Topic 3

Question 1

What is the main statute relating to taxation in the UK?

Answer 1

The Income and Corporation Taxes Act 1988.

Question 2

What are the sources of tax law in the UK?

Answer 2

Statutes (legislation passed by Parliament) and case law (law established by decisions made by judges in court cases).

Question 3

What is the purpose of the Finance Bill?

Answer 3

The Finance Bill is published each year following the Budget, containing the government’s taxation proposals. Once approved by Parliament and receiving Royal Assent, it becomes a Finance Act and the new tax measures take effect on the dates set out in the legislation.

Question 4

What is a tax year in the UK?

Answer 4

A tax year (also called a fiscal year) runs from 6 April in one calendar year to 5 April in the next.

Question 5

What factors determine a person’s liability to pay income tax, capital gains tax (CGT), and inheritance tax (IHT) in the UK?

Answer 5

Depends on their residence or domicile according to UK law.

Question 6

How is UK residence determined for tax purposes?

Answer 6

A person is regarded as automatically UK resident for tax purposes if they are present in the UK for at least 183 days in a given tax year. If they are not, the statutory residence tests are applied to determine residency.

Question 7

What taxes are affected by residence status in the UK?

Answer 7

Income tax and Capital Gains Tax (CGT) are mainly affected by residence. A UK resident and domiciled individual will be subject to UK income tax on their worldwide income and CGT on worldwide gains.

Question 8

How do reciprocal tax treaties (double taxation agreements) work?

Answer 8

Reciprocal tax treaties ensure individuals are not taxed twice on the same income or gains. In some cases, income is only taxed in one country. In other cases, it is taxed in both countries, but overseas tax paid can be deducted from the UK tax liability.

Question 9

What is Capital Gains Tax (CGT)?

Answer 9

CGT is tax payable on the gain made when certain assets (such as personal property above a specific value or business assets) are disposed of, usually by selling or gifting them.

Question 10

What is earned income?

Answer 10

Income from employment or self-employment, including profits, salary, tips, commissions, bonuses, and pension benefits.

Question 11

What is unearned income?

Answer 11

Income that is not derived from employment or self-employment, such as interest/dividends from investments, rental income, and trust income.

Question 12

What is residence?

Answer 12

Residence refers to the country where an individual lives and is present for tax purposes.

Question 13

What is income tax and why is it important?

Answer 13

Income tax is one of the main sources of government revenue. It is due from individuals on income received in a tax year, including income from employment, self-employment, pension income, rental income, and investment income such as interest and dividends.

Question 14

What types of income are subject to income tax?

Answer 14

Salary/wages from employment (including bonuses and commissions)
Pension income (including state pension benefits)
Profits from a trade or profession
Tips
Interest on bank deposits
Dividends from companies
Income from government stocks, local authority stocks, and corporate bonds
Income from trusts
Rents and income from property
Taxable employee benefits (e.g., company cars or medical insurance)

Question 15

What types of income are NOT subject to income tax?

Answer 15

Redundancy payments (if below the threshold)
Shares given in a Share Incentive Plan
Interest from NS&I Savings Certificates
Income from ISAs
Certain gambling profits
Lottery prizes
Wedding presents and certain gifts from an employer
Certain retirement gratuities
Scholarships for full-time students
War widows’ pensions
Certain state benefits

Question 16

How is a child’s income treated for tax purposes?

Answer 16

The income of a child arising from a settlement or arrangement made by their parents is treated as the parents’ income for tax purposes. The child’s unused allowances cannot be set against this income.

Question 17

What is personal allowance in the UK?

Answer 17

The amount of income that can be received each year before income tax is charged. If an individual’s annual income exceeds a certain threshold, their personal allowance may be reduced, sometimes to zero.

Question 18

What is the marriage allowance?

Answer 18

Allows an individual to transfer part of their personal allowance to their spouse or civil partner, provided the transferor is not liable to income tax, and the recipient is not liable to income tax at the higher or additional rate.

