Unit 1 Topic 3 Flashcards
What is the difference between resident and domicile ?
Residence refers to the country where an individual is living and determines liability for income tax and capital gains tax. The specific rules vary, but in the UK, spending 183 days or more makes you a tax resident. Other factors like employment, property ownership, and family ties also play a role in determining UK tax residence status.
Domicile is the country an individual considers their permanent home. It is usually acquired at birth based on parental domicile, but can change if someone moves abroad intending to reside there permanently. Domicile status mainly affects inheritance tax liability.
If a person is UK-domiciled, inheritance tax applies to their worldwide assets. If non-domiciled, only UK assets have inheritance tax. An individual living abroad for 15+ of last 20 years is deemed UK-domiciled for inheritance tax purposes.
What is reciprocal agreement
To prevent double taxation, the UK has reciprocal agreements with many countries. These treaties specify which country can tax particular sources of income and capital gains. Some income/gains are only taxed in one jurisdiction under the treaties. In other cases, overseas tax paid offsets the UK tax due on the same income/gains.
What incomes are not taxable
-ISA interest
- Certain state benefits
- Redundancy payments under £30k
- Scholarships for full-time students
- Certain pensions and insurance payouts
- Winnings from authorised lotteries
how tax is paid.?
Employees have income tax deducted automatically under PAYE. Employers receive tax codes from HMRC specifying allowances and consider these when deducting tax from salary. Tax codes are individualized based on circumstances.
Self-employed individuals pay HMRC directly based on profits. They calculate total taxable income by deducting allowable business expenses from total revenue.
How savings , interest and dividend are taxed ?
For savings, interest and dividends:
- ISA interest is tax-free along with some NS&I and National Savings accounts
- Other savings accounts are paid gross so tax must be calculated and paid
- Dividends are taxed after non-savings income with allowance considered
How is income calculated?
- Calculate total income from all sources
- Deduct allowable expenses like pension contributions
- Apply personal allowances
- Tax the income slices at the appropriate rates - 20%, 40%, 45%
What is gift aid ?
Is charity donations through the gift aid.
Gift Aid means the charity can claim back basic rate tax on the donation from HMRC. This makes a £100 donation worth £125 to the charity (£100 from donor + £25 tax reclaimed).
The donation amount is also added to the individual’s tax thresholds if a basic rate taxpayer. This can keep them in a lower tax bracket.
What is national insurance contributions?
National Insurance Contributions (NICs)…
NICs are compulsory payments by employers, employees and self-employed toward funding state benefits and the NHS.
What are the 4 main different classes of national insurance contributions ?
Class 1: Employees above the NIC lower earnings limit. Also paid by employers based on salary.
- Class 2: Flat rate contributions for self-employed over small profits allowance.
- Class 3: Voluntary contributions to fill NIC gaps to qualify for certain benefits.
- Class 4: Additional profit-based contributions for self-employed over the lower and upper profit limits.
What is Personal allowance
T h e a m o u n t y o u c a n e a r n
b e f o r e y o u p a y a n d t a x o n
y o u r i n c o m e . H o w m u c h t a x
y o u p a y a f t e r t h a t d e p e n d s
o n t h e t a x b a n d i n g y o u f a l l
i n t o ( s e e i n c o m e T a x T a b l e)
What is saving allowance
T h i s r e l a t e s t o h o w m u c h
i n t e r e s t y o u c a n e a r n o n
y o u r s a v i n g s . I t ’ s £ 1 , 0 0 0 f o r
a b a s i c r a t e t a x p a y e r a n d
£ 5 0 0 f o r a h i g h e r r a t e t a x
payer
What is capital gains tax
This is the amount of capital gains tax you can make take tax free each year
What is dividend allowance
ThIs allows you to earn dividend income tax-free up to an amount
What is marriage allowance?
Is allows one spouse or civil partner to transfer some of their personal tax allowance to their partner , if certain conditions are meet . This can reduce their tax bill
What is married couple allowance?
Is available to married couples and civil partners where one partner was born before 6 April 1935. To qualify the higher earner must pay basic tax rate and the Lower earner must normally pay no tax or tax below the basic rate
