
- NS&I savings certificates
- premium bond winnings
- some social security benefits
- dividends on first £200,000 of VCT shares acquired in any tax year
- gifts
- maintenance payment receipts
- some compensations for lots of job (up to £30k)
Income tax rates
Non savings income and savings income :
Basic rate band - up to £37,500 @20%
Higher rate band - £37,501 to £150,000 @ 40%
Additional rate - above £150,001 @45%
Dividend income :
Scottish taxpayers
Scottish taxpayers pay Scottish income on their non savings income and not savings income and dividend income.
The personal allowance of £12,500 and it’s reduction where ANI is more than £100,000 applies to all UK taxpayers
The rates are in the tax tables
Welsh taxpayers
Welsh taxpayers pay Welsh income tax on their non-savings income from April 6th 2019.
For 2019/20, Welsh taxpayers pay income tax using the same rates and threshold as other UK (not Scottish) taxpayers.
No calculation required for Welsh taxpayers
Savings income
Interest from UK banks and building society accounts, notional savings and investing accounts and government stocks (guilts) is received at gross with no tax being deducted at source.
An individual has a personal savings allowance which is £1,000 for a basic rate taxpayer, £500 for a HR and £0 for an AR taxpayer.
Interest within the savings allowance is still taxable income, but at 0% and can impact which tax band an individual is and if they have a restriction on their PA.
An individual is also entitled to a starting rate band of £5,000 which tax is also charged at 0%. However this is only where the taxable non-savings income is less than £5,000.
For Scottish taxpayers it is calculated the same way. When calculating you compare their taxable income to the normal basic and higher bands of £37,500 and £150,000. The available savings allowance is determined using UK bands.
Dividend income
You receive a dividend allowance of £2,000, this applies to all taxpayers.
Dividend income within the allowance is still taxable income (@0%), and still has an impact on the individuals tax band.
Scottish taxpayers are treated the same as other UK taxpayers on their dividend income.
An individual is entitled to both the dividend allowance and the savings allowance, but the amount of dividend income can effect the amount of the savings allowance.
Stock dividends and income from unit trusts
A stock dividend (aka scrip dividend) is the offer of additional shares in the company instead of a cash dividend.
If an individual receives a stock dividend, they will be raved on the cash dividend (for example the cash dividend that would have been received had the stock dividend option not been taken). This is taxed at normal dividend rates.
Distributions from unit trusts will either be in the form of interest or dividends. Depending on the nature, the income will be taxed as for other dividends or interest.
Interest distributions from unit trusts are received at gross
Allocation of the PA
The usual order of allocating the PA is not always the best.
Where only part of the PA can be allocated against non savings income, the remaining PA should be allocated against the savings income to the level of taxable savings income, to the amount of the starting rate band and the savings allowance.
Any excess PA should be allocated against dividend income.
If you take savings income less than £6,000 you are wasting you PA
Income from trusts
Interest in possession trusts -
Amounts received will be allocated between non savings, savings and dividend income as if the income was received directly from the paying source.
The trust last tax at the base rate. This means you need to gross the amount of income (amount received x 100/80 or 100/92.5), this must be included in the computation.
The tax paid by trustees is then deducted from the individuals liability to arrive at their tax payable/ repayable amount
Discretionary trusts -
Income always treated as non savings income
Income received has been taxed at AR
Need to gross up the amount (amount received x 100/55) and tax credit is fully repayable
Deductible payments
Qualifying loan interest, which are - loans taken out to buy shares in a close company (which is a company with less than 5 people and you have more than 5% of shares).
- buy partnership interest
- buy employment plant and machinery (4 years)
- buy shares in an employee owned company or invest in a cooperative
Deduction restricted to the higher of 25% adjusted total income or £50,000
Gifts to charity - quoted shares or land/buildings, use market value
Charitable donations
Cash donation via gift aid
carry back 1 tax year and claim by 31 Jan in the year of gift.
You pay 80%, HMRC will pay 20%.
Extend the basic rate and the higher rate by the gross amount.
For example if you make £3,600 GAD/PPC.
3600 x 100/80 = 4500. Therefore you extend the rates by 4500.
You also deduct this from net income to arrive at ANI for PA purposes
Scottish taxpayers - GAD
GAD are made net of the basic rate of tax for all taxpayers, including Scottish taxpayers.
You use the basic rate of £12,444, intermediate of £30,930 and higher of £150,000 rate limits to be extended by the gross amount of donation.
The starting limit of £2,049 is NOT extended by the gift aid donation
Tax reducers
VCT - relief of 30% x investment. Max of £200,000
EIS - relief of 30% x investment. Max £1,000,000 or £2,000,000 if knowledge intensive company.
SEIS - 50% x investment. £100,000 max
SITR - 30% x investment. £1,000,000 max
MCA - 10% x £6,450 min and 10% of £8,915 max. Need to have been born before 6 April 1935.
