Taxation Flashcards
How is Income Tax paid?
Two ways:
- Self-Assessment: The individual calculates their tax bill and sends a return to HMRC.
- PAYE - The employer deducts income tax and pays HMRC directly.
To pay via self-assessment:
- Tell HMRC you need to pay via self-assessment by 5th October
- File a return after 5th April (the end of the tax year)
- Pay by 31 January (following the end of the tax year)
How are sole traders and partners taxed with respect to income tax?
On their profits - sole trader on profit made from trade; partners on profits distributed to them from the partnership; both on profits made during their / the partnership’s accounting period.
- Within three months of starting their business, sole traders must register with HMRC.
- Sole Traders calculate profit according to their accounting period, which may be different to the tax year, which ends on April 5. As a result, sole traders are taxed according to profit made during the accounting period, except for the first year, when they are taxed up to April 5.
- A “nominated partner” registers the partnership with HMRC
- Partners include their profit figures on their tax returns and are taxed on those profits as per the income tax calculation.
- Members of an LLP are also taxed on profit made from the LLP by income tax.
What are the sources of income for income tax?
- Trading Income - including profits from a trade, profession, or vocation.
- Property Income - including rental income and any other receipts from land.
- Savings and Investment Income - Including dividends (this captures shareholders who are paid via dividends and lenders receiving interest on their loans).
- Miscellaenous Income - E.g., receipts from intellectual property.
- Income from Employment and Pensions.
How do you calculate Net Income?
Take your total income and deduct available tax reliefs.
There are two available tax reliefs:
- Interest on Qualifying Loans - These are loans used for business purposes by an individual, e.g., taking out a loan to buy an interest in a partnership. The interest payments from 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.
How do you get to the taxable income?
Take the net income and deduct the personal allowance of £12,750.
- Once a tax payer, has a net income of above £100k, the amount of personal allowance is deducted by £1 for every £2 of net income, e.g., someone with a net income of £125,140 or more, would not have any personal allowance left.
- To calculate the personal allowance for a taxpayer earning between £100k to £125,140, use the following formula:
£12,570 - (Net Income - £100k) divided by 2.
The sum of that formula is then deducted from the net income to get the taxable income figure.
What are the different types of taxable income for the purposes of calculating income tax?
- Non-Savings Income
- Savings Income
- Dividend Income
You need to calculate non-savings income first. So, if an individual has different kinds of income, to get the NSI:
Taxable Income - Savings Income - Dividend Income = Non-Savings Income
How do you calculate income tax on non-savings income?
Take the NSI, and apply the percentage of income tax rate according to the band in which the NSI falls.
As you apply the rates to the NSI, you move up the bands: start with the basic rate, use that up, then move to the higher rate, and finally the additional rate.
Basic - Taxable Income of £0 - £37,700 - Tax rate of 20%
Higher - Taxable Income of £37,701 - £125,140 - Tax rate of 40%
Additional - Taxable Income of over £125,140 - Tax rate of 45%
How do you calculate savings income?
- Deduct the appropriate personal savings allowance (PSA) from your savings income. The total left of your savings income is the taxable savings income.
- Add the PSA to your non-savings income to work out what band you are in.
- Take this figure and see how much of your band is left. Then add the taxable savings to this, and apply the correct rate according to what band it falls in.
Basic - Taxable Income of £0 - £37,700 - PSA of £1,000
Higher - Taxable Income of £37,701 - £125,140 - PSA of £500
Additional - Taxable Income of over £125,140 - PSA of £0
How do you calculate dividend income?
- Take your dividend amount. Subtract £500 (the dividend allowance, which is taxed at 0%). The remainder is the total dividend amount to be taxed.
- Add your NSI, total savings income (without PSA deducted) and your £500 deduction together. Check the band.
- Apply the relevant dividend tax rates to the dividend income left after deducting the £500, depending on where that amount sits in the jug (after adding the £1,000). If any amount is in excess of a certain band, tax that at the higher rate.
£0 - £37,700 - 8.75%
£37,701 - £125,140 - 33.75%
Over £125,140 - 39.35%
When does Capital Gains Tax apply?
- There must be a chargeable disposal;
- Of a chargeable asset;
- By a chargeable person; and
- Which gives rise to a chargeable gain.
- CGT only applies to individuals NOT companies.
- Targets the profits someone makes when they dispose of an asset which has appreciated in value during the period that they owned it.
- It is payable on or before 31 January following the tax year in which the disposal was made. The tax year runs from 6 April to 5 April.
What is a chargeable diposal?
The sale or gift of an asset.
What is a chargeable asset?
All assets unless specifically excluded.
Specifically excluded assets are:
- Principle Private Residence: If an individual used it as their only or main home during the whole period of ownership.
NOTE - One PPR per couple (husband and wife/civil partners).
- Cars for private use.
- Lottery winnings.
- Damages (won in court).
- Chattels sold for less than £6,000.
- Cash.
What is the consideration received on a disposal of an asset?
For the sale of an asset, consideration received; for the gift of an asset, market value.
There are special rules:
- Gifts betwen spouses; if one spouse gives or sells their partner an asset, there is no gain and therefore no CGT.
- If there is a sale of an asset between “connected persons”, the consideration received is deemed to be market value rather than what was actually paid.
Connected Persons = Lineal descendants (not nieces, nephews, uncles), parents/grandparents, or business partners.
- Disposal at undervalue between unconnected persons, then the sale is deemed to be at market value.
- A gift to a charity: no CGT payable.
- Inherited Gift: If a donee inherits a gift, and then sells it in the future, the market value of the gift when they inherited is deduced from their consideration/proceeds of sale received to get the gain.
How is the gain calculated?
Consideration Received (Sale Proceeds or Market Value) - Allowable Expenditure = Total Chargeable Gain
Allowable Expenditure:
- Initial Expenditure: The price of the asset/market value (if inherited) and costs of acquisition (e.g., legal fees)
- Subsequent Expenditure: spent on the enhancement of the asset’s value and expenses incurred in establishing/defending title to the asset
- Disposal Expenditure: Costs of disposal (e.g., fees/commission)
What is rollover relief?
A method of deferral if a qualifying business asset is sold and replaced with another qualifying business asset.
