Topic 3

Question 1

UK tax resident

Answer 1

Someone who lives in the UK for 183 or more days in a tax year. If they live in the UK for less than 183 days, a Statutory Residence Test is carried out to see if they should be considered a UK tax resident.

Question 2

Domicile

Answer 2

The country considered to be an individual’s home by the tax authorities. It is usually their father’s domicile, or their mother’s domicile if the parents were not married.
Deemed domicile – someone who is not UK‑domiciled but has been a UK tax resident for 15 of the previous 20 tax years.
Domicile of choice – it is possible to change from UK domicile by moving abroad and permanently severing all ties with the UK – it takes a long time and can be challenged.

Question 3

Gift Aid

Answer 3

Can apply to gifts made by a tax payer to a registered UK charity. The gift is made net of basic rate tax, and the charity can reclaim the tax deducted. So, if basic rate tax is 20%, the individual pays £80 and completes a Gift Aid declaration. The charity can claim £20 income tax, giving a total donation of £100.

Question 4

Tax legislation

Answer 4

The main statute relating to taxation is the Income and Corporation Taxes Act
1988 but there are other sources of tax law.Some of these take the form of
statutes (ie legislation passed by Parliament), while others are case law (ie law
established by the decisions made by judges in court cases

Question 5

Tax year

Answer 5

in the UK, a tax year (also known as a fiscal year)
runs from 6 April in one calendar year to 5 April in the next.

Question 6

Residence

Answer 6

A person who is resident and domiciled in the UK will be subject to UK income
tax on their worldwide earned and unearned income, whether or not such
income is brought into the UK.

Question 7

CAPITAL GAINS TAX

Answer 7

Tax payable on the gain made when certain assets (eg personal property
above a specific value, or business assets) are disposed of, usually by
selling them

Question 8

EARNED INCOME

Answer 8

Income from employment or self‑employment (profits, salary, tips,
commission, bonuses and pension benefits).

Question 9

UNEARNED INCOME

Answer 9

Income that is not derived from employment or self‑employment
(interest/dividends from investments, rental income, trust income, etc).

Question 10

WHY IS DOMICILE IMPORTANT?

Answer 10

Domicile mainly affects liability to IHT.
If a person is domiciled in the UK, IHT is chargeable on assets
anywhere in the world, whereas for persons not domiciled in
the UK, tax is due only on assets in the UK.
People who are not UK‑domiciled but have been resident in the
UK for tax purposes in at least 15 of the previous 20 tax years
are deemed to be UK‑domiciled for IHT purposes

Question 11

Which of the following people would be most likely to be a ‘UK resident’?
a) Susan, who normally lives in Spain but spends three months a
year working for the family business in England.
b) Antoine, a French surveyor, whose eight‑month contract in
Devon with a construction company started in May.
c) Max, who moved to London from Cologne on 6 January for a
seven‑month teaching contract.
d) Brenda, who spends 180 days a year in the UK and the remainder
in the USA

Answer 11

Answer b) Antoine is correct. Answer c) is not correct because three months
of Max’s contract are in one tax year and the rest in the following year. He
will not spend 183 days in either tax year in the UK

Question 12

Which of the following will not be subject to UK inheritance tax
upon death?
a) UK property owned by Paolo, who has lived in the UK for three
years but is not UK domiciled.
b) Overseas property owned by Kavita, who was born in the US (to
American parents) but has lived in the UK for the past 18 years.
c) Overseas property owned by Helena, who is UK resident but
not UK domiciled nor deemed domiciled.
d) Overseas property owned by David, who is UK domiciled but
resident in France

Answer 12

c) As Helena is not UK domiciled she will not pay IHT on overseas assets

Question 13

For a child, which of the following would be subject to income tax?
a) All earned income.
b) An educational grant.
c) Any earned income that exceeds their personal allowance.
d) A settlement from their parents

Answer 13

C) Any earned income that exceeds their personal allowance. The
settlement from their parents (answer d) will be taxed as the parents’
income, the educational grant (answer b) is tax‑free, and they would
not pay tax on all of their earned income (answer a), only that which
exceeds their personal allowance

Question 14

Allowances

Answer 14

All UK residents, including children from the day of their birth, have a personal
allowance, ie an amount of income that can be received each year before
income tax begins to be charged.

