Topic 1: Introduction to income tax Flashcards
What examples are there of different types of income that are exempt from income tax?
1) National savings certificate income
2) Income from ISAs
3) Betting / lotteries / premium bonds etc.
4) Scholarships
5) Some social security such as housing benefit
6) Income tax repayment interest
How much does the starting rate for savings income go up to, what % is it and when is it applicable?
It is £5000, 0% and is applicable when an individual has
What happens to savings income 0% rates for basic and higher rate tax payers?
For basic rate tax payers, there is £1000 taxed at 0%
For additional rate tax payers, there is £500 taxed at 0%
Which band to apply is chosen by looking at their taxable income (ignoring this nil rate band thing)
An individual could have both the £5k thing (or some of it) and one of these potentially depending on their mix of income amounts
What is the tax year for individuals?
6th April - 5th April
What is the tax year for companies?
1st April - 31st March
With regards to dividends…. all individuals….
regardless of income are allowed a £2000 nil rate on dividends
After the dividend nil rate, what are the % rates for dividends?
7.5%, 32.5% and 38.1%
How do you work out the gross donation a charity received via gift aid from someone’s net donation?
net x (100/80) - this then basically assumes that everyone is a basic rate (20%) taxpayer (as you have to be a taxpayer to claim gift aid). But what about higher and additional rate tax payers - they arguably have got charged 40% or even 45% on the money they are gifting already.
What happens when higher or additional rate taxpayers donate with gift aid?
The basic rate upper limit becomes £37500 + gross donation and the higher rate upper limit becomes £150000 + gross donation
If you want to carry back donated gift aid money in to your 2018/19 tax return even though you donated it in 2019/20 then when is the deadline for saying you want to do this?
When you file your 2018/19 tax return (latest deadline would be 31 Jan 2020)
How does the marriage allowance work?
Well it DOES NOT increase your personal allowance, you just deduct part (£1250) of the transferor’s personal allowance and you can then take 20% of that (£250) off the transferee’s tax liability. The transferor has to be basic or non taxpayer and the transferee has to be a basic tax payer
What is meant by a ‘receipts basis’ of assessment of employment income?
It means that it is assessed in the tax year that you receive it in
What does ‘taxable earnings’ mean?
Earnings that are taxable, IT IS THE AMOUNT PRIOR TO THE PERSONAL ALLOWANCE BEING TAKEN OFF
What are the 2 general rules for taxable benefits?
Always time apportion benefits if only available for part of the tax year.
Always deduct employee contribution (apart from private fuel)
When is living accommodation provided by an employer tax exempt?
When it is job related and one of:
Necessary, customary or security
If I got given say Tesco vouchers from my employer, what is the taxable value of that benefit?
The cost of the voucher to the employer
For a director, what extra details are there to whether their provided for accommodation is tax exempt or not?
They can only claim necessary accommodation or customary accommodation if:
They own less or equal to 5% of the company AND either:
- They work full-time OR the company is non-profit making / a charity
If living accommodation is not tax exempt then how is the value worked out?
- Normally it is the higher of the rental value (if applicable) or the ‘annual value’
- IF it is expensive (cost > £75K) then you do the following sum:
Official rate of interest at start of tax year x (cost - 75k)
This ‘cost’ is the original cost + any capital improvements BEFORE the start of the tax year
When should you use market value instead of original cost when working out accommodation benefit value?
If >6 years have elapsed when employee moves in since it was purchased
How do you work out the benefit of a car for PRIVATE USE?
List price x emissions %
List price includes optional accessories provided with the car and further accessories £100 or more provided later on.
Emissions % thing is in tables
Employee contributions reduces benefit
TIME APPORTION BENEFIT
Covers all running costs except fuel
How is fuel benefit worked out?
Basic figure (£24,100) x the car benefit.
NO reduction for partial contribution
TIME APPORTION BENEFIT
What is a key difference between vans and cars tax wise (apart from what is in the tables?)
Private use DOES NOT include home to work travel for vans but it is included for cars.
Both time apportion benefit
Employee contribution reduces benefit (like cars)
There is a fixed benefit amount, unlike cars where it is the list price.
How do you work out the annual value of a non house/car asset? like a tv
20% of market value OR how much the company rents it for
time apportion
employee contribution reduces benefit
if private use is insignificant then no taxable benefit
how do you work out the value of intangible benefits - such as a school place?
cost to employer less employee contributions
in-house benefit = marginal cost to employer
Name as many exempt benefits as you can
See favourites pic in phone’
When are PAYE payments due?
19th of month or 22nd if electronic
large employers > 250 employees must pay electronically
if monthly PAY total =
when benefits value (or adjustment for underpaid tax) is more than (personal) allowance(s), how do you make the tax code?
take the negative amount, take off end digit, then -1, then stick k in front. I.e. if someone had personal allowance of 12500, taxable benefits of 13000, then that makes -500 You take the end 0 off, -1 and add k and you get k49.
When is market value relevant in determining value of accommodation?
When it has been owned for 6 years prior to use
What is the trading allowance?
£1000, available to individuals carried on a trade, if trading receipts < £1000, trading income is not taxable
- a trader can chose to either take £1k off their trading income for tax or take off their expenses
What are some examples of disallowable expenses in a business?
improvement or enhancement
depreciation
salary to sole trader or partneR
What do you do with general provisions and specific provisions respectively for tax computation?
increase in general provision - add back to profit, decrease in general provision, deduct from profit. specific provisions no adjustement.
