Tax 1: Income Tax Flashcards
Who pays income tax?
- individuals (including sole traders)
- PRs on behalf of estate
- trustees on behalf of trusts
What are the primary system of collecting income tax?
- Pay as you earn (PAYE)
- Self Assessment
What is the PAYE system of collecting income tax
Employers request tax code for employees and use this to collect income tax for HMRC
How much does an employee have to earn for PAYE to apply?
£184 per week / £736 per month / £8,832 pa
What are the reporting rules for PAYE (including deadlines)?
- Empires must send HMRC a report of the money deducted on or before each payday
- if reporting electronically the report must be received by HMRC by the 22nd
When must payments be sent to HMRC for PAYE (including deadlines)?
- must be sent to HMRC monthly (or quarterly if paying under £1500 per month)
- if paying and reporting electronically payment must be received by the 22nd
When can payments be paid to HMRC quarterly under PAYE?
if paying under £1500 per month
What are the consequences of paying or reporting late under PAYE?
HMRC may add interest or a penalty.
Penalty is a percentage of payments made, depending on the number of defaults
When is the self-assessment system of income tax used?
If taxpayer has significant income from trading, rentals or dividends.
Includes sole traders and partners (in partnership)
For Self-Assessment when must tax returns be filed?
If Online
- by 31st of January after end of the tax year
If Paper Return
- 31st Oct after end of tax year
What are the payment dates of the self-assessment system of income tax?
Generally two payments (each 50%)
- 31 Jan in tax year in question
- 31 July after end of tax year
Balancing Payments (if required)
- 31 Jan after end of tax year in question
What is the penalty for late/non payment tax returns under self assessment of income tax?
- up to 30% penalty of tax potentially lost by HMRC for carelessly putting wrong figures
- up to 100% for falsifying income figures
What are the categories of income in order of how they are calculated?
- non-saving income;
- savings income; and
- dividend income.
What is included in Non-Savings Income?
- earnings and pensions (including bonuses and non cash benefits)
- trading income (profits from a trade)
- property income (rental income) (must enter separately if form non-uk properties)
What is included in Savings Income?
Interest arising from:
- UK banks and buildings societies
- credit union accounts
- bonds (gov and company)
What is dividend income?
- what it sounds like
What is foreign income? Is it taxable in the UK?
all income from outside the UK
Taxable if you are a UK resident
- meaning you spend 183 days or more in the UK during the tax year
What is included in exempt income?
- interest from National Savings Certificates
- interest/dividends from ISA
- winnings on premium bonds
- income from betting, gambling and lotteries
- social security benefits (except state pension and job seekers allowance)
- Child Benefits
- Child Tax Credit and Working Tax Credit
- Investments in ISA
What must a sole trader or partner calculate and include in their tax return as non-savings taxable income?
- trading profit
What is the deadline for registering with HMRC after becoming self-employed/staring own business?
- 3 months
How do you calculate trading profit?
- start with gross income from business’ accounting period
- subtract expenses that are revenue related
((Do NOT subtract cost of capital assets))
What are revenue related expenses?
- salaries
- rent
- utilities
- cost of goods sold
- supplies
Things used for personal and professional purposes
- can subtract only proportion for which it was used for business purposes
- so if van was used by business for deliveries 50% of time and for personal tasks 50%, then can only subtract 50% of petrol
What is the Annual Investment Allowance? What types of capital expenditure does this cover/ not cover?
Cap on the deductible allowance for capital assets
Capital assets include:
- plant and machinery
- computers
- tools etc.
Does not include:
- cars
- land
- buildings
What is a Writing Down Allowance? What assets does it cover?
Basically depreciation.
Covers capital assets exceeding the AIA allowance and those that don’t qualify such as cars, land and buildings
Allows taxpayer to deduct fixed percentage of the cost of the asset each year (so can deduct 18% progressively each year)
What are pools of assets in writing down allowance? What are the percentages for each pool?
Assets can be aggregated into pools according to how much of the value can be deducted
Pool 1
- main pool at 18%
Pool 2
- special rate pool at 6%
How much of the partnership profits must individual partners need to include in their non-saving income?
must account for their share as set out in the partnership agreement. If no agreement then spilt equally.
They must also account for the whole share of annual profits, even if the partnerships retains some or all in the business.
Does the partnership have to file a return and pay taxes?
Does not need to pay any, but does need to file a partnership tax return declaring the partnerships income, deductions and expenses.
