Personal Income Tax Flashcards
Exempt income
- 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
Deduction at source
- Debenture and loan interest paid by UK companies
- Interest on UK government securities
- 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
Deduct tax relief
- Pension contribution
- Loss relief
- 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 - Annual payments
- Patent royalties
- Patent expenses
- Tax reliefs are only deductible if sufficient income to offset
Abatement of PA
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
Savings income includes
-interest from a bank or building society account
-interest from government stocks
-interest from debentures
-interest from annuities
Personal savings allowance
Basic rate= £1000
Higher rate= £500
Additional= £0
Dividend income
Nil rate band of £1,000 available to all taxpayers
Pay As You Earn (PAYE)
- Employee deducts tax owed by employee from salary before receive it
- Income tax + NIC owed by employee are deducted by employer every time a payment is made to an employee
- Cumulative system
Employment or self employment
Contract that describes the working relationship
-contract of service= employment
-contract for service= self employment
Indicators of self employment
- Control-choose when to work
- Individual bears financial risk
- Individual provides equipment
- Individual benefits from efficient management of the contract
- Individual provides the staff to fulfil contract
Indicators of employment
- Employer must provide work
- Employer bears financial risk and enjoys rewards
- Holiday pay and sick pay
- Fixed hours of work
- Employer provides equipment and other staff
Components of employment income
-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)
Basis of assessment
-> earnings are taxable in year of receipt, not when due
-> benefits in kind, taxable in year of receipts
Allowable expenses (IMPORTANT)
-> 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
Include
- Pension
- Professional subscriptions
- Charitable donations under payroll giving scheme
- Capital allowances on plant provided by employee
- Some travel expenses
Main issues of travel expense
-nature of journey. Ordinary commute to work is private travel and doesn’t qualify
-amount of expense that can be allowed
Allowable journeys-travelling for work
-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
Accommodation BIK (IMPORTANT)
-> 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