What do you do with trade bad debts and non-trade bad debts for tax computation?
Allow trade bad debts, don’t allow non-trade bad debts (this includes loans to employees written off - unless it was a benefit to the employee)
What gifts are allowable for tax?
1) Staff entertaining
2) gifts to employees
3) trade samples
4) (gifts with business name on it AND not food/drink/tobacco/vouchers AND cost £50 or less)
What donations and subscriptions are allowed?
Donations to small local charities, NOT national charities
trading stock/used paint and materials to charities/schools
NOT donations made under gift aid
NOT fines and penalties APART from parking fine of employee on business
What capital related legal fees ARE allowed?
renewal of short lease (50 years), registering trade patent or copyright, raising long term finance
How are leasing and rental costs for tax calculated?
Hiring/renting/leasing plant and equipment is allowable.
Cars different. If =<110g/km then is allowable. If car is >110g/km co2 then FLAT RATE (i.e. NOT TIME APPORTIONED) 15% x hire charge is disallowed.
If its a pollutey car AND private use then you calculate what would be allowed (85% of hire charge) and then if say 40% is private use, then disallow 40% of the 85% of the hire charge
IS REDECORATION MAINTAINENCE OR IMPROVEMENT?
maintenance - i.e. allowable expense
Re: tax, what do you do when goods taken from a business (by an owner) for private use?
Need to be treated as being taken at market value NOT cost
therefore add the market value into the taxable profits bit
What should you do with non-trade income in the accounts? - i.e. rental income, profit on disposal of assets, investment income
must deduct from profits
what should you do if the owner of a business pays for business expenditure on a personal account?
it is allowable to be deducted
Would you count computer software licences as?
Plant and machinery - therefore can claim capital allowance on it
are capital allowances calculated for period of account or tax year?
period of account
how do you do a write down allowance for a main pool?
pro-rate for non-12 month periods, date of acquisition is irrelevant, 18% is written down after adding additions and taking away disposals (proceeds limited to cost)
what do you know about first year allowances?
never time apportioned.
100% on energy saving equipment, new and unussed zero emission goods vehicles, new low emission cars - electric or emission <50 on/after 1 April 2018 or 75 before 1 April 2018
what is the annual investment allowance?
DOESN’T APPLY TO CARs but applies to most other plant and machinery.
it is £1m per year.
all additions up to £1m receive 100% relief
balance of expenditure above £1m receives normal WDA
allocate the AIA to assets otherwise getting the worst allowances, i.e. not 100% FYA assets
After additions and disposals, what happens if a written down main pool is =
You write it off instead of normal process.
You pro-rate the £1k for non 12 month periods
what about assets with private use by the business owner?
kept in separate pool.
work out amount you would normally allow but only deduct business use %
what happens when you dispose of a PRIVATE USE asset and it is sold for more (or less) than the written down value?
If sold for more then the difference is charged from the tax allowances (or added to adjusted trading profit), need to times by business % use. do opposite for if made a loss
what happens if in the main pool, too many allowances have been claimed, i.e. proceeds of disposal > twdv of pool?
pool becomes negative and the excess is given back as a balancing charge
if proceeds of disposal
for ongoing business, what period of account will be taxed in the ‘19/’20 tax year?
Whichever ENDS in the 19/20 tax year
how do you work out first tax years?
the day the business is started to the next 5 April!!!!! Only would therefore be 12 month period if started the business at start of April
what do you do for the second tax year if there is a period of account ending in the second tax year and it is 12 months long?
current year basis - i.e. the tax year it ends in is the one it counts as
what do you do for the second tax year if there is a period of account ending in the second tax year and it is LESS THAN 12 months long?
tax the FIRST 12 months from commencement
what do you do for the second tax year if there is a period of account ending in the second tax year and it is MORE THAN 12 months long?
TAX 12 MONTHS TO THE END OF THE PERIOD OF ACCOUNT
what do you do for the second tax year if there is NOT a period of account ending in the second tax year?
use the actual tax year (6 April - 5 April)
what happens if an accounting period ending in the third tax year is more than 12 months long?
you take the LAST 12 months of that accounting period
what are the rules for closing year?
ALL PERIODS OF ACCOUNT WHICH FINISH IN THE TAX YEAR IN THE DATE OF CESSATION ARE TAXED AND THEN OVERLAP PROFITS TAKEN OFF
OVERLAP PROFITS ARE taken off profits still to be taxed
what is the basis period for the penultimate tax year?
current year basis UNLESS no period ending in penultimate tax year, in that case, tax 12 months to normal year end
what is the cash basis of accounting all about?
can be used by unincorporated businesses (not companies) with receipts =<150k
a trader must leave the scheme if previous tax year receipts >= 300k
accounting profit is receipts less expenses in the period
capex (apart from cars) is allowable, proceeds on disposal of P&M should therefore be tqxed as receipts
interest (up to 500 a year max is allowable)
do you or do you not pro-rate capital allowances for sole traders for business/personal use?
You do not
if you commute to work as your only private use of a work van, is this tax-able or tax-exempt?
tax exempt
