Topic 1 - Introduction to Income Tax Flashcards
When does the UK tax year run?
From 6th April to 5th April of the following year.
What are the dates for the 2024/25 tax year?
6th April 2024 to 5th April 2025.
When does the UK financial year run?
From 1st April to 31st March of the following year.
What are the dates for the FY24 financial year?
1st April 2024 to 31st March 2025.
What are the main taxes that individuals are liable for? 4
Income Tax (IT), Capital Gains Tax (CGT), National Insurance Contributions (NICs), and Value Added Tax (VAT).
What are things income tax can be generated from? 2
Employment, Renting
Which tax applies to earnings from employment or self-employment?
Income Tax (IT).
What tax is payable on the profit from selling an asset?
Capital Gains Tax (CGT). If you hold onto a chargeable capital asset you pay on disposal of capital assets e.g. paintings, jewelery and crypto.
What contributions are individuals required to make towards social security?
National Insurance Contributions (NICs).
What are things NIC can be generated from? 4
- [ ] NHS/Pension benefits
- [ ] Employees pay NIC
- [ ] Employers pay NIC for employees
- [ ] Self employed NIC on earnt / trading income
Is NIC an direct or indirect tax?
Direct Tax
What is VAT and who pays it?
Value Added Tax (VAT) is a consumption tax on goods and services, generally paid by consumers but collected by businesses.
Is VAT an direct or indirect tax?
Indirect Tax
How are partners in a partnership taxed?
Each partner is taxed on their share of profits with Income Tax and their share of gains with Capital Gains Tax.
What are the joint tax liabilities in a partnership?
Partners are jointly liable for Income Tax of employees, NICs as an employer, and VAT as a supplier.
Are unincorporated businesses a company?
No
What taxes are companies liable for?
Corporation Tax (CT), Value Added Tax (VAT), National Insurance Contributions (NICs), and Income Tax on employees (PAYE).
What is the main tax on company profits?
Corporation Tax (CT). On all income and chargeable gains = total taxable income. Pays tax for companies year end/accounting period.
What year do companies conform to?
Financial year not tax year e.g. FY24 1st April 2024 to 31st March 2025.
What tax must companies deduct from employee wages?
Income Tax under PAYE (Pay As You Earn). They collect employees on behalf of HMRC and they pay employeers also.
What is the role of HM Revenue & Customs (HMRC)?
HMRC administers and collects taxes, enforces tax laws, administers benefits, and ensures compliance.
What are the responsibilities of HMRC?
Collect and administer IT, CGT, NIC, CT, and VAT; manage benefits and tax credits; enforce minimum wage rules; prevent tax fraud and smuggling. Pay and adister chld benefit but not CSA (Child support agency).
What is the child support agency (CSA)?
If parents split up, the absent parent has to pay towards the children. CSA makes them pay.
What do Commissioners of HMRC do?
Commissioners of HMRC – civil servants whose duty is to implement the tax laws and oversee the administration of tax
What are the main sources of tax law in the UK? 3
Legislation (Acts and Finance Acts), Statutory Instruments, and Case Law.
What is the purpose of Finance Acts?
To amend tax legislation based on the Budget, including tax rates and allowances.
What legislation does Finance Act 2024 (FA24) include?
Finance Act 2024 (FA24) includes rates and allowances relating to:
a) Tax year 2024/25
b) Financial year 2024 (FY24)
What is case law in taxation?
Precedents set by judges when statute law is unclear, shaping tax law through court cases.
What are Statutory instruments? 3
Statutory instruments
– Secondary or ‘delegated’ legislation
– Introduced by a parliamentary minister or local authority
– Automatically law within stated period if no objection
How does HMRC interpret tax laws?
Through manuals, statements of practice, extra statutory concessions, press releases, and leaflets.
HMRC interpretation of law – Manuals
– Manuals: Provide guidance for HMRC staff, also available to the public on HMRC’s website
HMRC interpretation of law – Statements of practice
– Statements of practice: Outline how HMRC interprets and applies the law in practice
HMRC interpretation of law – Extra statutory concessions
– Extra statutory concessions: Allow relaxation of the strict application of the law to relieve undue hardship for taxpayers in specific situations
HMRC interpretation of law – Press releases
– Press releases: Detailed changes in tax law
HMRC interpretation of law – Leaflets
– Leaflets: Explain the tax system in non-technical language
What are the two main types of income for tax purposes?
Chargeable income (taxable) and exempt income (non-taxable).
What is chargeable income?
Income that is subject to income tax, also known as taxable income.
What is exempt income?
Income that is not subject to income tax.
What are the main types of chargeable income? 6
Employment income
Trading income
Property income
Savings income (interest and dividends)
Taxable state benefits
Miscellaneous income
Which state benefits are taxable?
Carer’s allowance, jobseeker’s allowance, state pension.