Question 15

Personal allowance

Answer 15

the personal allowance threshold usually determines
the rate above which income tax is charged. Individuals whose annual
income exceeds an upper threshold have their personal allowance reduced,
depending how much their earnings exceed the threshold

Question 16

Marriage allowance

Answer 16

it is possible for an individual to transfer part of
their basic personal allowance to their spouse or civil partner, providing
the transferor is not liable to income tax at all and the recipient is not liable
to income tax at the higher or additional rate

Question 17

Married couple’s allowance

Answer 17

this allowance is available if one partner in a
marriage or civil partnership was born before 6 April 1935. The allowance
is provided as tax relief and is limited to a percentage of the applicable
allowance amount

Question 18

Blind person’s allowance

Answer 18

this allowance is available to those registered
as blind with a local authority. If the allowance cannot be used by the
individual, it can be transferred to their spouse or civil partner

Question 19

Personal savings allowance (PSA)

Answer 19

this enables savers to receive a certain
amount of savings interest tax‑free. The tax‑free amount decreases for
higher‑rate taxpayers and there is no tax‑free savings interest allowance
for additional‑rate taxpayers

Question 20

Dividend allowance (DA)

Answer 20

where an individual’s aggregate dividend
income in a tax year falls within the DA, no tax is payable

Question 21

Allowances for property and trading income

Answer 21

o‑called
‘micro‑entrepreneurs’ who supplement their main income with property
or trading income are entitled to an additional allowance. There are two
separate allowances, one for trading income and one for property income.
The allowances apply to those who, for example, make small amounts of
money by selling on eBay or by renting a room in their house or a parking
space. If trading/property income is less than the allowance, then no tax is
payable on that income; if it is more than the allowance, then the individual
has the choice to either deduct the allowance from trading/property income
or calculate profit in the usual way and deduct allowable expenses

Question 22

Deductions

Answer 22

In addition to these allowances, taxpayers are permitted to make certain
deductions from their gross income before their tax liability is calculated.
These deductions include:
„ certain pension contributions (within specified limits) – for example, a
scheme set up by an employer;
„ certain charitable contributions;
„ allowable expenses – such as costs incurred in carrying out one’s
employment

Question 23

For self‑employed people, allowable expenses can

Answer 23

can only be incurred “wholly
and exclusively for the purpose of trade”

Question 24

for employed persons allowable expenses

Answer 24

must be incurred “wholly, exclusively and necessarily” while doing the job

Question 25

Taxable income

Answer 25

When all the relevant deductions have been made from a person’s gross income, what remains is their taxable income. This is the amount to which the appropriate tax rate(s) is applied in order to calculate the tax due. FACTFIND For the latest rates and allowances, check: www.gov.uk/income‑tax‑rates

Question 26

Income bands and tax rates

Answer 26

PAYE tax rate Rate of tax Annual earnings the rate applies to (above the PAYE threshold) Basic tax rate 20% Up to £37,700 Higher tax rate 40% From £37,701 to £125,140 Additional tax rate 45% Above £125,140

Question 27

Paying income tax

Answer 27

ncome taxed at source In some cases, HMRC collects income tax at source, ie from the person who makes the payment, not the recipient. An example of where tax is deducted at source is PAYE (see section 3.4.2). Employers deduct tax weekly or monthly (as appropriate) from wages and salaries, which are then paid to the employee net of tax

Question 28

How do employees pay income tax?

Answer 28

Employees pay income tax under the pay‑as‑you‑earn (PAYE) system. Employers use tables supplied by HM Revenue & Customs (HMRC) to calculate the tax due from each employee; they then deduct the appropriate amount from their wages or salary and pass it to HMRC. In order to deduct the right amount of tax, the employer is supplied with a tax code number for each employee: the tax code relates to the amount that the employee can earn without paying tax, taking account of allowances, exemptions, and adjustments for taxable employee benefits (commonly referred to as benefits in kind) and for amounts overpaid or underpaid from previous years

Question 29

P60

Answer 29

A P60 is issued to each employee by the employer in May each year. This shows, for the previous tax year, total tax deducted, National Insurance contributions (NICs) and the final tax code.

Question 30

P45

Answer 30

On leaving an employer, an employee should be provided with a form P45 showing their name; district reference; code number; week or month of last entries on the employee’s deductions working sheet; total gross pay to date and total tax due to date. A copy is sent to HMRC. The P45 provides the new employer with all the information they require to complete a new tax deductions working sheet for the employee

Question 31

How do self‑employed people pay income tax?

Answer 31

People who are self‑employed (including partners in a business partnership) pay income tax directly to HMRC on the basis of a declaration of net profits calculated from their accounts. For a self‑employed person, net profits are broadly the equivalent of the gross income of an employee, ie they are the amount on which income tax is based. They are calculated by taking the total income of the business and deducting allowable business expenses and capital allowances. %

Question 32

Class 4 NIC and Class 2 NIC

Answer 32

Self‑employed people pay their income tax and Class 4 NICs in two equal parts. The first payment is due on 31 January of the tax year in which their business year ends; the second is due on 31 July, six months later. Any under or overpayment is then rectified on the 31 January following the end of the tax year. Class 2 NICs are also due in one lump sum on this date

Question 33

Self‑assessment may apply to (among others):

Answer 33

the self‑employed; „ those with investment income in excess of relevant allowances; „ those who receive rental income from land and property in the UK; „ trustees; „ personal representatives of deceased persons

Question 34

How do people pay tax on their savings and investment income?