One partner must be nominated to file this Partnership Tax Return
How are partnership payments (of different types) dealt with for tax purposes?
If one or more partners is paid a salary or interest on their capital accounts.
then these sums are allocated to particular partner first and the remaining amount is divided as provided by the partnership agreement
The partners are still liable for tax on the salary or interest they receive
What is an overlap profit problem and how can business seek relive
If business accounting period does not align with tax period they will be double taxed on profits made in first and/or second year.
Cannot recover this unless they change their basic period to closely aligned with tax period or when it ceases trading (overlap relief)
How to calculate income tax liability (general)?
Adding all categories on income:
- non-saving
- saving
- dividend income
Subtracting out any allowance
- personal
- marriage
Multiplying the income in each category by tax applicable to that category
Subtract any tax already paid at source
- PAYE
How to calculate net income?
Gross income from all sources (minus) payments of interest on qualifying loans
Qualifying Loans
- capital contribution to (or loans to) a partnership
- investments in a close trading company; and
- payment of inheritance tax for personal representatives
How to calculate taxable income
Net Income (minus) available allowances
Include
- personal allowance
- marriage allowance
- additional allowances
What does it mean for a persona allowance to be tapered?
- the personal allowance is reduced by £1 for every £2 of income above £100k
How does the marriage allowance apply?
Allows person to transfer part of their personal allowance to spouse (amount changes).
Conditions
- the couple must be married
- transferring spouses income must be less than the personal allowance
- recipient spouse must be a basic rate taxpayer
What effect does the marriage allowance have?
Transferring Spouse
- has PA reduced by amount they transferred
Transferor Spouse
- entitled to income tax liability reduction of 20% of the amount transferred to them
- so does not increase the PA but acts as reduction of tax liability
What is the tax rate for non-saving income?
3 bands
- basic rate band (20%): from £1 - £37,700
- Higher Rate Band (40%): £37,701 - £150k
- Additional Rate Band (45%): over £150k
If income does not exceed one of the bands you are a X rate tax payer
How is saving income taxed ?
Stage two of process (after non saving is applied)
Based on what tax band it falls into (basic 20%, Higher 40% or Additional 45%)
IMPORTANTLY must first apply personal savings allowance which I (these still push you up into new brackets):
- Basic Rate Taxpayer £1000
- Higher Rate Taxpayer £500
- Additional Rate Taxpayer NOTHING
Total income will determine who is at what rate
How is dividend income taxed?
Stage 3 of process (after non-saving and saving applied)
Taxed at rate that it falls in (basic, higher or additional) (no need to remember numbers)
IMPORTANTLY £2000 Dividend Allowance available to all taxpayers (these still push you up into new brackets):
Who can claim a trading loss?
Only the partner/trader who made the trending loss can claim the loss.
- for partners the loss is generally in same shares as profits (unless PR agrees otherwise)
Cannot be transferred.
What are the four options for claiming a trading loss (general)?
- current year/prior year loss relief
- carry forward of loss relief
- carry forward relief on incorporation of a business
- terminal loss relief
Rules for claiming trade loss under current year or prior loss relief?
Trad loss can be set off against total income (before personal allowance) from current tax year or prior tax year.
Must use all loss at once to relieve all available income (no partial claims)
If loss exceeds income then can use excess
- to offset income from prior tax year (if not done); or
- to offset capital gains
Rules for claiming trade loss under carry forward of loss relief?
Loss can be carried forward and set off against future profit of same trade
- must be against next available trading income
Rules for claiming trade loss under carry forward relief on incorporation of a business?
When trader/partner incorporates business and receives shares.
Can set off any unused trading loss against salary or dividend payments received from the company for any year in which they own shares.
Rules for claiming trade loss under Terminal Loss Relief?
When trader ceases trading.
Loss can be
1. deducted from trading profit in the tax year of cessation (if there are any); then
2. carried back to the three preceding tax years (starting with latest to earliest)
IMP: Can only be used to offset profits of the trade not other income.
When can HMRC set aside tax arrangements under GAAR?
Only if HMRC can prove that the arrangement cannot reasonably be regarded as a reasonable course of action
HMRC must obtain the opinion of an independent advisory panel regarding the reasonableness of any particular arrangement.
What happens if HMRC finds a tax arrangement abusive under GAAR?
- HMRC may make a tax adjustment which is just and reasonable under the circumstances
- taxpayer may also be liable under general tax laws of filing inaccurate return
