Topic 3 Flashcards
What is the main statute relating to taxation in the UK?
The main statute relating to taxation in the UK is the:
Income and Corporation Taxes Act 1988
What is case law in relation to taxation?
Case law is law established by court decisions, serving as a source of tax law alongside legislation.
How are new tax measures introduced each year?
After the Budget, a Finance Bill is introduced. Once approved by Parliament, it becomes a Finance Act, and the tax measures take effect.
What is a Finance Act?
A Finance Act is a bill that becomes law after being:
- Approved by Parliament
AND
- Receiving Royal Assent
What is the time frame for the tax year in the UK?
From 6 April to 5 April of the following year.
How does the Finance Act relate to other tax legislation?
It adds to existing tax laws, like the Income and Corporation Taxes Act 1988.
What is the process for a tax law to become part of UK legislation?
A Finance Bill is introduced, approved by Parliament, and becomes a Finance Act after Royal Assent.
What role does the Budget play in UK taxation law?
It introduces the government’s tax proposals, later formalized in a Finance Bill.
What happens after a Finance Bill receives Royal Assent?
It becomes a Finance Act, and its provisions become law.
How many days must a person be present in the UK to be automatically considered UK resident for tax purposes?
At least 183 days in a tax year.
What happens if a person is not present in the UK for 183 days?
Statutory residence tests are applied to determine if they are considered UK resident for that tax year.
How is income taxed for a person who is resident and domiciled in the UK?
They are taxed on their worldwide income, both earned and unearned, whether or not the income is brought into the UK.
How is capital gains tax (CGT) applied to UK residents?
CGT is charged on the realisation of gains worldwide for UK residents.
What are double taxation agreements, and what is their purpose?
Double taxation agreements are treaties between countries to prevent individuals from being taxed twice on the same income or gains.
How is tax liability handled for a UK resident with overseas income?
Overseas tax paid is deducted from the UK tax liability under double taxation agreements.
What do reciprocal tax treaties often include?
Agreements to exchange information to combat tax evasion.
What is Capital Gains Tax?
Tax payable on the gain made when assets are disposed of, usually by selling or gifting them.
What is meant by Earned Income?
Income from employment or self-employment.
What are examples of earned income?
- Profits
- Salary
- Tips
- Commission
- Bonuses
- Pension benefits
What is meant by ‘Unearned Income’?
Income that is not derived from employment or self-employment
What are examples of unearned income?
- Interests
- Dividends from investments
- Rental income
- Trust income
What is domicile?
Domicile is the country an individual considers their permanent home, even if they are temporarily elsewhere.
What is a domicile of origin?
It is the domicile acquired at birth.
Typically, it is the domicile of the father, OR, the mother if the parents are unmarried.
Can a person change their domicile?
Yes.
When can a person change their domicile?
By moving to another country with the intent to stay permanently and severing ties with their former country, they acquire a domicile of choice.
What is a domicile of choice?
It is a domicile that a person chooses by moving to a new country, intending to make it their permanent home.
Is there a formal process to change domicile?
No.
Changing domicile is based on actions and intent, therefore NOT a formal process.
Why is domicile important for tax purposes?
Domicile primarily affects liability to inheritance tax (IHT)
How does domicile affect IHT liability for UK-domiciled individuals?
UK-domiciled individuals are liable for IHT on their assets worldwide.
How is IHT applied to non-UK-domiciled individuals?
Non-UK-domiciled are only liable for IHT on their UK-based assets
What is deemed domicile for IHT purposes?
A person is deemed UK-domiciled if they have been a UK resident for at least 15 of the last 20 years.
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
EXPLANATION:
To be a UK resident, you have to be present in the UK for min. 183 days from the current tax-year.
Tax years start from the 6th of April, to the 5th of April the following year.
Antoine has a 8-month contract starting in May, 1-month before the new tax year.
Therefore, he will based in Devon for 7-month of the new tax year, which is c.210 days.
