Topic 3: Questions

Question 1

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

Answer 1

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 2

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

Answer 2

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 3

Which type of following is not assessable for income tax purposes?

Answer 3

Lottery prizes

Question 4

In what order of priority is income taxed?

Answer 4

Non-savings income, then savings income, the dividend income

Question 5

Blind person’s allowance can be transferred to a spouse or civil partner if the blind person does use the allowance. True or false?

Answer 5

True

Blind persons allowance can be transferred to a spouse/civil partner if the original recipient does not pay tax or use their allowance

Question 6

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 6

Class 3

Question 7

Saria (24) is employed. She has a salary of £27,430. Her personal allowance is £12,570. Calculate income tax payable

Answer 7

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

Question 8

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?

Answer 8

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

Question 9

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?

Answer 9

Nil

Question 10

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?

Answer 10

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

Question 11

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?

Answer 11

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

Question 12

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 …

Answer 12

£1,000 to £38,700

Question 13

Mike earns £22,000. He also receives £500 interest on his savings from a building society deposit account. Calculate the income tax payable.

Answer 13

£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

Question 14

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.

Answer 14

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%)

Question 15

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.

Answer 15

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

Question 16

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.

Answer 16

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

Question 17

Explain the difference between residence and domicile?

Answer 17

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

Question 18

What is domicile by choice?

Answer 18

Domicile by choice is living in another country intending to stay their permanently (putting down roots)

Question 19

Name three sources of income that are assessable to tax and three that are not?

Answer 19

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

Question 20

Explain who issues individuals with their tax code and how the tax code is used

Answer 20

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

Question 21

Describe how a self-employed person pays income tax?

Answer 21

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

Question 22

Explain how the starting-rate band and personal savings allowance work.

Answer 22

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

Question 23

NICs- Class 1

Answer 23

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

Question 24

NICs- Class 2

Answer 24

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

Question 25

NICs- Class 3

Answer 25

Voluntary Contributions that can be paid by people who would not otherwise be entitled to the full state pension or sickness benefits e.g working overseas or career break

Flat rate contributions

Question 26

NICs- Class 4

Answer 26

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

Paid to HMRC in half-yearly instalments by self-assessment

Question 27

Which of the following people would be most likely to be 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 Jan for a seven-month teaching contract.
d. Brenda, who spends 180 days a year in the UK and the remainder in the USA.

Answer 27

Antoine, a French surveyor, whose eight-month contract in Devon with a construction company started in May.

Question 28

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 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 28

Overseas property owned by Helena, who is UK resident but not UK domiciled nor deemed domiciled.

Question 29

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 29

All earned income- only if exceeds their personal allowance

An educational grant-tax free
c. Any earned income that exceeds their personal allowance

A settlement from their parents- this is taxed as the parents’ income

Question 30

Personal allowance

Answer 30

Determines the rate above which income tax is charged

Annual income exceeding an upper threshold have their PA reduced depending on how much their earnings exceed the threshold

Question 31

Marriage Allowance

Answer 31

Spouse or civil partner can transfer part of their PA

The transferor can not be liable to income tax at all

The recipient is nit liable to income tax at the higher or additional rate

Question 32

Married Couple’s Allowance

Answer 32

Available if one partner in a marriage of civil partnership was born before 6 April 1935

Provided as a tax reduction

Is limited to a percentage of the applicable allowance amount

Question 33

Blind Persons Allowance

Answer 33

Registered as blind with the local authority

If unable to be used by the individual it can be transferred to a spouse or civil partner

Question 34

Personal Savings Allowance

Answer 34

Tax-free allowance

Enable savers to earn interest on savings without paying tax on the interest

Allowance is depended on individuals’ income tax band

No PSA for additional- rate taxpayers

Question 35

Dividend allowance

Answer 35

Dividend income is received each year

Any dividend income above the DA is taxable

Special rates apply to this income

Dividends on any shares held in an ISA are tax free

Question 36

Allowances from property and trading income

Answer 36

Main income from property or trading income are entitled to additional allowances. Trading income and Property income

If income is less than the allowance no tax is payable on that income

If income is more than the allowance, they can either deduct the allowance from trading/property income or calculate profit in the usual way and deduct allowable expenses

Question 37

Summarise deductions

Answer 37

Taxpayers are permitted to make certain deductions from their gross income before their tax liability is calculated
Theses are:
- Certain pension contributions: (within specified limits)
- Certain charitable contributions
- Allowable expenses: costs incurred carrying out employment

Self employed allowable expenses are for the purpose of trade

After deductions have been made from gross income, remaining is the taxable income

The remaining taxable income is the amount the tax rate is applied to calculate tax due

Question 38

Basic rate tax and income band

Answer 38

20%

0-37,700

Question 39

Higher rate tax and income band

Answer 39

40%

37-701-125,140

Question 40

Additional rate tax and income band

Answer 40

45%

125,141+