Topic 3: UK Taxation 1

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 country 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 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.

Answer 3

c) Lottery prizes.

Question 4

In what order of priority is income taxed?

Answer 4

Non savings income, then savings income, then dividend income.

Question 5

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?

Answer 5

True. Blind person’s allowance can be transferred to a spouse/civil partner
if the original recipient does not pay tax or use all 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? For the following questions, use the tax rates, bands and allowances 
for 2020/21.

Answer 6

Class 3.

Question 7

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

Answer 7

The following answers use the tax rates, bands and allowances for 2020/21.
On earnings:
£22,000 – £12,500 (personal allowance) = £9,500
£9,500 × 20% = £1,900
There is no tax on savings income because, as a basic rate taxpayer, Mike
has a personal savings allowance of £1,000.

Question 8

Roopa is a company director. In 2020/21 she draws a salary
of £12,500. She has dividend income of £27,000. Calculate the income tax payable.

Answer 8

Total income is £39,500
Salary falls within personal allowance of £12,500 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 7.5 per cent.
Total tax is £1,875 (£25,000 × 7.5%).

Question 9

Jemma is self employed and is in receipt of blind person’s allowance. In 2020/21, 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 £9,500. Calculate the income tax and Class 4 NICs payable.

Answer 9

Income tax:
£20,000 Gross profit 
(£2,500) Allowable expenses 
£12,500) Personal allowance 
(£2,450) Blind person’s allowance 
Taxable income: £2,550
Tax: £2,550 × 20% = 
£510
Class 4 NICs:
£20,000 – £2,500 = £17,500 taxable profit
£17,500 – £9,500 × 9% = 
£720.00

Question 10

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 10

Tax on earned income:
£75,000 Income
(£12,500) Personal allowance
£62,500 taxable earned income
£37,500 × 20% = £7,500
£62,500 – £37,500 = £25,000 × 40% = £10,000
Savings interest:
£500 (PSA) × 0% = £0
£150 × 40% = £60
Dividend income:
£2,000 (DA) × 0% = £0
£5,000 × 32.5% = £1,625