As a result, he will be spending more than 183 days in the UK for the upcoming fiscal year.
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: C
EXPLANATION:
One’s residency mainly impacts income tax and capital gains tax (CGT).
Whereas, domicile mainly impacts inheritance tax (IHT).
IF an individual is not UK domiciled, they will ONLY have to pay IHT on their UK assets.
On the other hand, IF an individual is UK domiciled, they will have to pay IHT on their WORLDWIDE assets.
Helena owns overseas property, but is NOT UK domiciled. So she will only have to pay IHT on her UK assets. Therefore NOT paying IHT on her overseas property.
What is income tax based on?
Based on income received during a tax year.
What types of income are subject to income tax?
Income from:
- Employment
- Self-Employment
- Pensions
- Rental income
- Interest
- Dividends
Are children subject to income tax in the UK?
Yes.
Children may be subject to income tax depending on the type and amount of income they receive.
How is a child’s income from a parental settlement taxed?
- It is treated as the parents’ income for tax purposes;
- The child’s allowances CANNOT be used against it.
What types of employment income are assessable to tax?
- Salary
- Wages
- Bonuses
- Commissions
- Taxable employee benefits
- Pension income
- Profits from a trade or profession
- Inventor’s income from a copyright or patent
- Interest on bank and building society deposits
- Dividends from companies
- Income from government stocks, local authority stocks and corporate bonds.
- Income from trusts
- Rents and other income from land and property
Is pension income subject to tax?
Yes.
Pension income, including state pension benefits, is assessable to tax.
Are profits from a trade or profession taxable?
Yes.
Profits from a trade or profession are subject to tax.
Is interest earned from bank deposits taxable?
Yes.
Interest on bank and building society deposits is taxable.
Are dividends from companies taxable?
Yes.
Dividends from companies are assessable to tax.
Is income from land and property taxable?
Yes.
Rents and other income from land and property are taxable.
Is income from government and corporate bonds taxable?
Yes.
Income from government stocks, local authority stocks and corporate bonds is assessable to tax.
Is income from trusts taxable?
Yes, income from trusts is taxable.
Are redundancy payments taxable?
It depends.
Redundancy payments are not taxable up to a certain threshold; Any excess IS taxable.
Also, payments in lieu of notice are FULLY TAXABLE.
Under what circumstances is an employee’s redundancy payment taxed?
If they were given notice, they will receive payments in lieu of notice.
Receiving redundancy payment in lieu of notice is fully taxable.
Are shares given to an employee as part of a Share Incentive Plan taxable?
It depends.
Some shares in a ‘Share Incentive Plan’ are not taxable.
Is interest on NS&I Savings Certificates taxable?
No.
Interest on NS&I Savings Certificates is not taxable.
Is income from ISAs taxable?
No.
Income from ISAs is generally not taxable.
Are gambling profits taxable?
No.
Casual gambling profits are not taxable.
Are lottery prizes taxable?
No.
Lottery prizes are not taxable.
Are wedding presents from an employer taxable?
No.
Wedding presents from an employer, IF not given in return for service, are not taxable.
Are retirement gratuities paid by an employer taxable?
Certain retirement gratuities, within limits, are not taxable.
Are scholarships or education grants taxable?
No.
Scholarships or grants received by full-time students are not taxable.
Are war widows’ pensions taxable?
No.
War widows’ pensions are not taxable.
Are state benefits taxable?
Some state benefits are not taxable.
Is the capital part of a purchased life annuity taxable?
No.
The capital part IS NOT taxable.
However, the interest IS taxable.
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: C
Children are subject to income tax on all taxable income.
Children, just like adults, also have a personal allowance.
Therefore, any earned income that exceeds the personal allowance of £12,570 is taxed.
What is the personal allowance?
The personal allowance is the amount of income a UK resident can earn each year before being charged income tax.
How much is the personal allowance in the UK?
Personal allowance in the UK is £12,570
What happens to the personal allowance if income exceeds a certain threshold?