Question 19

What is the married couple’s allowance?

Answer 19

Available if one partner in a marriage or civil partnership was born before 6 April 1935. It is a tax reducer, limited to a percentage of the applicable allowance amount.

Question 20

What is the blind person’s allowance?

Answer 20

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 21

What is the personal savings allowance (PSA)?

Answer 21

A tax-free allowance that enables savers to earn interest on savings without paying tax. The amount depends on the individual’s marginal rate of income tax, and there is no PSA for additional-rate taxpayers.

Question 22

What is the dividend allowance (DA)?

Answer 22

Allows individuals to receive a certain amount of dividend income each year tax-free. Any dividend income above this threshold is taxable, but special rates apply. Dividends on shares held in an ISA are tax-free.

Question 23

What are the allowances for property and trading income?

Answer 23

“Micro-entrepreneurs” who earn property or trading income are entitled to allowances for each. If income from trading or property is less than the allowance, no tax is payable. If income exceeds the allowance, the individual can either deduct the allowance or calculate profit in the usual way and deduct allowable expenses.

Question 24

What deductions can be made from gross income before calculating tax liability?

Answer 24

Deductions include certain pension contributions (within specified limits), certain charitable contributions, and allowable expenses (such as costs incurred in carrying out one’s employment).

Question 25

What are allowable expenses for the self-employed?

Answer 25

For the self-employed, allowable expenses must be incurred "wholly and exclusively for the purpose of trade."

Question 26

What are allowable expenses for employed persons?

Answer 26

For employed persons, allowable expenses must be incurred "wholly, exclusively and necessarily" while doing the job.

Question 27

What is taxable income?

Answer 27

The amount remaining after all relevant deductions have been made from a person’s gross income. The appropriate tax rate(s) is then applied to this amount to calculate the tax due.

Question 28

How are income tax rates and bands determined?

Answer 28

Income tax rates and bands are reviewed by the government each year, with any changes announced in the Budget and included in the subsequent Finance Act.

Question 29

What are the income tax rates and bands for the UK until the end of 2027/28?

Answer 29

Basic rate 20%: £0–37,700 Higher rate 40%: £37,701–125,140 Additional rate 45%: £125,141+

Question 30

What is the starting-rate for savings income in the UK?

Answer 30

The starting-rate for savings income, including interest from bank and building society accounts, is taxed at 0% for income below a certain limit.

Question 31

How does income tax apply when income comes from different sources?

Answer 31

1. Tax is first calculated on non-savings income (earned income, self-employed net profits, pension income, rent). 2. Then, it is applied to savings income (interest). 3. Next, it is applied to dividends. 4. Finally, any chargeable gains on non-qualifying life assurance policies are included in the calculation.

Question 32

What does "tax collected at source" mean?

Answer 32

The person making the payment deducts the tax before paying the recipient.

Question 33

What is an example of income tax being collected at source?

Answer 33

PAYE (Pay As You Earn), where employers deduct tax from employees' wages and salaries before paying them the net amount.

Question 34

Are there other types of income that are taxed at source?

Answer 34

Yes, some types of income, such as income from certain trusts, are taxed at source.

Question 35

How do employees pay income tax under the PAYE system?

Answer 35

Employees pay income tax through the PAYE system, where employers calculate the tax due using HMRC tables, deduct the appropriate amount from wages or salary, and pass it to HMRC.

Question 36

What is a tax code used for?

Answer 36

A tax code determines the amount an employee can earn without paying tax, taking into account allowances, exemptions, and adjustments for benefits in kind and tax overpayments or underpayments from previous years.

Question 37

What is a P60 and when is it issued?

Answer 37

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

Question 38

What is a P45 and when is it provided?

Answer 38

A P45 is provided to an employee when they leave an employer. It includes information such as the employee's name, tax code, total pay and tax due to date, and is sent to HMRC. The new employer uses it to complete a new tax deductions working sheet for the employee.

