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
Total Income - Benefits Wholly/Largely Tax Exempt
Group Income Protection:
- Premiums paid by employer are usually allowable deduction for them
- Benefits are paid to employer and treated as trading receipt
- Employer deducts tax and NI and pays to employee as sick pay
- Premiums on group income protection are not taxed as a benefit
Meal Provision - low cost or free canteens - not taxable
Mobile Phones - providing one phone is not a taxable benefit
Long-Service Awards - 20 years or more (max £50 per year of service)
Suggestion Schemes - £25 or less
Work training normally exempt
Relocation and Removal Expenses - tax free up to £8,000
Home-Working - up to £6 per week
Workplace Nurseries/Other Child-Minding - tax free/and childcare vouchers up to £55 pw (closed to new entrants since Oct 2018)
Liability Insurance - employers paying indemnity insurance - not taxable
Trivial Benefits – not taxable where cost to employer no more than £50 per employee
Tax exemption £500 of pensions’ advice provided by employer to employee per tax year
Coronavirus antigen tests
Total Income - Self-Employed Tax
UK residents: trades, professions, and vocations worldwide
Non-UK residents: trades, professions, and vocations in the UK
Self-employed taxable in each tax year on income accounts ending in that tax year
1st year - profits for that tax year
2nd year - based on profits for accounting period ending in that tax year
If not full year, then first 12 months’ profit
3rd and subsequent years - profits for accounting period ending in that tax year
If accounting period changes or the business is sold, overlap relief can be claimed where profits charged to tax more than once
Date self-employed person retires/ceases employment affects tax liability in final year of business
Deductions must be wholly and exclusively incurred and of revenue nature
Trading allowance:
- if trading income less than £1,000 (before expenses) then it
is exempt from tax and does not need to be declared.
- If greater than £1,000, then can claim the allowance against the income in lieu of deducting actual expenses.
Total Income - Property Income
Taxable whether UK resident or not
Income from overseas property is taxable if property business by UK resident
UK property is pooled, overseas property is pooled
Accounts for property letting are drawn up to 05/04 or 31/03
Accruals basis used, unless income before expenses £150,000 or less when can use simplified cash basis (can opt-out)
Property allowance:
- if property income less than £1,000 (before expenses) then it is
exempt from tax and does not need to be declared.
- If greater than £1,000, then can claim the allowance against the income in lieu of deducting actual expenses.
Total Income - Savings Income
Includes purchased life annuities and gains from life assurance contracts
UK resident - income taxable regardless of source (inside or outside UK)
Non-UK resident - taxable only if source is inside UK
Taxed on income received during tax year
No deductions allowed
Bank, building society, NS&I, interest distributions from UTs/OEICs, gilts, local authority bonds, corporate bonds all paid gross
Basic rate tax (20%) deducted at source from other sources including interest element of PLAs (Property Lease Agreements)
- Non-taxpayers and starting rate taxpayers (i.e., those with taxable savings income falling within the £5,000 0% band) can reclaim
Gross income required on tax returns, so gross up interest from net amount (Multiply by 1.25 or divide by 0.8)
Total Income - Dividend Income
UK dividends paid gross
Allowable deductions - Interest Payments
Allowable deduction if loan is taken out for qualifying purposes:
- Purchase of shares in borrower’s company or to finance loans (must have 5 or fewer shareholders/directors)
- Investment in a partnership
- To buy machinery for use in a partnership
- Payment of IHT
Each of the above give relief at the borrower’s top tax rate
Interest is capped at higher of £50,000 or 25% of adjusted total income
Allowable deductions - Expenses
Self-employed: expenses need to be wholly and exclusively incurred for the purpose of the business
Employed: wholly and exclusively and necessarily
Property: wholly and exclusively incurred ongoing expenses (not enhancements), tax relief for finance costs - 100% basic rate tax deduction in 2020/21
Allowable deductions - Net Pay Arrangement
Employee payments to occupational schemes are deducted before calculating tax (includes AVCs - Additional Voluntary Contribution)
Allowable Deductions - Relief by making a claim
Some retirement annuity contracts do not operate the relief at source. Payment is made gross and tax relief is given by deducting them from total income.
Retirement annuity contracts are individual pension plans that were issued before 01/07/88.
Allowable Deductions - Payroll Giving
Employer deducts charitable donation (no min. or max.) from salary before calculating tax under PAYE.