If annual income exceeds an upper threshold, the personal allowance is reduced, potentially to £0.
What is ‘marriage allowance’?
Marriage allowances allows one spouse to transfer part of their personal allowance to the other, ONLY IF neither pays higher or additional rate income tax
Who qualifies for the married couple’s allowance?
Couples qualify if one partner was born before:
6th of April 1935
It reduces tax and is limited to a percentage of the allowance.
What is the blind person’s allowance?
It is an additional allowance for individuals registered as blind.
It CAN be transferred to a spouse or civil partner IF unused.
What is the ‘Personal Savings Allowance’ (PSA)?
PSA is a tax-free allowance that let savers earn interests on savings WITHOUT paying tax.
The amount depends on their income tax band.
IMPORTANT: Additional-rate taxpayers are NOT eligible for PSA.
What is the ‘dividend allowance’ (DA)?
DA allows individuals to earn a certain amount in dividends tax-free.
Dividends above the DA are taxed at special rates, but dividends from ISAs remain tax-free.
What allowances are available for property and trading income?
There are separate allowances for trading and property income, applicable to individuals earning small amounts from activities like: Selling online or renting out space.
If income is below the allowance, it’s tax free.
What are deductions in relation to UK income tax?
Deductions are amounts subtracted from gross income before tax liability is calculated.
What types of pension contributions are deductible?
Certain pension contributions, such as those made to employer-set-up schemes, within specified limits, are deductible.
Are charitable contributions deductible?
Yes.
Certain charitable contributions are deductible from income.
What are allowable expenses for tax purposes?
Allowable expenses are costs incurred in performing employment duties or running a business that meet specific conditions.
What is the condition for allowable expenses for the self-employed?
Expenses must be incurred “Wholly and exclusively for the purpose of trade”
What is the condition for allowable expenses for employees?
Expenses must be incurred “Wholly, exclusively, and necessarily” while doing the job.
What is taxable income?
Income remaining after all relevant deduction have been made from a person’s gross income.
How is tax calculated on taxable income?
The appropriate rate are applied to the taxable income to determine the tax due.
What are the income tax rates and bands until the end of 2027/28?
Basic rate: 20% on £0 - 37,700
Higher rate: 40% on £37,701- 125,140
Additional rate: 45% on £125,141+
What is the starting-rate for savings income?
The starting rate for savings income is 0% on income below the starting-rate limit.
How is income tax applied when income comes from different sources?
(in the correct pecking order)
- Non-savings income (e.g., earned income, pensions, rent)
- Savings income (e.g., interest)
- Dividend income
- Chargeable gains on non-qualifying life assurance policies
Are income tax rates the same in Scotland?
No.
Scotland has different income tax rates.
Do income tax rates differ in Scotland?
Yes.
Scotland applies different income tax rates and bands.
What does it mean for income to be taxed at source?
It means tax is collected by HMRC directly from the person making the payment (i.e., employer), rather than from the recipient of the income (i.e., employee).
What is an example of income taxed at source?
Pay As You Earn (PAYE).
This is where an employer deducts tax from wages or salaries before paying employees.
Are there other type of income taxed at source?
Yes, income from certain trusts is also taxed at source
How do employees pay income tax?
Employees pay income tax through the PAYE system.
What is a tax code, and why is it important?
A tax code reflect the amount an employee can earn without paying tax.
It helps employers calculate the correct amount of tax to deduct, accounting for allowances, exemptions and taxable benefits.
What is a P60, and the is it issued?
A P60 is a form issued to employees in May each year that shows:
- Total tax deducted
- National Insurance Contributions
- Final tax code for the previous tax year
How is income tax calculated for an employee?
Taxable income is calculated by subtracting the personal allowance from the employee’s income
Saira (24) is employed. She has a salary of £27,430. Assume a
personal allowance of £12,570.
Answer: £2,972
CALCULATION:
1. Income: £27,430
2. Income - Personal Allowance: £27,430 - £12,570
3. Taxable Income: £14,860
4. Tax Band: Basic Rate (20%)
5. Tax Calculation: £14,860 × 20%
6. Tax Paid: £2,972
What is a P45, and when is it issued?
