Section 1 - Income Tax Flashcards
Income Tax Calculation - 6 Step Process
- Add up all income (that is taxable) in tax year (Gross Income)
- Take off allowable deductions (Net Income)
- Deduct Personal Allowance (Taxable Income)
- Extend basic/higher rate tax brackets
- Calculate Tax
- Take off tax reducers
Total Income categories
Non-Savings Income
Savings Income
Dividend Income
Total Income - Non-Savings Income
Income from:
- Employment
- Self-Employment
- Pensions
- Property
- Taxable State Benefits
If not sure if employed/self-employed, just assume employed and pay under PAYE
Self-employed must self-assess tax payable
Total Income - Employed or Self-Employed
Employed:
- Contract for service
- Expenses more strict. Exclusively incurred doing business duties
- Controlled more
- Set hours/Holiday Pay
- Working for 1 employer
Self-Employed:
- Contract of service
- Expenses less strict. Exclusively incurred for purpose of business
- Ability to take business risks or benefit from increased efficiency
Total Income - IR35 (Off-Payroll Working)
HMRC Rules to stop contractors (disguised employees) dodging income tax / NIC by setting themselves up as personal service companies (ltd).
Doesn’t impact self-employed
Tax charge applies if excess profits are left in company to avoid income tax/NIC
Total Income - Salaried Members of LLPs (Limited Liability Partnerships)
Taxed under self-assessment if:
- >20% pay based on profits of LLP
- member has significant say in running of LLP
- have made significant capital contribution to LLP (25% or more of LLP income)
Total Income - Employment Income
Includes salaries, fees, bonuses and taxable employee benefits
Assessed in year income is received
Employer usually deducts from PAYE
Total Income - Taxation of Employee Benefits
Most benefits are deemed employment earnings and therefore will be taxable.
Usually employees are taxed on cash equivalent benefit (i.e. cost to employer) instead of 2nd hand value.
If employee makes contribution to benefit cost, this is deducted from cash equivalent.
In-House Benefit (not bought in) - taxable cost is the marginal cost to the employer
Use of asset (excl. car or accommodation) - taxable cost is annual value (20% of asset market value when first provided to employee) + any employee expenses in maintenance of asset
If asset is rented, then the taxable cost is the higher of the annual value or the rent
Asset given outright - taxable cost is the market value at time of transfer
Use of an asset before being given outright - tax charge is the higher of market value of asset at time of transfer or market value of asset at time it was made available to employees (less any amounts already taxed as benefits).
Total Income - Living Accommodation
Provided by employer - assessed on annual value of rent that could be obtained or rent actually paid (if greater)
If owned by employer and cost >£75,000:
- Additional charge on excess of cost over £75,000 at 2% (HMRC official rate of interest)
- If acquired more than 6 years prior to being provided to employee -> market value of property when first provided to employee used to calculate additional tax charge
No tax charge if:
- Accommodation is necessary for performing duties (e.g. caretaker)
- Accommodation helps employee perform duties better
- Special threat to employee’s security
Furnished accommodation - additional taxable benefit which is 20% of market value of furnishing equipment (e.g. bed, sofa etc.)
Total Income - Company Cars
Taxable car benefit = percentage of list price
- Percentage determined by carbon dioxide emissions/electric range
- 55 grams per km (g/km) base charge = 16% of list price
- Increase by 1% for each additional 5g/km
- Max. 37%
- Diesel cars that do not meet RDE2 subject to extra 4% charge (but no higher than 37%)
Other considerations:
- Contributions towards running costs - reduce benefit charge accordingly
- Contributions towards capital costs - up to £5,000 deducted from list price
- Availability - if only available for part year, charge reduced accordingly
- Pool cars not taxed as benefit
Total Income - Free fuel for private use
Percentage of set figure (£25,300 for 2022/23)
Same % as used for car benefit
Reduced if proportionate use
Total Income - Mileage Allowance
No tax/NI if your own car
Statutory rate paid free of tax and NI
- 45p per mile for first 10,000 miles
- 25p thereafter
- Flat rate of 45p for Northern Ireland
Total Income - Beneficial Loans
Taxable benefit is difference between HMRC official interest rate (2%) and amount actually paid
Beneficial loans below £10,000 are not taxable
Total Income - Extra Taxable Benefits
Cash Vouchers - treated as earnings for tax purposes
Non-Cash Vouchers - taxed on amount equal to cost incurred by employer
Credit token - taxed on amount equal to cost incurred by employer
Employee Liabilities - e.g. rent, generally benefit is fully taxable
Medical Insurance - taxable benefit - group premiums apportioned on reasonable basis/cost of treatment is taxable/£500 annual exemption per employee
Total Income - Extra Taxable Benefits
Cash Vouchers - treated as earnings for tax purposes
Non-Cash Vouchers - taxed on amount equal to cost incurred by employer
Credit token - taxed on amount equal to cost incurred by employer
Employee Liabilities - e.g. rent, generally benefit is fully taxable
Medical Insurance - taxable benefit - group premiums apportioned on reasonable basis/cost of treatment is taxable/£500 annual exemption per employee
