Topic 3: Questions Flashcards
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 UK 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 type of following is not assessable for income tax purposes?
Lottery prizes
In what order of priority is income taxed?
Non-savings income, then savings income, the dividend income
Blind person’s allowance can be transferred to a spouse or civil partner if the blind person does use the allowance. True or false?
True
Blind persons allowance can be transferred to a spouse/civil partner if the original recipient does not pay tax or use their allowance
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
Saria (24) is employed. She has a salary of £27,430. Her personal allowance is £12,570. Calculate income tax payable
Income: £27,430
Less personal allowance: £12,570
Taxable income: £14,860
£14,860 x 20% = £2,972
Saria’s employer will collect this tax monthly under the PAYE scheme
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. What is his income tax due?
Income: £240,000
Less allowable deductions: -£40,000 (business expenses)
Net profits: £200,000
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
Income tax due: £76,203
As he is self employed he will calculate his own tax and pay HMRC in instalments
Applying the starting-rate band and PSA:
Jamie:
Earned income: £12,720
Taxable earned income: £12,720-£12,570 personal allowance = £150
Savings income: £2,500
Savings income falls within remaining starting-rate band of £4,850 (£5,000-£150)
What is the tax due on savings income?
Nil
Applying the starting-rate band and PSA:
Roisin
Earned income: £29,600
Taxable earned income: £29,600-£12,570 personal allowance = £17,030
Savings income: £2,500
No starting-rate band as total income is above £17,570 (£12,570+ £5,000)
Total earned and saving income is within the basic-rate tax band. What PSA is she eligible for?
What is the tax due on the savings income?
PSA £1,000
Thus £1,000 of her savings income is subject to 0% tax and £1,500 of her savings income is taxable at 20%
Tax due on savings income £1,000 x0%= £0
£1,500 x20%= £300
Applying the starting-rate band and PSA:
Jodie
Earned income £49,000
Taxable earned income £49,000-£12,570 personal allowance = £36,430
Savings income £2,500
There is no starting-rate band as total income is greater than £17,570
Total income is £51,500 (£49,000+£2,500) meaning Jodie pays higher-rate tax. What PSA is she eligible for?
What is her tax due on savings income?
PSA £500, so first £500 of her savings income is subject to 0% tax.
Her taxable earned income is £36,430
£500 of her savings income is subject to 0% tax. A further £770 falls within the remaining basic-rate tax band (£37,700-£36,430-£500= £770
The balance of £1,230 is in the higher-rate tax band
Tax due on savings income
£500x0%=£0
£770x20%=£154
£1,230x40%=£492
Total= £646
Charitable giving
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
Mike earns £22,000. He also receives £500 interest on his savings from a building society deposit account. Calculate the income tax payable.
£22,000-£12,570 personal allowance= £9,430
£9,430 x 20%= £1,886
There is no tax to pay on savings income because as a basic-rate taxpayer her has a personal savings allowance of £1,000
Roopa is a company director. In the current tax year, she draws a salary of £12,570. She had dividend income of £27,000. Calculate the income tax payable.
Total income is £39,570
Salary falls within personal allowance of £12,570 so no tax is paid on this
£2,000 of dividend income is taxable at 0 per cent.
The remaining £25,000 all falls within the basic rate tax band and is taxed at 8.75 per cent
Total tax is £2,187.50 (£25,000 x8.75%)
Jemma is self employed and is in receipt of blind’s person’s allowance of £2,870. In the current tax year her gross profit is £20,000 and she has allowable expenses of £2,500. She has to pay Class 4 NICs at 9 per cent on her taxable profit above £12,570. Calculate the income tax and Class 4 NICs payable.
Income Tax: £20,000 gross profit
(£2,500) allowable expenses
(£12,570) Personal allowance
(£2,870) Blind person allowance
Taxable income: £2,060
Tax: £2,060 x 20%=£412
Class 4 NICs:
£20,000-£2,500=£17,500 taxable profit
£17,500-£12,570 x 9% =£443.70
Ashok’s salary is £75,000 and he is paid savings interest of £650. He also has dividend income of £7,000. Calculate the income tax payable.
Tax on earned income:
£75,000 income
(£12,570) personal allowance
£62,430 taxable earned income
£37,700 x 20%=£7,540
£62,430-£37,700+ £24,730 x 40% =£9,892
Savings Interest:
£500 PSA x 0% = £0
£150 x 40% =£60
Dividend income:
£2,000 DA x 0% = £0
£5,000 x 33.75% = £1,687.50
Explain the difference between residence and domicile?
Residence is based on who is regarded as a UK residence for tax purposes. 183 days in the UK to be regarded as a UK resident for tax purpose.
Domicile is the country that a individual treats as their home. Everyone acquires a domicile of origin at birth. A person can change domicile known as domicile by choice
What is domicile by choice?
Domicile by choice is living in another country intending to stay their permanently (putting down roots)
Name three sources of income that are assessable to tax and three that are not?
assessable to tax: salary/wages from employment including bonuses and commission, pension income, investors income
not assessable to tax: redundancy payments, income from ISA’s, lottery prizes
Explain who issues individuals with their tax code and how the tax code is used
HMRC
The tax code relates to the amount that the employee can earn without paying tax. It looks at allowances, exemptions and adjustments for taxable employee benefits and for amounts overpaid or underpaid from previous tax years
Describe how a self-employed person pays income tax?
Pay income tax directly to HMRC on the basis of a declaration of net profits calculated from their accounts
Income tax and Class 4 NICs is paid in two parts. One on 31 January. Second on 31 July. Class 2 NICs is also paid in a lump sum
Explain how the starting-rate band and personal savings allowance work.
Starting rate for savings income anything below the limit is taxed at 0 per cent
Starting rate of 0 per cent applied to the first £5,000 of savings income. The starting rate band reduces as taxable non-saved income is received.
Starting rate does not apply where income received exceeds personal allowance plus starting-rate band
NICs- Class 1
Paid by employees at a percentage on earning between certain levels, known as the primary threshold and upper earnings limit with a reduced percentage payable on earnings above the limit
Paid by employees on most employees’ earning above a lower limit called the secondary threshold- no upper limit
no employer NICs are paid in respect of employees and apprentice under a certain age on earnings between primary and upper earning limit
NICs- Class 2
Flat rate contributions paid by the self employed if their annual profits exceed the small profit threshold or deemed paid if their annual profits exceed the small profits threshold but are below the lower profits threshold
quoted a weekly amount
Collected through self-assessment in a single lump sum
