Tax: Income Tax Basic Info

Question 1

Who pays income tax?

Answer 1

• individuals (including sole traders)
• PRs on behalf of estate
• trustees on behalf of trusts

Question 2

What are the primary system of collecting income tax?

Answer 2

• Pay as you earn (PAYE)
• Self Assessment

Question 3

When is the self-assessment system of income tax used?

Answer 3

If taxpayer has significant income from trading, rentals or dividends.

Includes sole traders and partners (in partnership)

Question 4

For Self-Assessment when must tax returns be filed?

Answer 4

If Online
- by 31st of January after end of the tax year

If Paper Return
- 31st Oct after end of tax year

Question 5

What are the payment dates of the self-assessment system of income tax?

Answer 5

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

Question 6

What are the categories of income in order of how they are calculated?

Answer 6

• non-saving income;
• savings income; and
• dividend income.

Question 7

What is included in Non-Savings Income?

Answer 7

• 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)

Question 8

What is included in Savings Income?

Answer 8

Interest arising from:
- UK banks and buildings societies
- credit union accounts
- bonds (gov and company)

Question 9

What is dividend income?

Answer 9

• what it sounds like

Question 10

What is foreign income? Is it taxable in the UK?

Answer 10

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

Question 11

What is included in exempt income?

Answer 11

• 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

Question 12

What must a sole trader or partner calculate and include in their tax return as non-savings taxable income?

Answer 12

• trading profit

Question 13

What is the deadline for registering with HMRC after becoming self-employed/staring own business?

Answer 13

• 3 months

Question 14

How do you calculate trading profit?

Answer 14

• start with gross income from business’ accounting period
• subtract expenses that are revenue related
  ((Do NOT subtract cost of capital assets))

Question 15

What are revenue related expenses?

Answer 15

• 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

Question 16

What is the Annual Investment Allowance? What types of capital expenditure does this cover/ not cover?

Answer 16

Cap on the deductible allowance for capital assets

Capital assets include:
- plant and machinery
- computers
- tools etc.

Does not include:
- cars
- land
- buildings

Question 17

What is a Writing Down Allowance? What assets does it cover?

Answer 17

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)

Question 18

What are pools of assets in writing down allowance? What are the percentages for each pool?

Answer 18

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%

Question 19

How much of the partnership profits must individual partners need to include in their non-saving income?

Answer 19

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.

Question 20

Does the partnership have to file a return and pay taxes?

Answer 20

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

Question 21

How are partnership payments (of different types) dealt with for tax purposes?

Answer 21

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

Question 22

What is an overlap profit problem and how can business seek relive

Answer 22

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)