What is Miscellaneous income?
Miscellaneous income (income that is not categorised as from a specific source)
Which types of income are exempt from income tax? 8
Interest on National Savings Certificates
ISA income
Betting and lottery winnings
Some social security benefits
Scholarships
Tax repayment interest
Apprenticeship bursaries
Compensation payments made under certain schemes such as the Windrush, Post Office Process Review and Victims of Overseas Terrorism compensation schemes
Are social security benefits taxable?
Some are taxable, but many, such as housing benefit, child tax credit, and disability living allowance, are exempt.
What is income taxed at source?
Income where tax is deducted before payment, such as employment income under PAYE.
What is income received gross?
Income received without tax deduction, such as trading income, property income, and most savings and investment income.
What are examples of savings income? 4
Savings income:
– Interest from banks and building societies
– NS&I Direct Saver Account and Investment Account
– Income from Government securities
– Interest on loan between friends or relatives
What are the key components of an income tax computation? 8
Trading income, Employment income, Property income, Miscellaneous income, Interest income, Dividend income, Personal allowance, and Taxable income. SEE PROFORMA PAGE 28 NOTES
Classify the following types of income as non-savings, savings, dividend or exempt income.
a) Bank interest received from HSBC of £600
b) Property income of £1,000
c) Dividend received from overseas company of £495
d) Interest received on Treasury Stock of £525
e) Trading profits of £5,000
f) Interest received on NS&I investment account of £600
a) SI
b) NSI
c) DI
d) SI
e) NSI
f) SI
What is the personal allowance for 2024/25?
£12,570.
How is the personal allowance deducted?
Deducted from net income in the order: non-savings income, then savings income, then dividends.
Formula Taxable income
Net income less personal allowance = Taxable income
How is the personal allowance affected by high income?
Reduced by £1 for every £2 over £100,000 and completely withdrawn if net income exceeds £125,140.
What are the tax bands and rates for 2024/25? IN TAX TABLES
Starting rate: 0% on first £5,000 (savings only); Basic rate: 20% (8.75% dividends); Higher rate: 40% (33.75% dividends); Additional rate: 45% (39.35% dividends).
At what income level does the additional tax rate apply? IN TAX TABLES
At income above £125,140.
At what income level does the higher tax rate start? IN TAX TABLES
At income above £37,700.
What are the tax rates for dividends in each band? IN TAX TABLES
Basic: 8.75%, Higher: 33.75%, Additional: 39.35%.
How is savings income taxed at the starting rate band? IN TAX TABLES
Taxed at 0% if non-savings taxable income is below £5,000.
What are the nil rate bands for savings income? IN TAX TABLES
£1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and none for additional rate taxpayers.
What happens to savings income exceeding the nil rate bands? IN TAX TABLES
It is taxed at standard income tax rates: 20%, 40%, or 45%.
Can a taxpayer benefit from both the starting rate band and the savings nil rate band?
Yes, they may get 0% tax on the first £5,000 of savings plus a further £1,000 or £500 under the savings nil rate band.
How much of dividend income is tax-free under the nil rate band? IN TAX TABLES
£500 for all individuals, regardless of income level.
What are the tax rates on dividend income beyond the nil rate band? IN TAX TABLES
8.75% (ordinary rate), 33.75% (upper rate), 39.35% (additional rate).
How is tax payable or repayable computed?
First, calculate tax liability on all income, then deduct tax suffered at source (e.g., PAYE).
What is the tax relief on Gift Aid donations?
Basic rate tax relief (20%) is given at source, and charities receive the gross donation (net x 100/80)
Basic rate taxpayer ignores Gift Aid in computations as full relief already achieved
Basic rate taxpayer ignores Gift Aid in computations as full relief already achieved
How do higher and additional rate taxpayers benefit from Gift Aid?
They extend their basic and higher rate bands by the gross donation amount. (extra 20/25% to make
40/45% in total)
How do higher rate limits change with Gift Aid donations?
Basic rate limit increases from £37,700 + the gross donation, and the higher rate limit increases from £125,140 + the gross donation.
What is the Marriage Allowance?
A spouse or civil partner can transfer £1,260 of their personal allowance (PA) to their partner.
Who is eligible to transfer the Marriage Allowance?
The transferor must be a basic rate taxpayer or non-taxpayer.
Who is eligible to receive the Marriage Allowance?
The transferee must be a basic rate taxpayer.
How is the Marriage Allowance applied?
The transferee deducts the transferred allowance × 20% from their tax liability.
Identify whether the following couples could claim the marriage allowance:
Marriage allowance available? (Yes / No)
a) Alison is married to Fiona. Alison has income of £25,000 and Fiona has income of £12,000 in 2024/25.
b) Paul and Peter have lived together for 20 years. Paul has income of £30,000 and Peter has income of £8,000 in 2024/25.
c) Julie and Kevin are in a civil partnership. Julie has income of £60,000 in 2024/25 and Kevin currently has no income as he stays at home to care for the couple’s two-year-old twins.
d) Nikhil has income of £45,000 in 2024/25. His wife Jaya has income of £25,000.
a) Yes
b) No
c) No
d) Yes
What is included in employment income?