A P45 is given to an employee when they leave a job, showing their pay and tax details to date.
It helps the new employer set up the correct tax deductions.
How do self-employed people pay income tax?
Self-employed individuals pay income tax directly to HMRC based on net profits declared from their accounts.
What is the process for self-employed individuals to calculate and submit their tax?
They use self-assessment, where they calculate their tax liability and submit it to HMRC, either online or on paper.
When are tax payments due for self-employed individuals?
Tax and Class 4 NICs are paid in two equal parts:
- 31st JANUARY of the tax year.
- 31st JULY of the tax year.
Any adjustments are made by 31 January following the end of the tax year.
Who else might use self-assessment?*
It applies to the self employed, those with significant investment or rental income, trustees, and legal personal representatives of deceased persons.
What are net profits for the self-employed?
Net profits are the total business income minus allowable expenses and capital allowances, similar to gross income for employees.
Michael (36), who is based in Wales, is self‑employed with gross
profits of £240,000. His allowable business expenses are £40,000.
His personal allowance would have been £12,570 but because his
income is so high, the allowance is reduced by £1 for every £2
that his income exceeds the £100,000 threshold. As a result the
personal allowance is reduced to nil.
Answer: £76,203
CALCULATION:
1. Income: £240,000
2. Less allowable deductions: -£40,000 (business expenses)
3. Net profits: £200,000
4. Taxable income: £200,000
Taxable income broken into tax bands:
£37,700 x 20% = £7,540
£87,440 x 40% = £34,976
£74,860 x 45% = £33,687
Total = £76,203
- Income tax due: £76,203
How is tax paid on savings income?
Interest on deposits is paid gross, and individuals must report it to HMRC via their tax code or self-assessment.
What is the starting-rate for savings income?
0% applies to the first £5,000 for low-income earners.
Reduces as non-savings income increases.
What is the Personal Savings Allowance (PSA)?
Basic-rate taxpayers have a PSA for tax-free savings income.
It’s lower for higher-rate taxpayers, and additional-rate tax payers are NOT eligible for any PSA.
How is the PSA determined?
Based on total income, which determines tax band.
What types of savings income are tax-free?
Income from:
- ISAs
- Some NS&I accounts is tax-free
What happens to savings income paid gross?
Interest from bank and building society accounts is paid gross but may be subject to tax IF it exceeds the personal savings allowance.
How is dividend income taxed?
Dividends are paid gross, and if they exceed the dividend allowance, they are taxed at rates based on the individual’s TAX BAND.
What are the four stages for calculating income tax liability?
- Calculate total income
- Deduct allowable expenses and pension contributions
- Subtract personal allowance and reliefs
- Apply tax rates to the appropriate income bands
What is the order of priority for taxing different types of income?
In order:
- Non-savings income
- Savings income
- Dividends
- Chargeable gains on non-qualifying life assurance policy
What is Gift Aid?
Gift aid allows charities to reclaim the basic-rate tax (20%) on donations, increasing the value of the donation.
For example, a £80 donation is treated as £100.
How does Gift Aid affect a donor’s tax liability?
The donor’s basic-rate tax thresholds are extended by the gross value of the donation.
For example, a £1,600 donation is treated as a gross value £2,000.
Therefore, the donor’s basic-rate tax band is extended by £2,000 to £39,700.
What happens when Ruben makes a gift aid of £800?
The gross value of Ruben’s gift is (£800 / 20%) £1,000.
As a result, his basic-rate tax band is extended by £1,000 to £38,700.
What is payroll giving?
It allows employees to donate from their salary before tax.
How does payroll giving benefit the donor?
Tax relief is applied at the donor’s highest tax rate.
What are Class 1 NICs for employees?
Employees pay a percentage on earnings between the primary threshold and the upper earnings limit, with a reduced percentage on earnings above the upper limit.
