Tax Flashcards
What is income tax?
A tax levied on individuals’ income, relevant in contexts such as payments to employees, sole traders, partners, shareholders, lenders, and debenture holders.
Who pays income tax?
Individuals.
Personal representatives for deceased persons.
Trustees for trust income.
What are the three income categories?
Non-Savings Income - Salaries, trading profits, property income.
Savings Income - Bank interest, bonds.
Dividend Income - Company share dividends.
How is trading income calculated?
Gross income minus revenue-related expenses (e.g., salaries, rent).
How is taxable income determined?
Gross income - qualifying deductions = Net income
Net income - allowances = Taxable income.
What is the personal allowance for 2023/24?
£12,570, this is tapered by £1 for any £2 made over £100,000.
What are the tax rates for non-savings income?
Basic Rate: 20% (up to £37,700).
Higher Rate: 40% (£37,701–£125,140).
Additional Rate: 45% (over £125,140).
What is the Personal Savings Allowance (PSA)?
£1,000 for basic rate taxpayers (20%)
£500 for higher rate taxpayers. (40%)
No PSA for additional rate taxpayers. (45%)
How is dividend income taxed?
£1,000 is taxed at 0%.
Above that: 8.75% (basic), 33.75% (higher), 39.35% (additional).
what is the order of calculating income?
First slice - non- savings income
Second slice - Savings income
Thirds slice - Dividend
Who pays CGT?
Individuals and partners pay CGT at lower rates than income tax.
Companies pay tax on capital gains at the corporation tax rate.
What is the effect of residence on CGT liability?
UK residents are taxed on worldwide capital gains, while non-residents are taxed only on disposals of UK land.
What assets are exempt from CGT?
Sterling cash, shares held in an ISA, and gilts (government bonds).
Wasting chattels (movable items with a life of less than 50 years, e.g., cars, boats).
Non-wasting assets worth less than £6,000.
How is a capital gain calculated?
CapitalGain= ProceedsofSale −(CostsofAcquisition + IncidentalCosts)
What costs are deductible?
Purchase costs (e.g., stamp duty, legal fees).
Costs of sale (e.g., agent fees, advertising).
Capital improvement costs still part of the asset.
What is Private Residence Relief (PRR)?
Exempts gains on a property used as a main residence.
Full exemption if the property was the main residence throughout ownership.
Deemed occupation applies in certain periods of absence.
What deemed occupation rules apply?
Last 9 months of ownership
Any period of absence for whatever reason up to 3 years
Owner abroad on employment this is unlimited
Absent from property but working elsewhere up to 4 years
What is Business Asset Disposal Relief (BADR)?
Reduces CGT to 10% on qualifying gains up to a lifetime limit of £1 million.
All or part of a business carried on for 2 years before disposal
Assets owned and used by individual’s personal trading company in the 2 years before disposal
What is Hold Over (Gift) Relief?
Defers CGT on gifted business assets. The donee inherits the donor’s deferred gain, this has to be elected in order to apply.
What is Roll-Over Relief?
Defers CGT when proceeds from business asset sales are reinvested in new qualifying assets within 1 year prior or 3 years after sale.
What is Incorporation Relief?
Defers CGT when a sole trader or partner transfers business assets to a company, reducing the base cost of the company shares.
What is the Annual Exempt Amount?
The first £6,000 (2023/24) of capital gains is tax-free.
What are the CGT rates?
10% if total income is within the basic rate band.
20% for income exceeding the basic rate band.
Residential property gains are taxed at 18% or 28%.
How are capital losses treated?
Automatically offset against gains in the same year.
Excess losses are carried forward to reduce future gains.
Losses are applied in the most tax-efficient way.
Give an example of PRR.
Henry owned a home for 10 years, living there for 7 years, then rented it out. He sells it for a gain of £150,000.
Deemed occupation applies for the last 9 months.
PRR exempts 7.75/10 of the gain:
£150,000 × (7.75/10) = £116,250
Give an example of CGT calculation.
Albert has a taxable income of £36,000 and sells an asset for a gain of £70,000. After the £6,000 exempt amount, the gain is £64,000.
Unused basic rate band: £36,000 - £12,570 = £23,430.
£37,700 - £23,430 = £14,270
CGT Tax liability:
£14,270 × 10% = £1,427
£64,000 - £14,270 = £49,730
£49,730 × 20% = £9,946
£1,427 + £9,946 = £11,373
Total: £11,373
How does VAT work in practice?
Businesses charge VAT on sales (output tax) and reclaim VAT paid on purchases (input tax), paying HMRC the net difference.
What supplies are exempt from VAT?
Supplies such as land, insurance, financial services, education, health services, and postal services.
What are the VAT rates in the UK?
Standard Rate: 20% (e.g., most goods and services).
Reduced Rate: 5% (e.g., domestic fuel, energy-saving materials).
Zero Rate: 0% (e.g., food, books, newspapers).
When must a business register for VAT?
When taxable turnover exceeds £85,000 within a 12-month period or is expected to exceed £85,000 in the next 30 days.
Can businesses register voluntarily?
Yes, voluntary registration allows reclaiming input tax but requires charging VAT on supplies
When can a business deregister?
If taxable turnover falls below £83,000 or the business ceases trading
What is the tax point for VAT?
The date when VAT becomes due, typically when goods are delivered or services performed, but can be earlier if payment or invoice occurs first.
What must VAT invoices include?
Supplier’s VAT number, tax point, supply value, and VAT rate charged
How are VAT returns filed?
Electronically every quarter, with payments made via direct debit to HMRC.
: How is VAT on VAT-inclusive prices calculated?
For standard-rated supplies, VAT = Total price × 1/6.
For reduced rate, VAT = Total price × 1/21
Example of VAT accounting for a business?
Sales: £20,000 (standard rate).
Purchases: £30,000 (VAT inclusive).
Output tax: £20,000 × 20% = £4,000
£20,000×20%=£4,000.
Input tax: £30,000 × 1/6 = £5, 000
Net VAT: £4,000−£5,000= −£1,000(repayable by HMRC).
What penalties apply for VAT non-compliance?
Late registration: Percentage penalty based on VAT due.
Late returns/payment: Surcharges increase with repeated defaults.
Under-declaration: Percentage penalties for lack of care or dishonesty.
Evasion: Fines up to the amount evaded or imprisonment up to seven years.
