Topic 3 Flashcards
UK tax resident
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.
Domicile
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.
Gift Aid
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.
Tax legislation
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
Tax year
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.
Residence
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.
CAPITAL GAINS TAX
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
EARNED INCOME
Income from employment or self‑employment (profits, salary, tips,
commission, bonuses and pension benefits).
UNEARNED INCOME
Income that is not derived from employment or self‑employment
(interest/dividends from investments, rental income, trust income, etc).
WHY IS DOMICILE IMPORTANT?
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
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 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
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
c) As Helena is not UK domiciled she will not pay IHT on overseas assets
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
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
Allowances
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.
Personal allowance
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
Marriage allowance
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
Married couple’s allowance
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
Blind person’s allowance
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
Personal savings allowance (PSA)
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
Dividend allowance (DA)
where an individual’s aggregate dividend
income in a tax year falls within the DA, no tax is payable
Allowances for property and trading income
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
Deductions
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
For self‑employed people, allowable expenses can
can only be incurred “wholly
and exclusively for the purpose of trade”
for employed persons allowable expenses
must be incurred “wholly, exclusively and necessarily” while doing the job
Taxable income
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
Income bands and tax rates
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
Paying income tax
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
How do employees pay income tax?
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
P60
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.
P45
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
How do self‑employed people pay income tax?
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.
%
Class 4 NIC and Class 2 NIC
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
Self‑assessment may apply to (among others):
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
How do people pay tax on their savings and investment
income?
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.
personal savings allowance (PSA
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.
savings income will fall into one of two categories:
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.
The calculation of personal liability to income tax is broadly a
four‑stage process
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
If a person’s income comes from several different sources, it
is taxed according to a set order of priority:
1) Non‑savings income.
2) Savings income.
3) Dividends.
4) Chargeable gains on a non‑qualifying life assurance policy.
IN
BRIEF
Charitable giving
Making gifts to charity can be beneficial for the charity and reduce an
individual’s income tax liability
Gift aid
the donor making the gift has their basic‑ and higher‑rate tax
thresholds extended by the value of the gross gift
Example of gift aid
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.
Payroll giving
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
National Insurance contributions
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
CLASS 1 NIC
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.
CLASS 2 NIC
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.
CLASS 3
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
CLASS 4 NIC
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
A person who is UK resident for tax purposes only pays income
tax on earnings generated in the UK. True or false?
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
A person may become UK domiciled once they have been
settled in the country for a number of years. True or false?
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
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
C
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?
True
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?
Class 3
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?
2 and 4
For how many days in a tax year must a person be present in the UK to be considered a UK tax resident?
183
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
D
he starting rate of income tax applies to:
a)
pension income.
b)
all income for low earners.
c)
dividends.
d)
interest from savings
D
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.
B
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.
A
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
D
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
B
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.
A
Income tax calculation order
Non‑savings income, then savings income, then dividend income.
Personal Savings Allowance (PSA)
The Personal Savings Allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers aren’t eligible.
Starting Rate for Savings (SR)
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.
Interest Paid Gross
interest paid by banks and building societies is now paid gross (without tax being taken off).
Calculation
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.
Calculation continued
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.
The following examples for 2020/21 explain the interactions between the SR and the PSA.
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.
Example 2 -
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.
Example 3
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.
Example 4
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.
What are the 2 other sources of tax law (besides Income and Corporation Taxes Act 1988)?
Statutes Case Law
‘Residence’ mainly affects which 2 types of tax?
Income tax Capital gains tax.
Where someone is not resident for at least 183 days in a tax year, what is applied?
statutory residence test is applied (unless they are regarded as automatically not UK resident).
