Tax Flashcards
What are the main sources of income
- Trading income (including profits from a trade, profession or vocation - this captures all self-employed people / sole traders and partners at law firms)
- Property income (including rental income and any other receipts from land)
- Saving and investment income including dividends (this captures shareholders who are paid via dividends and lenders receiving interest on their loans).
- Miscellaneous income (eg receipts from intellectual property)
- Income from employment and pensions
What tax reliefs are there on income?
- Interest on qualifying loans. These are loans used for business purposes by an individual eg taking out a loan to buy an Personal allowance for income tax GBP12,570 in a partnership, or using the money to buy shares in a small company. The interest payments on these loans are deducted from the total income figure.
- Pension scheme contributions: an equivalent amount given by someone into their pension is deducted from their total income; so if someone puts GBP1,000 into their scheme, GBP1,000 is deducted from their total income
what is the personal allowance?
GBP12,570
Once a taxpayer has a net income of above GBP100k, the amount of personal allowance is reduced by GBP1 for every GBP2 of net income. So the more you earn above 100k, the less personal allowance you get.
Formula: 12,570 - [(Net income - 100,000)/2]
the 3 types of income that make up the taxable income
- non-savings income
- savings income
- dividend income
How to calculate the non-savings income?
Taxable income - savings income - dividend income = non-savings income
tax rate for taxable income in the higher band (i.e. 37,701 - 125,140 GBP)
40%
tax rate for taxable income in the basic band (i.e. 0-37,700 GBP)
20%
tax rate for taxable income in the additional band (i.e. over 125,140 GBP)
45%
What is the savings starting rate
If you have a non-savings income of GBP5,000 or less, you get a starting rate savings allowance which means the first GBP5,000 of savings income above a 0 non-savings income threshold is tax-free.
E.g. if you have a non-savings income of 0, the full 5000 savings income is tax-free.
But for every GBP1 of non-savings income, the savings starting rate is reduced by GBP1. So, if you have a non-savings income of GBP2,000, then your savings started rate is GBP3,000.
What are the dividend tax rates?
0-37,700: 8.75%
37,701 - 125,140: 33.75%
over 125,140: 39.35%
Sole traders must register with HMRC within how many months?
within 3 months
Sole traders calculate profit according to accounting period of tax year (which ends on 5 April)?
accounting period
what is the cap on reliefs that a sole trader can use to reduce income tax?
A sole trader can use loss relief to reduce income tax. These are trading losses the sole trader has made in running their business. They can offset these losses against profits in the current or previous tax year. There is a cap on reliefs of GBP50,000 or 25% of total taxable income; any unused losses can be carried forward. The sole trader may also in certain circumstances use any unused trade loss relief (after using it against all profits) to reduce CGT liability by reducing chargeable gains
Capital allowances available for sole traders?
Sole traders can take advantage of capital allowances on the purchase of plant and machinery. The main capital allowances available for sole traders are the Annual Investment Allowance (1m GBP) and the 18% writing down basis.
How are profits distributed to partners and how are such profits taxed?
Profits arising from a partnership are distributed to partners equally (under PA1890) or if there is a partnership agreement, likely according to their capital contributions. The profits are taxed to income tax, the partnership itself pays no tax.