Do employers have an upper limit on Class 1 NICs?
No.
Employers pay NIC on employees’ earnings above the secondary threshold, with NO upper limit.
Are employers required to pay NICs for younger employees and apprentices?
No.
Employers don’t pay NICs for employees and apprentices under a certain age on earnings between the primary threshold and the upper earnings limit.
How does the upper earnings limit affect NICs for employees?
Employees pay a reduced percentage on earnings above the upper earnings limit.
Why might employers be exempt from paying NICs for certain employees?
Employers are exempt from paying NICs for employees and apprentices under a certain age on the earnings between the primary threshold and the upper earnings limit.
What happens to mandatory Class 2 NICs after Apri 6th, 2024?
Mandatory Class 2 NICs for self-employed individuals will be abolished.
What was the purpose of Class 2 NICs for self-employed individuals?
Class 2 NICs were flat-rate contributions made by self-employed individuals with income above a small profits threshold, in addition Class 4 NICs.
Can self-employed individuals still pay Class 2 NICs after 2024?
Yes.
Individuals with very low profits or those who wish to access contributory benefits can continue to pay Class 2 NICs voluntarily.
Why might some self-employed individuals continue to pay Class 2 NICs voluntarily?
To maintain access to contributory benefits such as the state pension.
How does the small profits threshold relate to Class 2 NICs?
Self-employed individuals with income above the small profits threshold were required to pay Class 2 NICs, but they can choose to pay voluntarily if their income is below it.
What are Class 3 NICs?
Class 3 NICs are voluntary contributions paid by individuals who want to qualify for the full state pension or sickness benefits
Why might someone need to pay Class 3 NICs?
A person may need to pay Class 3 NICs if they have gaps in their National Insurance record due to a career break or time spent working overseas.
What type of payment are Class 3 NICs?
They are flat-rate contributions.
For 2024/25, the flat-rate is £17.45 per week.
How can someone fill gaps in their National Insurance record for pension benefits?
By paying voluntary Class 3 NICs
Why are Class 3 NICs important for individuals who have lived abroad?
They allow individuals to maintain eligibility for state pension and sickness benefits despite gaps in contributions during their time overseas.
What are Class 4 NICs?
Class 4 NICs are contributions paid by self-employed individuals on their annual profits within specific thresholds.
How are Class 4 NICs calculated above the upper limit?
A reduced rate is applied to profits above the upper limit, similar to Class 1 NICs.
How are Class 4 NICs paid?
They are paid in half-yearly instalments through self-assessment to HMRC.
Why do self-employed individuals pay Class 4 NICs?
Class 4 NICs are required contributions on their profit to cover National Insurance obligations.
How do self-employed individuals manage their NIC payments?
They make payments through the self-assessment system in two instalments each year.
What is the difference between residence and domicile?
Residence refers to where a person lives for tax purposes, often determined by the number of days (i.e., 183 days) spent in the UK each tax year.
Domicile is the country an individual considers their permanent home, even if they live elsewhere temporarily, and affects liability for certain taxes like inheritance tax (IHT).
Outline the different classes of National Insurance contributions.
Class 1: Paid by employees and employers on earnings.
Class 2: Flat-rate contributions for self-employed individuals (abolished after April 2024 but voluntary payments remain).
Class 3: Voluntary contributions to fill gaps in National Insurance records.
Class 4: Paid by self-employed individuals on annual profits, with a reduced rate for profits above the upper limit.
How do the starting-rate band and personal savings allowance work?
Starting-rate band:
Applies to low-income earners and provides a 0% tax rate on savings income up to £5,000 if non-savings income is below the personal allowance plus the starting-rate limit.
Personal savings allowance:
Provides a tax-free allowance for savings income, £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and none for additional-rate taxpayers.
How does a self-employed person pay income tax?
A self-employed person calculates their net profits, deducts allowable expenses, and pays income tax and Class 4 NICs through self-assessment in two instalments, in January and July.
