Taxation Income Tax

Question 1

The UK tax system is used by the government to…

Answer 1

-Raise revenue
-Control inflation
-Encourage savings

Question 2

What are the different types of income?

Answer 2

-employment
-self employment
-pension
-interest
-investment and dividends
-rental income

Question 3

What Deductions can a person make before paying income tax?

Answer 3

-Pension contributions set up by employers
-charitable donations
-allowable expenses

Question 4

Amir has employment income of £14,570 and savings income of £5,000.
As he has income, excluding interest, of £2,000 above the personal allowance, his starting-rate band for savings is reduced by £2,000.
Calculate his income tax.

(starting band rate up to £17570
Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1)

Answer 4

Employment income £14,570
Less personal allowance £12,570
Taxable employment income = £2,000
Basic-rate tax £2,000 x 20% = £400
Savings income £5,000
Less starting-rate band (£5,000 – £2,000) £3,000
Less personal savings allowance £1,000
Taxable savings income = £1,000
Basic-rate tax £1,000 x 20% = £200
Total income tax £400 + £200 = £600

Question 5

Paolo, aged 40, has earnings of £60,000 per annum. How would his tax would be calculated?

Answer 5

Earnings £60,000
Less personal allowance £12,570
Taxable income = £47,430
Basic-rate tax £37,700 x 20% = £7,540
Higher-rate tax £9,730 x 40% = £3,892
Tax payable = £11,432

Question 6

Jenny, aged 38, has earnings of £159,000 per annum. How would her tax would be calculated?

Answer 6

Jenny, aged 38, has earnings of £159,000 per annum. Her tax would be calculated as follows.
Earnings £159,000
Less personal allowance £0 (personal allowance is reduced £1 for
every £2 over £100,000)
Taxable income = £159,000
Basic-rate tax £37,700 x 20% = £7,540
Higher-rate tax £87,440 x 40% = £34,976
Additional-rate tax £33,860 x 45% = £15,237
Tax payable = £57,753

Question 7

Maureen, a higher-rate taxpayer, has received dividends from her shares totalling £6,200

2022- 2023 div allowance of £2000

Answer 7

Her dividend tax will be calculated as:
Dividends £6,200
Less dividend allowance £2,000
Taxable dividends £4,200
Tax due on dividends £4,200 x 33.75% = £1,417.50

Question 8

Why would a basic rate tax payer invest into a life assurance policy?

Answer 8

the net result for the investor is that all benefits coming out of a life fund are deemed to have already borne tax

Question 8

What are some incomes not assessable to tax?

Answer 8

• Redundancy payments under 30k
• ISAs
  -Lottery
  -Gambling
  -scholarships

Question 9

Kieran has earned income of £13,570 and receives £10,000 gross bank interest
Calculate his income tax due

Answer 9

Assuming a personal allowance of £12,570, of his earned income, £12,570 will be covered by the personal allowance. Assuming a basic-rate tax of 20 per cent,
£1,000 will then be taxable at 20 per cent.
This will mean that his starting-rate band for savings income will be reduced from £5,000 to £4,000.
From his bank interest, £4,000 will fall within the starting-rate band (0 per cent),
£1,000 will be covered by the personal savings allowance and £5,000 will be taxed at 20 per cent.
Income tax due:
£1,000 x 20% = £200, plus £5,000 x 20% = £1,000.
Total tax £1,200.

Question 9

What employee benefits are taxable?

Answer 9

Readily convertible assets
Vouchers, credit cards and other credit tokens
Non‑cash vouchers
Meeting an employee’s private expenses and living accommodation
Private medical insurance
Loans made by employers to employees at beneficial rates of interest.

Question 9

Jane has been provided with a brand new company car. It is a diesel that does not meet the latest emissions standards. The list price is £50,000. The CO2 emissions are 129g/km and the appropriate percentage is 30. The diesel surcharge is 4 per
cent.
Calculate her taxable employee benefits:

Answer 9

£50,000 x (30% + 4%) = £17,000

Question 10

Who pays class 1 National insurance?

Answer 10

• Employees on earnings between primary threshold to upper earnings limit.
  -Reduce level payable above the upper limit
  -Employers on employees earning above the secondary threshold
  -Employers must pay class 1A on taxable employee benefits

Question 11

Who pays class 2 NIC?

Answer 11

• All self employed taxpayers unless they earn less that the small profit threshold.
• have been abolished in April 2024

Question 12

Why would someone pay class 3 NICs?

Answer 12

• Not entitled to the full state pension
  -Voluntary contributions
• fill in gaps

Question 13

who pays class 4 NICs?

Answer 13

-self employed individuals
-On rate of profits between lower and upper limit

Question 14

When must self employed people pay their taxes?

Answer 14

-by 31st January
- most people pay in two equal parts jan31st and (6 months later) 31 July

Question 15

Carla is given a company car (petrol engine) by her employer. The list price is £30,000 and the CO2 emissions are 220g/km.
The appropriate percentage is 37.
What is the taxable value of Carla’s employee benefit?

Answer 15

£30000 x 0.37 = £11,100 in taxable employee benefits

Question 16

Siobhan has self-employment earnings of £175,000 per annum. She has also received interest payments of £800 gross into her deposit account.
Calculate her total income tax liability, assuming a basic rate of 20 per cent on the first £37,700 of taxable income, a higher rate of 40 per cent on taxable income up to £125,140 and an additional rate of 45 per cent beyond this.

Answer 16

No personal allowance or personal saving allowance

Taxable income = £175,800
£37,700 x 20% = £7,540
£87,440 x 40% = £34,976
Income above £125,140 = £49,860 x 45% = £22,437
(No personal allowance or personal savings allowance available)
Interest = £800 x 45% = £360
Total tax liability = £65,313

Question 17

Janice has just become a self-employed consultant and has asked that you explain the following to her.

-What will she have to pay in NICs?
-When will she have to pay any income tax and National Insurance liabilities?

Answer 17

Mandatory Class 2 contributions have been abolished from April 2024. If her profits are under a low threshold, she can, however, voluntarily make a Class 2 contribution if she wishes to. She may also pay Class 4 contributions. There is a rate on profits between a lower limit and an upper limit, plus a lower additional rate on profits above this upper limit.

• She will usually pay her income tax (plus Class 4 NICs) in two equal parts.
  -The first payment is due on 31 January in the tax year concerned; the second is due on 31 July, six months later.

Question 18

Sarah earns £36,570 and lives in Berwick-upon-Tweed.
Explain how the tax treatment of her earnings will differ if she moves across the border to Scotland.

Answer 18

If she moved to Scotland, Sarah’s earnings would still be eligible for the personal allowance. However, rather than her taxable income then being charged just at the basic rate, she will be charged at the Scottish starter, basic and intermediate rates

Question 19

What is a ‘readily convertible asset’ ?

Answer 19

An asset that can easily be turned into money, such as shares and gold bullion.