Personal Income Tax

Question 1

Exempt income

Answer 1

• betting & lottery winnings, premium bond prizes
• gifts
• interest from ISAs
• scholarships
• injury compensations
• lump sums received from approved pensions
• statutory redundancy pay up to £30,000

Question 2

Deduction at source

Answer 2

1. Debenture and loan interest paid by UK companies
2. Interest on UK government securities
3. Patent royalties
   -> gross up the income in tax return and include tax deducted as tax paid
   -> if tax at 20% has been deducted then gross up is: net income x 100/80

Question 3

Deduct tax relief

Answer 3

1. Pension contribution
2. Loss relief
3. Eligible interest
   -> loans to buy plant and machinery for a partnership/ as an employee
   -> loans to invest in an employee controlled company
   -> loans to invest in a partnership
4. Annual payments
5. Patent royalties
6. Patent expenses
7. Tax reliefs are only deductible if sufficient income to offset

Question 4

Abatement of PA

Answer 4

Reduce if ANI/ATI is > £100,000.

Total income A
Less: grossed amount of gift aid donations B
Less: gross amount of pension contributions relieved at source C
Adjusted net income Z

If Z>£100,000 then PA reduced by £1 for every £2 of income over. Reducing to £0 if income exceeds £125,140

PA
Less: TI-£100k
Abated PA

Question 5

Savings income includes

Answer 5

-interest from a bank or building society account
-interest from government stocks
-interest from debentures
-interest from annuities

Question 6

Personal savings allowance

Answer 6

Basic rate= £1000
Higher rate= £500
Additional= £0

Question 7

Dividend income

Answer 7

Nil rate band of £1,000 available to all taxpayers

Question 8

Pay As You Earn (PAYE)

Answer 8

1. Employee deducts tax owed by employee from salary before receive it
2. Income tax + NIC owed by employee are deducted by employer every time a payment is made to an employee
3. Cumulative system

Question 9

Employment or self employment

Answer 9

Contract that describes the working relationship
-contract of service= employment
-contract for service= self employment

Question 10

Indicators of self employment

Answer 10

1. Control-choose when to work
2. Individual bears financial risk
3. Individual provides equipment
4. Individual benefits from efficient management of the contract
5. Individual provides the staff to fulfil contract

Question 11

Indicators of employment

Answer 11

1. Employer must provide work
2. Employer bears financial risk and enjoys rewards
3. Holiday pay and sick pay
4. Fixed hours of work
5. Employer provides equipment and other staff

Question 12

Components of employment income

Answer 12

-earnings from employment
1. Wages
2. Bonus
3. Commissions
4. Benefit in kinds
5. Tips
6. Less: allowable expense
-pension received (retirement or personal)
-certain social security benefits (Jobseeker’s Allowance)

Question 13

Basis of assessment

Answer 13

-> earnings are taxable in year of receipt, not when due
-> benefits in kind, taxable in year of receipts

Question 14

Allowable expenses (IMPORTANT)

Answer 14

-> are deductions that a taxpayer can subtract from their income to compute their employment income and reduce overall tax bill
1. Employee must be obliged to incur and pay the expense. Must be necessary.
2. Must be wholly and exclusively incurred in the performance of duties of employment are allowable

Question 15

Include

Answer 15

1. Pension
2. Professional subscriptions
3. Charitable donations under payroll giving scheme
4. Capital allowances on plant provided by employee
5. Some travel expenses

Question 16

Main issues of travel expense

Answer 16

-nature of journey. Ordinary commute to work is private travel and doesn’t qualify
-amount of expense that can be allowed

Question 17

Allowable journeys-travelling for work

Answer 17

-permanent place of work to and from client
-travel normal part of job
-to and from temporary workplace (client site)
-use of own car, tax free allowances that the employer can pay

Question 18

Accommodation BIK (IMPORTANT)

Answer 18

-> if not job related and property owned by employer. The employer is taxed on annual value (AV) of the property (less contributions paid by employee). AV is rent that would have been received if accommodation let out. (Rateable value)
-> if property not owned by employer, the employee will be assessed on the higher of AV and the actual rent paid by the employer
-> if property cost > £75,000 or market value when provided to employee > £75,000, then classified as expensive and further BIK charged to employee…

(Value of property-75,000) x official rate of interest

Question 19

Job related accommodation (IMPORTANT)

Answer 19

-> no BIK (unless director)
-> job related if
1. Employee required to live there for performance of duties (caretaker)
2. Customary to provide accommodation to enable better performance of duties
3. Provided for security reasons (security guard)