This gives the employee tax relief at their highest rate.
No benefit for non-taxpayers
Personal Allowance
Available to both children and adults, and to non-residents who are:
- UK Citizens
- EEA nationals
- Crown/missionary society employees
- employee of territory under HM protection
- resident of Isle of Man/Channel Islands
- Ex-UK resident living overseas due to ill-health
Children’s Income:
- Income derived from asset gifted from parent to minor unmarried child is taxed on parent if interest exceeds £100/annum
Personal Allowance:
- £12,570
- Earnings in excess of £100,000 - reduced £1 for every £2
- Adjusted net income of £125,140 = no personal allowance
Personal Allowance Trap:
- Net Income £100,000 - £125,140 = marginal rate of 60% (higher rate of 40% + 20% as a result of no personal allowance)
- Need to reduce adjusted net income
- Make taxable investments non-taxable (ISAs)
- Make pension payments/charitable donations under gift aid
- Switch to growth funds
- Transfer assets between partners - must be unconditional and absolute
Extend Tax Bands
Extend basic and higher rate bands if any net pension contributions or gift aid donations made
Extend by gross contribution/donation
Gift Aid:
- Charity donation treated as payment on which BR tax (20%) has been deducted
- Charity can recover the tax
- Donor’s basic and higher rate tax limits are increased by gross amount
- No min. or max. donation
- Not available for non-taxpayers (liable for excess tax deducted)
- Limit on reciprocal benefits:
- gift up to £100 -> benefit can’t exceed 25%
- gift over £100 -> benefit can’t exceed £25 + 5% of gift’s value over £100, capped at £2,500
Summary of tax treatment of pension contributions
Relief at source:
- Pension contribution made after deducting basic rate of income tax
- Applies to PP/GPP/SIPP
- Scheme administrator reclaims from HMRC
- Higher/additional rate tax relief given via self-assessment
Net Pay Arrangement:
- Employee payments to occupational schemes are deducted before calculating tax (includes AVCs), i.e. deduct from gross income
Relief by Making a Claim:
- Payments made gross
- Tax relief given by deducting from total income
- Retirement annuity contracts issued before 01/07/88
Calculating Tax
Taxable Income: £0 - £37,700 (basic rate)
All Income Except Dividend Income: 20%
Dividend Rate: 8.75%
Taxable Income: £37,701 - £150,000 (higher rate)
All Income Except Dividend Income: 40%
Dividend Rate: 33.75%
Taxable Income: £150,000+ (additional rate)
All Income Except Dividend Income: 45%
Dividend Rate: 39.35%
Personal Savings Allowance - 0%:
Basic rate - £1,000
Higher rate - £500
Additional rate - Nil
0% starting rate band for savings where it falls within first £5,000 of taxable income
£2,000 dividend allowance of 0% available to all taxpayers
Tax Reducers - Marriage Allowance
Married couples/civil partners can transfer 10% of their personal allowance to each other
- Provided neither pays tax at more than the basic rate
- Full 10% must be transferred
Married Couple’s Allowance:
- £9,415
- Reduced if net income over £31,400
- Floor of £3,640
- Tax reducer- relief given at 10%
- Only available if either spouse born before 06/04/1935
- Reduce income below threshold - swap investments between couple/switch out of income-producing investments
Tax Reducers - Investments
EIS/VCT - 30% of eligible investment can be deducted from tax bill
SEIS - 50% of eligible investment can be deducted from tax bill
Tax Reducers - Pre-eminent objects to the nation
Gifts given to the government, e.g. art etc.
Tax reduction = 30% of value of object (can be spread over 5 years)
Tax Reducers - Tax paid at source
e.g. on purchased life annuity
Tax Reducers - Property finance costs
100% given as basic rate deduction
Child Benefit Issues
High-Income child benefit charge:
- If adjusted net income (income after gross pension payments and gift aid donations) is more than £50,000/annum, the charge withdraws all or part of the child benefit received
- Removes 1% of child benefit received for every £100 of excess adjusted net income over £50,000
- Income over £60,000 - no child benefit
Child Tax Credit issues
Child Tax Credit (if not claiming universal credit):
- Family element worth up to £545
- Child element, standard amount £2,935
- Claimed from HMRC
- Reduced by 41p for every £1 of income over £17,005
- Make PP contributions to reduce income
- Working tax credit/universal credit may be available for those on low incomes