Wages, salaries, bonuses, benefits, pensions, expense allowances, and reimbursed expenses.
What is the basis of assessment for employment income?
Receipts basis – income received between 6/4/24 and 5/4/25 is taxable in 2024/25.
When is employment income considered ‘received’?
The earlier of when the payment is made or when the person becomes entitled to it.
Entitled to payment mean?
Contractual payment date. Put into place as tax year change therefore avoids this issue. e.g. paying bonus 30/3 or 6/4 as tax rate changes.
When are benefits taxable?
Taxable when the benefit is received.
What is the general rule for valuing taxable benefits?
The benefit equals the cost to the employer unless specific rules apply.
How should taxable benefits be time-apportioned?
Benefits should be time-apportioned if available for only part of the tax year.
What should be deducted when calculating taxable benefits?
Employee contributions should be deducted (except for private fuel).
How are cash vouchers treated for tax purposes?
Their benefit is equal to the cash equivalent.
How are vouchers exchangeable for goods/services treated?
The benefit is equal to the cost to the employer.
When is employer-provided accommodation exempt from tax?
When it is job-related and meets at least one of the three tests: Necessary, Customary, or Security.
What are the three tests for exempt job-related accommodation?
- Necessary for job e.g. zookeeper, fireman, doctors, 2. Customary for the job e.g. there is a list of these jobs, 3. Required for security reasons e.g. for safety of workers.
When is employer-provided accommodation taxable?
When it is not job-related.
How is the basic charge for taxable accommodation calculated?
It is the higher of the rental value (if applicable) or the ‘annual value’.
What additional charge applies if accommodation is expensive?
If the original cost exceeds £75,000, the additional charge is calculated as: Official rate of interest × (Cost - £75,000).
What happens if the employer has owned the property for more than six years before the employee moves in?
Market value is used instead of the original cost in the additional charge calculation.
How is the taxable benefit calculated when market value is used?
Official Rate of Interest × (Market Value at move-in + Capital improvements before start of tax year - £75,000).
When can directors claim job-related accommodation exemptions? 2
If they own 5% or less of the company and either work full-time or the company is non-profit/charity.
How is the taxable benefit of employer-provided accommodation expenses calculated?
Taxable benefit = cost to employer minus any employee contribution.
When is a company car considered a taxable benefit?
When it is available for private use.
What does private use of a company car include?
Ordinary home-to-work travel.
Is a pool car a taxable benefit?
No, pool car use is not a taxable benefit.
How is the taxable benefit of a company car calculated?
List price × percentage based on CO₂ emissions.
How to calculate percentage based on CO₂ emissions.
CO₂ emissions - 75 = ANSWER. ANSWER/5 + 20 = %
What does the list price of a company car include?
Optional accessories provided with the car and further accessories worth £100 or more added later.
How is the taxable benefit for fuel provided for private use calculated?
Benefit = basic figure (£27,800 for 2024/25) × same percentage as car benefit.
Does an employee’s partial contribution to fuel reduce the taxable benefit?
No, there is no reduction for partial contribution.
How should the fuel benefit be time-apportioned?
Time apportion the benefit if applicable.
What is the fuel benefit charge for private use in 2024/25?
£27,800 × the same percentage as the car benefit.
Does an employee’s partial contribution reduce the fuel benefit charge?
No, there is no reduction for partial contribution.
How is the fuel benefit charge time-apportioned?
Time apportion the benefit if applicable.
How is the taxable benefit for assets available for private use calculated?
Higher of 20% × Market Value when first provided or the rent paid by the employer for the asset.
How is furniture in employer-provided accommodation taxed?
It is taxed in the same way as other assets available for private use.
Does employee contribution reduce the taxable benefit for private use assets?
Yes, employee contributions reduce the benefit.
How does insignificant private use affect the taxable benefit?
If private use is insignificant, no taxable benefit arises.
Are employer contributions to a registered pension scheme taxable?
No, they are exempt from tax.
What are trivial benefits and how are they treated for tax purposes?
Benefits costing less than £50 to provide are exempt, but capped at £300 per year when provided to certain directors.
How much pension advice can an employer provide tax-free?
Up to £500 per tax year; above this, the full amount is taxable.
Are employer-run childcare facilities taxable?
No, they are exempt from tax.
Is a mobile phone provided by an employer taxable?
One mobile phone, including call costs, is exempt from tax.
Are free or subsidised meals in a workplace canteen taxable?
No, if they are available to all staff, they are exempt.
What is the tax treatment of annual social events provided by an employer?