Question 20

Assets provided for private use

Answer 20

• if asset given to employee then the value of BIK is the actual cost of the benefit to employer (marginal cost to employer which usually lowers the BIK)
• if asset is loaned to an employee for private use then BIK is greater of
  1. 20% of MV of asset when first provided to employee
  2. Rent or hire charged incurred if it is
• if asset is transferred to employee the amount assessed is the difference between amount paid by employee and high of
  1. MV at date of transfer
  2. MV of asset when first provided less total of the annual benefits assessed on employee for use of the asset

Question 21

Exempt BIKs

Answer 21

-small gifts provided by 3rd parties as long as net proceeds by employer and not in recognition of services. Max £250
-staff parties, £150 per person
-uniforms
-rewards £5,000
-child care (workplace nursery)
-relocation costs £8,000
-work place car parking
-mobile phones (one employee)

Question 22

Company car benefit

Answer 22

Start with list price (manufacturers recommended price, ignore discounts)
-add: all optional extras at time car provided
-add: optional extras > £100 if added later
-deduct capital contributions from employee (£5,000 max)

Reduce benefit
-if not available for whole year
-if contributions made by employee towards running costs

Pooled cars exempt
-used by more than 1 person
-private use incidental to business use
-not normally kept overnight at or near residence
-vans £3,960 BIK, only if no restriction on private use, reduced if for whole year

-> electric range of a car is the furthest distance that can be driven in electric mode without recharging battery
-> any contributions made by employee to private use of car must be made by 6th June 2024 (for 23/24 tax year)

Question 23

Fuel provided for private use- BIK

Answer 23

No benefit if
-all fuel provided only made available for business use
-reimbursement must be full cost of private fuel or based on mileage using HMRC advisory fuel rates

If private fuel not reimbursed by employee, then use % calculated for car benefit x £27,800
No reduction of only partly reimbursed
Van, £757 BIK if private fuel required

Question 24

Approved mileage allowance

Answer 24

-own vehicle
-allowance is tax free as long as they don’t exceed allowance
-if exceed allowance the excess is taxable

Question 25

Beneficial loans to employees

Answer 25

-if loan made to an employee from an employer and then written off, taxable benefit = amount written off -if it is interest free/cheap interest charged, the excess (4%) is taxable 1. Not taxable if total loans < 10,000 at all times during the year 2. If £10,001+, benefit arise on whole loan

Question 26

Business entertaining

Answer 26

-> business incurs costs to entertain or provide hospitality to a customer, prospective customer or other contact -> disallowed for tax purposes (added back to profit)

Question 27

Staff entertaining- implications for employer

Answer 27

1. Allowable as long as wholly + exclusively for purpose of the trade 2. Current and retired staff and partners 3. No limit as long as provides benefit for business

Question 28

Staff entertaining - implications for employee

Answer 28

1. No BIK if social event is open to all employees and cost per head is <£150 per person 2. If more than £150, then pay full price for -themselves -members of family who attend as guests

Question 29

Exempt investment income- individual savings accounts (ISA)

Answer 29

-Uk residents only -> cash, stocks and shares -exempt from both income tax and capital gains tax -no statutory minimum investment holding period -withdrawals without loss of tax relief -no lifetime investment limit -annual investment limits -> 18 years and over £20,000 -> money saved in cash isa in previous years can be transferred to shares without affecting this years investments

Question 30

Income from property includes

Answer 30

1. Rent received 2. Lease premium (<50 yrs) 3. Income from rights of way 4. Income from letting fixed caravans or permanently moored house boats -not hotels and guest houses -property income is unearned income so cannot be used as source of income against which pension contributions can be offset -taxable income from uk property is pooled to create net loss/profit -> 6th April 23 to 5th April 24

Question 31

Property income allowance

Answer 31

1. Total gross property income of up to £1,000 per annum (before expenses) is exempt from income tax. Aim is to provide simplicity and certainty regarding inform tax obligations on small amounts of income from renting out property 2. Of total property income > £1,000 can either -elect to be taxed on gross income over £1,000 -use normal property rules (deduct expenses from gross income) 3. If election made can’t deduct expenses as well as £1,000 -> All property added together

Question 32

Tax reducer

Answer 32

-20% tax reducer only available if tax payer has sufficient taxable total income of at least the amount of the interest disallowed

Question 33

Conditions for replacement of domestic items relief (IMPORTANT)

Answer 33

1. Old item replaced by new item 2. New one the same so cost of new item is allowed as a deduction from income 3. Disposal of old is added to cost of new one 4. Any proceeds from sale of old one deducted from cost of new one