MA - relief of £1,250. Not available if claimed MCA
MCA
Available if spouse born before 6 April 1935
Relief is a tax reduced of 10% of the qualifying allowance.
Max is 10% of £8,915
Max allowance is restricted if ANI of person entitled exceeds £29,600.
The abatement is 1/2 x (ANI - £29,600).
The min allowance after abatement is £3,450.
Marriages before the 5 Dec 2005, the MCA is given to the husband. After the date it is given to the partner with the highest adjusted net income
Transferable marriage allowance
MA is 10% (rounded time nearest £) of personal allowance - £1,250 in 19/20.
Available to married couples and civil partners.
Transferrers PA is reduced by £1,250, whereas the recipient is entitled to an income tax reducer at 20% (not an increased PA)
Neither transfer nor recipient can be liable to tax above the basic rate (intermediate for Scotland)
Not available if claiming married couple allowance. If both MCA and TPA can be claimed, MCA is preferable to claim
Spouses and civil partners
Each spouse has own PA based on income
For Jointly held property, income is taxed 50,50. You can elect for income to be taxed based on actual proportions if different. Dividends from shares in close companies are always taxed in proportions.
Children get a PA.
If income from parent is a voice £100, it is taxed on the parent not the child
Qualifying care relief
An individual providing foster care will not be taxed on receipt of income for providing care if they do not exceed the qualifying amount.
If exceeds qualifying amount the individual chooses to be taxed on the gross receipts less the allowable expenses or can elect to be taxed on the gross receipts less qualifying amount (simple method)
The election to apply for the simplified method should be made by 31 Jan following the tax year concerned. 31 Jan 2021 for 19/20 year.
Qualifying amount is £10,000 per annum and £200 a week for each child under 11 and £250 for over 11
Property income
Individuals with gross property income not exceeding £150,000 will calculate the profits using the cash basis.
The £150,000 limit is reduced proportionately if the property business is carried for only part of the year.
Even if the cash basis is the default method the taxpayer may elect to use the accruals basis.
Cash basis - income + expenses are accounted for when money is received or paid and the different gives the property income profit or loss for the year.
Accruals basis - basis uses the rents available (which is the rental income that relates to the tax year, whereas expenses payable are those that relate to the tax year, which may differ to when the cash is actually paid or received), and expenses payable to determine the profit or loss for the year
Property income - allowable expenses
Expenses can be deducted from the cash and accruals basis if they are incurred ‘wholly and exclusively’ for the property business.
For example :
- Loan interest to buy/ improve property
- Maintenance
- Council tax and water rates
- Repairs to the property
- Insurance
- Motor expenses
- Advertising for tenants and letting agents fees
- Staff
- Plant and machinery used in property business (either amount paid or capital allowances) but not furniture.
- Replacement of domestic items in respect of furnishings in a residential property - relief restricted to cost of equivalent replacement
- Expenditure restricted where related to private use by landlord
Property income - Motor expenses
Landlords are allowed to claim a statutory flat rate expense for motor expenses incurred in their property business instead of having to claim the business proportion of the actual expenses incurred.
Flat rates are :
- 45p per mile for the first 10,000 business miles
- 25p per mile thereafter
Flat rate covers the cost of purchasing, running and maintaining the vehicle
Incidental expenses like parking and tolls are allowable if they relate to the property business
Finance cost restrictions (property income)
Interest relief is allowed where the individual takes out a loan to purchase or improve the property that is being let. From 2017/18 interest relief on let residential properties has been restricted. Intention is to restrict the tax relief to the basic rate of tax.
In 2019/20, 75% of the interest will be subject to the restriction. The interest not subject to the restriction (25% in 2019/20) will be deducted as normal in calculating the amount of property income, whereas the restricted amount, 75% will be a tax reducer at 20%.
The restriction does not apply to the letting of commercial properties or furnished holiday lettings.
(Deduct 25% of interest from property, other 75% is a below the line relief at 20%).
The amount of the tax reducer at 20% will be based on the lower of :
- interest not allowed as a deduction from the property income (75%)
- property income for the year less property losses brought forward
- adjusted total income (net income - savings income - dividend income - PA)
- any amount unused as a tax reducer for year is carried forward and added to the following years interest eligible for relief
Property business losses - IT reliefs
Calculate the profit/ loss for each property.
Offset the current year profits/losses to obtain profit/ loss (UK properties are treated as separate businesses to overseas properties.
If loss, you can carry forward and offset against profits from the same property business
UK losses against future UK profits, overseas against future overseas profits
Property allowance
Allowance of £1,000 per tax year, if gross income does not exceed this the income is not charged to tax.
An individual can elect for this relief to not apply, which is beneficial where a loss has arisen.
If it is greater than £1,000 then you can either deduct allowable expenses or deduct £1,000 from the income.
Both elections must be made no later than the first anniversary of 31 Jan following the tax year for which the election is made.