Question 39

How do self-employed people pay income tax?

Answer 39

Self-employed people pay income tax directly to HMRC based on a declaration of net profits, calculated from their business accounts. Net profits are the total income minus allowable business expenses and capital allowances.

Question 40

What is self-assessment?

Answer 40

Self-assessment is the process by which self-employed people (and others) calculate their own income tax liability and submit their figures online to HMRC for approval. HMRC may calculate the tax for paper submissions.

Question 41

How do self-employed people make payments for income tax and National Insurance?

Answer 41

Self-employed people pay income tax and Class 4 NICs in two equal parts: the first payment is due on 31 January of the tax year, and the second is due on 31 July. Any under or overpayment is rectified on the 31 January following the end of the tax year.

Question 42

Who might be required to use self-assessment?

Answer 42

Self-assessment may apply to the self-employed, those with investment income exceeding relevant allowances, people receiving rental income from UK land and property, trustees, and legal personal representatives of deceased persons.

Question 43

How is tax applied to savings income?

Answer 43

Tax on savings income is applied through the starting rate of 0% for the first £5,000 of savings income, reducing as taxable non-savings income increases. For basic-rate and higher-rate taxpayers, a personal savings allowance (PSA) applies, making savings income within certain limits tax-free.

Question 44

How does the starting rate for savings income work?

Answer 44

The starting rate for savings income is 0% on the first £5,000. However, it reduces as taxable non-savings income increases and does not apply if the total income exceeds the personal allowance plus the starting-rate band.

Question 45

How is eligibility for the personal savings allowance (PSA) determined?

Answer 45

Eligibility for the PSA depends on the individual’s total income. The PSA is available to basic-rate taxpayers, and a lower allowance applies to higher-rate taxpayers. All income is considered when determining if someone qualifies for the PSA.

Question 46

What is the process for calculating income tax liability?

Answer 46

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

Question 47

How does Gift Aid benefit both charities and donors?

Answer 47

Gift Aid allows charities to reclaim the basic-rate tax (20%) on donations, increasing the gift’s value. Donors also get their basic- and higher-rate tax thresholds extended by the gross value of the gift.

Question 48

How does Gift Aid increase the value of a donation?

Answer 48

When a donor gives £80, the donation is treated as £100 because the charity can reclaim £20 from HMRC, effectively increasing the gift’s value by 25%.

Question 49

What happens to a taxpayer’s income tax band when they make a Gift Aid donation?

Answer 49

The basic-rate and higher-rate tax thresholds are extended by the gross value of the gift, allowing more income to be taxed at a lower rate.

Question 50

How does payroll giving work?

Answer 50

Payroll giving allows employees to donate to charity directly from their salary before income tax is deducted, giving them tax relief at their highest rate of income tax.

Question 51

What are National Insurance Contributions (NICs)?

Answer 51

NICs are a form of taxation on earned income, paid differently depending on whether a person is employed or self-employed.

Question 52

How are Class 1 NICs paid?

Answer 52

Paid by employees on earnings between the primary threshold and upper earnings limit, with a reduced rate above this limit. Paid by employers on employees' earnings above the secondary threshold, with no upper limit. No employer NICs for employees and apprentices under a certain age on earnings within the primary threshold and upper earnings limit.

Question 53

What happened to Class 2 NICs from 6th April 2024?

Answer 53

Mandatory Class 2 NICs for self-employed individuals were abolished, but those below a certain profit threshold or paying voluntarily can still contribute.

Question 54

What are Class 3 NICs, and who pays them?

Answer 54

Voluntary contributions made by people who do not qualify for the full state pension or sickness benefits. Often paid by individuals taking a career break or working abroad. These are flat-rate contributions.

Question 55

Who pays Class 4 NICs, and how are they calculated?

Answer 55

Paid by self-employed individuals on annual profits between a minimum and maximum level. A reduced rate is applied to profits above the upper limit. Paid to HMRC in half-yearly instalments via self-assessment.