Question 34

Losses

Answer 34

If gross property income is less than allowable property costs then a loss will arise -> offset against property profits of same year -> carry forward for offset against first available future property profits -> property loss cannot be used against other types of income

Question 35

Lease premium

Answer 35

-> lump sum paid by a tenant to a landlord on the grant of a lease. It is a capital payment to secure the lease. -> not deposit or advance payment of rent 1. Long lease (>50 yrs) exempt from income tax but CGT maybe 2. Short lease (<50 yrs) then lease premium is treated as partly payment of rental income, partly capital payment 3. Landlord revives Whole premium X Less: 2% x (no. of yrs of lease -1) (X) = X

Question 36

Taxation of tenant

Answer 36

Tenant can claim a tax deduction for a part of any lease premium paid in two circumstances 1. Tenant uses the property for business purposes throughout the duration of the lease 2. Tenant sub lets the property to someone else and receives a premium For (1), tenant can claim deductions as trading expenses of the business… The amount of premium when the landlord is taxed on/number of years of the lease -> tax relief spread over life of the lease

Question 37

Rent a room scheme (IMPORTANT)

Answer 37

-taxpayer can elect into the scheme if taxpayer lets furnished room in main residence where they live -if gross rents < £7,500 1. If election made then income free of tax and no allowance 2. If not made then normal rules apply. Would be beneficial if expense exceeds income creating a loss -if gross rent > £7,500 1. If election made then assessed on rental income received in excess of £7,500 (no allowance) 2. No election then tax as normal, deducting expenses/allowances -> income taxed under rent a room rules is not eligible for the property income allowance

Question 38

Furnished holiday lettings (FHL) (IMPORTANT)

Answer 38

must be 1. Available for let go the public for min 210 days 2. Actually let for at least 105 days 3. Not normally 150 days to the same person -if tax payer owns more than one property, each property must meet 210 day rule, but 105 days across all properties

Question 39

National insurance income

Answer 39

-> calculated on the individuals income for the current payment period -> non cumulative tax -> an employees earning is their earnings before any pension contributions or charitable donations made via payroll giving scheme

Question 40

Classes of NIC

Answer 40

-> class 1= paid by both employees (primary contributions) and employers (secondary contributions) -> class 2 and 4 = paid by self employed individuals -> class 3 = payments made on a voluntary basis, by individuals who would otherwise not pay enough contributions via other classes to entitle them to a state pension when they retire

Question 41

Employment allowance

Answer 41

-available to offset NIC liabilities for small employers -£5,000 -only available to employers who’s liability for secondary NICs for the previous year was less than £100,000 -not available for companies with a single director and no other employees

Question 42

State pension scheme

Answer 42

-pension paid by government, amount dependant on NIC contributions made by the individual -age of entitlement for state pension is increasing -when receive it is taxable income and must be included in tax computation with any other income as employment income

Question 43

Occupational pension scheme

Answer 43

-pension contributions are allowed as deductible expenditure from employment or tradings income -not be approved to be recoverable before 55 unless special circumstances -pension deducted from salary before PAYE calculated

Question 44

Personal pension scheme

Answer 44

-> individual makes a contribution to a pension scheme that is not an employer scheme -> paid net of basic rate -> relief given by extending the basic rate band by the gross contribution -specific fund kept for each contributing member -not attached to a particular employee, but can employee can contribute

Question 45

Registered occupational schemes

Answer 45

1. Linked to particular employers or group of employers 2. Only open to qualifying employees 3. Employer contributes too 4. Two main benefits -> contributions set at a level to ensure a set value on retirement, based on final salary -> whatever is contributed is used to purchase a pension on retirement (money purchase)

Question 46

Payroll giving scheme (PAYE) (IMPORTANT)

Answer 46

-employer runs a payroll giving service -donations from individual goes direct from employer to charity -tax relief for the individual is given via PAYE (the donation is deducted from earnings before PAYE is calculated) -donation not allowed for NIC purposes

Question 47

Gift aid (IMPORTANT)

Answer 47

1. Gifts to charity by individuals are eligible for tax relief at the taxpayers marginal rate 2. Provides a tax incentive for individuals to make a charitable donation. 3. donor needs to give charity a gift aid declaration. The charity can then use that declaration to get back from HMRC some of the tax paid by the individual. (Donate 20, gross gift is 20x100/80, charity get 20 from donor and 5 from HMRC) 4. Conditions -charity must be a registered charity -donor uk resident -gift of money -donor revives no benefit from making the gift