For jointly owned property the allowance is available to each individual.
Premium on grant of a short lease
Short lease
Rent a room relief
If gross rents
Furnished holiday lettings (FHL)
They are let on a commercial basis (to promote tourism), in the UK or any other EEA state (Europe, except Switzerland, Norway and San Marino)
Have to be available for short term letting for 210 days and actually let for 105 days.
Occupation by the same tenant for more than 31 consecutive days will not compromise the criteria, as long as the letting does not exceed 155 days in the tax year.
Advantages :
- no finance restrictions (full deduction)
- capital allowances for furniture
- earnings for pension contributions - ‘earned income’
- CGT business asset reliefs
If two or more properties each pass the 210 days availability tests actual occupation can be averaged to pass 105 day test.
If a property was FHL one year but not the next, as it wasn’t let for enough days you can elect for it to continue to being FHL for another year.
Elect by the first anniversary of 31 Jan following first year condition wasn’t met.
Losses can only be offset against income from FHL businesses and not against general property business profits.
UK losses and EEA FHL property losses are kept separate.
- UK FHL losses against UK FHL profits
- EEA FHL losses against EA FHL profits
Real estate investment trusts
A REIT is a special type of company which invests in property.
It’s property income and gains are exempt from corporation tax
Dividends are paid by REITS out of its tax exempt property income or gains are treated as UK property income in the hands of the shareholder and taxed accordingly at non savings rather than dividend rates.
Such amounts are received net of 20% tax. Therefore they need to be grossed up by 100/80 in the the recipients income tax computation and the 20% credit gets deducted at the foot of the income tax computation in the calculation of income tax payable.
Dividends paid out of the non tax exempt business of the REIT are treated as normal dividends.
Employment income proforma Salary x Bonus/tips x Benefits x Less : allowable deductions (x) This equals employment income
Vouchers
Taxed on the cost to the employer (less amounts paid by employee).
Childcare vouchers-
Where employee joined the employee childcare scheme before 6 April 2011, the first £55 a week are exempt.
Where employee joined between 6 April and 5 Oct 2008 the level of relief was
BR taxpayer - first £55 a week exempt
HR taxpayer - first £28 a week exempt
AR taxpayer - first £25 a week exempt
Employee determines relief available at the start of the tax year by estimating the employees relevant from the employment for a year, other income is ignored
Tax free childcare scheme
Parents set up an online account (separate for each child) which is used too lat for approved childcare under the scheme operated by the government with no employer involvement.
Person opening the account must be in paid work (min 16 hours a week) and have an ANI not exceeding £100,000
Contributions into the account get a 25% top up subject to a maximum of £2,000 (£4,000 for a disabled child), per annum per child.
Top up payments can be made until the 1 September following their 11th birthday or 16 if the child is disabled
If the individual remains a member of their employee childcare voucher scheme they are not entitled to participate in this scheme
Accommodation benefit
Higher of the annual value (market value of rent) or the rent paid by the employer, which is calculated by:
Rent paid + lease premium / length of lease, where the lease of less than or equal to 10 years is entered into
Additional charge (only if you own the property)
(Cost - 75000) @ the official rate of interest (2.5%)
If the employee occupies more than 6 years after purchase by the employer, you use the market value at the date of first occupation of more than the value of the cost.
Include capital improvements of incurred before the start of the tax year
These are exempt if the accommodation is job related. Accommodation is job related if:
Necessary for proper performance of employment (care teacher/boarding school teacher)
Customary to provide and enables employee to perform duties better (police house)
Provided for security reasons (soldiers)
Directors accommodation is only job related if it is provided for security reasons
Additional accommodation expenses
General living expenses - cost to employer
Furniture - cost x 20%
Council tax/ water rates - taxable in full (exempt if job related)
The total benefit is limited to 10% of other earnings from employment if job related accommodation
Loans (95-96)
Written off - taxable amount = amount written off
Interest free/low interest - only if less than £10,000
There is two ways to calculate this :
Normal method :
Loan @ start + loan @ end / 2
Strict method (HMRC or taxpayers election) Loan interest @ 2.5% x Less interest paid x This equals the taxable amount. This is done on a monthly basis
Cars and fuel (97-100)
Car benefit 2019/20 - list price x co2%
You include optional accessories if added later and above £100
It can be reduced by capital contribution by employee, max £5,000
Time apportion if unavailable for more than 30 consecutive days.
You less contributions towards private use.
0-50g/km = 16% taxable benefit
51-75g/km = 19%
76-94g/km = 22%
95g/km + = 23% + 1% for every whole 5g/km over 95g/km.
You also add 4% for a diesel vehicle unless is meets kot 2 standard. The max is can be is 37%.
Fuel for private mileage, taxable benefit :
£24,100 x co2 % x x/12
No reduction for partial reimbursement of fuel for private use.