Exempt up to £150 per head per tax year (including VAT); if the cost exceeds £150, the whole amount is taxable.
Is a parking space at or near the workplace taxable?
No, it is exempt from tax.
Is the provision of bicycles or cyclist safety equipment taxable?
No, if made available to all employees, it is exempt.
Are long-service awards taxable?
Non-cash long-service awards for at least 20 years of service are exempt, up to £50 per year of service.
What is the PAYE system?
A method of collecting Income Tax (IT) and National Insurance Contributions (NICs) on payments to employees.
When must IT and NICs be paid electronically under PAYE?
Funds must have cleared by the 22nd of each month.
When can small employers pay PAYE quarterly instead of monthly?
If their monthly PAYE total is £1,500 or less.
What is the basis for PAYE income tax deduction calculations?
Tax codes issued by HMRC.
What is a PAYE coding notice (Form P2)?
A document given to employees detailing their allowances, deductions, and resulting tax code.
What form informs the employer of an employee’s tax code?
Form P9(T), which does not include details of allowances or deductions.
What are the key components of tax code computation?
Allowances (e.g., personal allowance, allowable expenses, overpaid tax adjustments) and Deductions (e.g., taxable benefits, underpaid tax adjustments).
How is a positive tax code adjusted?
The last digit is removed, and ‘L’ is added for basic personal allowance.
How is a negative tax code adjusted?
Taxable pay is increased, the last digit is removed, 1 is deducted, and ‘K’ is added at the beginning of the code.
How does marriage allowance affect tax codes?
The transferor’s PA is reduced to £11,310 (code ‘N’), and the transferee’s PA increases to £13,830 (code ‘M’).
What is the Real Time Information (RTI) system?
A system that requires employers to inform HMRC about the amount paid and tax deducted for each employee on or before each payroll date using Full Payment Submission (FPS).
How does RTI integrate with payroll?
It provides online information integrated with employer payroll software.
What PAYE forms does RTI eliminate for employers?
RTI removes the need for employers to submit some PAYE forms to HMRC.
What is the Employer Payment Summary (EPS) used for?
It reconciles differences between actual amounts paid and FPS, reclaims employment allowance, and reports apprenticeship levy due.
When can benefits be collected through the PAYE code?
If the value of benefits remains the same year-on-year.
What benefits can be subject to voluntary payrolling?
All benefits except living accommodation and cheap loans.
How does voluntary payrolling work?
Employers report the cash equivalent of benefits monthly, treating them as PAYE income, with tax deducted each month.
Can employers choose which benefits to payroll?
Yes, they can exclude specific employees or benefits if payroll deductions would exceed 50% of pay.
What happens if benefits are not included in voluntary payrolling?
They must be reported, and tax collected via the P11D form.
What is the function of form P11D?
Provides details of benefits provided to employees.
When must form P11D be submitted? IN TAX TABLE
By 6 July after the end of the tax year to HMRC and the employee.
What is the function of form P60?
Provides details of gross pay, tax deducted, and NICs.
When must form P60 be provided to employees? IN TAX TABLE
By 31 May after the end of the tax year.
What is the function of form P45?
Provides particulars of an employee leaving, including tax code, gross pay to date, tax, and NICs deducted.
Who receives form P45?
The employee only; HMRC gets the information from Real Time Information (RTI).
What are the penalties related to PAYE forms?
Penalties apply for incorrect Full Payment Submission (FPS), late FPS returns, and late payment of PAYE.
What is the penalty for an incorrect FPS?
Subject to the common penalty regime.
What penalties apply for late FPS returns and late payment of PAYE? IN TAX TABLE
These are specified in tax tables and subject to HMRC penalties.
5 John and Dana operate a VAT-registered partnership, employing a large number of staff.
Which of the following options correctly identifies which taxes the partners are jointly and severally liable for?
(1) Income tax on each partner’s share of profits from the partnership
(2) Income tax of employees deducted under the Pay As You Earn (PAYE) system
(3) Employer and employee national insurance contributions payable in respect of their staff
(4) Capital gains tax on each partner’s share of partnership gains
(5) VAT as a supplier of goods
A All of them
B (1), (2) and (3) only
C (2), (3) and (5) only
D (1), (2), (3) and (5) only
C (2), (3) and (5) only
Each partner is liable to tax on their share of income and gains of the partnership, but not for tax on the shares of income and gains of the other partners.
6 (SAMPLE EXAM)
Which of the following are functions carried out by HMRC?
(1) Collect and administer direct taxes
(2) Collect and administer indirect taxes
(3) Pay and administer child support payments
(4) Collect repayments of student loans
(5) Pay and administer the state pension
A (1) and (2) only
B (1), (2) and (3) only
C (1), (2) and (4) only
D (1), (2), (3) and (5) only
C (1), (2) and (4) only