Answer 34

Since 6 April 2016, interest on deposits has been paid gross to all customers, and individuals have to advise HMRC to deduct tax via their tax code or pay via self‑assessment. For those on low incomes a starting rate of 0 per cent applies to the first £5,000 of savings income. The starting‑rate band reduces as taxable non‑savings income is received, and the starting rate does not apply at all where income received exceeds an individual’s personal allowance plus the starting‑rate band.

Question 35

personal savings allowance (PSA

Answer 35

here is a personal savings allowance (PSA) for basic‑rate taxpayers and a lower allowance for higher‑rate taxpayers: savings income falling within these limits is subject to 0 per cent tax. In calculating eligibility for the PSA, all of an individual’s income is taken into account in assessing whether they are a basic‑ or higher‑rate taxpayer.

Question 36

savings income will fall into one of two categories:

Answer 36

Tax‑free – including income from ISAs and some National Savings and Investments accounts. „ Paid gross without deduction of tax but subject to tax in the hands of the individual – including interest from bank and building society accounts – if in excess of the personal savings allowance.

Question 37

The calculation of personal liability to income tax is broadly a four‑stage process

Answer 37

1) Work out the total income. 2) Make appropriate deductions, eg allowable expenses or certain pension contributions. 3) Deduct the personal allowance and other reliefs (eg blind person’s allowance) to arrive at the taxable income. 4) Apply tax at the current rates to the appropriate bands of income

Question 38

If a person’s income comes from several different sources, it is taxed according to a set order of priority:

Answer 38

1) Non‑savings income. 2) Savings income. 3) Dividends. 4) Chargeable gains on a non‑qualifying life assurance policy. IN BRIEF

Question 39

Charitable giving

Answer 39

Making gifts to charity can be beneficial for the charity and reduce an individual’s income tax liability

Question 40

Gift aid

Answer 40

the donor making the gift has their basic‑ and higher‑rate tax thresholds extended by the value of the gross gift

Question 41

Example of gift aid

Answer 41

Ruben is a higher‑rate taxpayer who makes a gift of £800. The gross value of the gift is £800 ÷ 0.8 = £1,000. As a result of making the gift, Ruben’s basic‑rate income tax band is extended by £1,000 to £38,700.

Question 42

Payroll giving

Answer 42

This enables employees to make tax‑efficient gifts by having a charitable gift deducted from their salary before income tax is charged. By making a gift in this way, tax relief is granted on the value of the gift at the individual’s highest rate of income tax

Question 43

National Insurance contributions

Answer 43

NICs are a form of taxation in everything but name. They are in effect a tax on earned income and are payable in different ways according to whether the earner is employed or self‑employed

Question 44

CLASS 1 NIC

Answer 44

„ Paid by employees at a percentage on earnings between certain levels, known as the primary threshold and the upper earnings limit with a reduced percentage payable on earnings above the upper limit. „ They are also paid by employers on most employees’ earnings above a lower limit called the secondary threshold – but with no upper limit. „ No employer NICs are paid in respect of employees and apprentices under a certain age on earnings between the primary threshold and the upper earnings limit.

Question 45

CLASS 2 NIC

Answer 45

CLASS 2 „ Flat‑rate contributions paid by the self‑employed if their annual profits exceed the small profits threshold. „ They are quoted as a weekly amount. „ They are collected through self‑assessment.

Question 46

CLASS 3

Answer 46

Voluntary contributions that can be paid by people who would not otherwise be entitled to the full state pension or sickness benefits. „ This can occur because a person has, for instance, taken a career break or spent some time working overseas. „ They are flat‑rate contributions

Question 47

CLASS 4 NIC

Answer 47

CLASS 4 „ Additional contributions payable by self‑employed people on their annual profits between specified minimum and maximum levels, with a reduced rate payable above the upper limit, as for Class 1. „ They are paid to HMRC in half‑yearly instalments by self‑assessment

Question 48

A person who is UK resident for tax purposes only pays income tax on earnings generated in the UK. True or false?

Answer 48

False. They are liable for income tax on income generated anywhere in the world, but the UK has reciprocal tax treaties (double taxation agreements) with many countries to ensure that people are not taxed twice on the same income

Question 49

A person may become UK domiciled once they have been settled in the country for a number of years. True or false?

Answer 49

True, as long as their actions indicate that their change of residence is permanent and they have severed links with their original country of domicile

Question 50

Which of the following is not assessable for income tax purposes? a) Tips. b) Interest from bank and building society deposits. c) Lottery prizes. d) Rents from land and property

Answer 50

C

Question 51

Blind person’s allowance can be transferred to a spouse or civil partner if the blind person does not use the allowance. True or false?

Answer 51

True

Question 52

Emma worked abroad for five years but is now back working in the UK. What class of National Insurance contributions could she pay to improve her contribution record for the state pension?

Answer 52

Class 3

Question 53

Greg is self-employed, with annual profits over the minimum threshold. Which of the following classes of National Insurance contributions will he have to pay?

Answer 53

2 and 4

Question 54

For how many days in a tax year must a person be present in the UK to be considered a UK tax resident?

Answer 54

183

Question 55

Which of the following sources of income is not subject to income tax? a) State pensions. b) Share dividends. Incorrect Response c) Redundancy payment in lieu of notice. Correct Answer d) War widow's pension

Answer 55

D

Question 56

he starting rate of income tax applies to: a) pension income. b) all income for low earners. c) dividends. d) interest from savings

Answer 56

D

Question 57

The personal savings allowance is: a) available only to non-taxpayers. Correct Answer b) not available to additional-rate taxpayers. c) available to all taxpayers. Incorrect Response d) only available to basic-rate taxpayers.

Answer 57

B

Question 58

Paula is a higher-rate taxpayer who makes a charitable donation through Gift Aid. This means: a) Paula's basic-rate income-tax threshold will be extended by the gross amount of the gift. b) Paula will receive immediate basic-rate tax relief on the gift. c) Paula will receive immediate basic- and higher-rate tax relief on the gift. d) the charity can recover basic- and higher-rate tax Paula paid on the gifted amount.

Answer 58

A

Question 59

Imran is self-employed. In order to be able to deduct his business expenses from his gross income, they would need to be: a) exclusively incurred for his trade. b) allowable by HMRC. c) wholly, exclusively and necessarily incurred for his trade. d) wholly and exclusively incurred for the purpose of his trade

Answer 59

D

Question 60

Juan comes from a long line of Argentinians, but now lives in the UK. For how many years must he have been a UK tax resident to be deemed domicile? a) A total of 15 years. b) 15 of the last 20 years. c) 17 of the last 20 years. d) A total of 20 years

Answer 60

B

Question 61

HMRC sets out a strict order in which income tax on different types of income is applied. Which of the following is third in that order? a) Dividends. b) Interest. c) Chargeable gains from life assurance policies. d) Earned income.

Answer 61

A

Question 62

Income tax calculation order

Answer 62

Non‑savings income, then savings income, then dividend income.

Question 63

Personal Savings Allowance (PSA)

Answer 63

The Personal Savings Allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers aren’t eligible.

Question 64

Starting Rate for Savings (SR)

Answer 64

The starting rate for savings is a 0% band, that for 2022/23 is £5,000. It is restricted by non-savings taxable income so that none of the band will be available if that income is above their personal allowance (& Blind Person’s Allowance if claimed) plus the £5,000 starting rate.

Question 65

Interest Paid Gross

Answer 65

interest paid by banks and building societies is now paid gross (without tax being taken off).

Question 66

Calculation

Answer 66

The easiest way to establish if you qualify is to add up your non-savings income, if it is below your Personal Allowance (£12,570 in 2022/23) plus £5,000 (£17,570) then the Starting Rate for Savings will apply.

Question 67

Calculation continued

Answer 67

If this doesn’t cover all of your savings income then apply the Personal Savings Allowance. To determine which rate to use add up all of your taxable income including savings income. If it's £50,270 or less then use £1,000, if between £50,270 and £150,000, use £500. If higher it doesn't apply.

Question 68

The following examples for 2020/21 explain the interactions between the SR and the PSA.

Answer 68

Alex is 71 and has non-savings income of £11,000. In addition he receives £600 in savings income. His non-savings income is below £17,570 and the savings income is within the 0% savings rate of £5,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Question 69

Example 2 -

Answer 69

If Alex’s non-savings income is now £17,170, it is still below the £17,570 threshold and £400 of his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Question 70

Example 3

Answer 70

If Alex’s non-savings income plus his saving interest is between £17,571 and £50,270, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Question 71

Example 4

Answer 71

if Alex’s non-savings income is between £50,271 and £150,000 he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.

Question 72

What are the 2 other sources of tax law (besides Income and Corporation Taxes Act 1988)?

Answer 72

Statutes Case Law

Question 73

‘Residence’ mainly affects which 2 types of tax?

Answer 73

Income tax Capital gains tax.

Question 74

Where someone is not resident for at least 183 days in a tax year, what is applied?

Answer 74

statutory residence test is applied (unless they are regarded as automatically not UK resident).