Unit 1 - Topic 3 - UK taxation

Question 1

What is the main statute relating to taxation

Answer 1

Income and Corporation Taxes Act 1988

Question 2

What are the 2 other sources of tax law (besides Income and Corporation Taxes Act 1988)?

Answer 2

Statutes Case Law

Question 3

In the UK, what dates do a tax year run from and to?

Answer 3

Runs from 6 April in one calendar year to 5 April in the next.

Question 4

‘Residence’ mainly affects which 2 types of tax?

Answer 4

Income tax Capital gains tax.

Question 5

Any person who is present in the UK for at least ____(?) days in a given tax year is regarded as automatically UK resident for tax purposes

Answer 5

183

Question 6

Where someone is not resident for at least 183 days in a tax year, what is applied?

Answer 6

statutory residence test is applied (unless they are regarded as automatically not UK resident).

Question 7

True or false: A person who is resident and domiciled in the UK will be subject to UK income tax on their worldwide earned and unearned income, whether or not such income is brought into the UK.

Answer 7

True (Similarly, capital gains tax is charged on the realisation of gains anywhere in the world)

Question 8

What is CAPITAL GAINS TAX?

Answer 8

Tax payable on the gain made when certain assets (eg personal property above a specific value, or business assets) are disposed of, usually by selling them.

Question 9

What is EARNED INCOME?

Answer 9

Income from employment or self‐employment (profits, salary, tips, commission, bonuses and pension benefits).

Question 10

What is UNEARNED INCOME?

Answer 10

Income that is not derived from employment or self‐employment (interest/dividends from investments, rental income, trust income, etc).

Question 11

Explain Domicile

Answer 11

Domicile is best described as the country that an individual treats as their home, even if they were to live for a time in another country. This is the domicile of their father on the date of their birth (or the domicile of the mother if the parents are not married).

Question 12

Which tax is mainly affected by domicile?

Answer 12

Inheritance tax (IHT). (If a person is domiciled in the UK, inheritance tax is chargeable on assets anywhere in the world, whereas for persons not domiciled in the UK, tax is due only on assets in the UK.)

Question 13

True or false: People who are not UK‐domiciled but have been resident in the UK for tax purposes in at least 15 of the previous 20 tax years are deemed to be UK‐domiciled for inheritance tax purposes.

Answer 13

True

Question 14

What qualifies you to be a UK resident for tax purposes?

Answer 14

Any person who is present in the UK for at least 183 days in a given tax year is regarded as automatically UK resident for tax purposes.

Question 15

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

Answer 15

b) Antoine, a French surveyor, whose eight‐month contract in Devon with a construction company started in May. c) is not correct because three months of Max’s contract are in one tax year and the rest in the following year. He will not spend 183 days in either tax year in the UK.

Question 16

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 UK 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 16

As Helena is not UK domiciled she will not pay IHT on overseas assets.

Question 17

On which of the following would a child 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 17

c) Any earned income that exceeds their personal allowance. The settlement from their parents (answer d) will be taxed as the parents’ income, the educational grant (answer b) is tax‐free, and they would not pay tax on all of their earned income (answer a), only that which exceeds their personal allowance.

Question 18

What is your Personal tax allowance?

Answer 18

£12,500.

Question 19

People whose annual income exceeds £100,000 have a restricted personal allowance, what is it?

Answer 19

The allowance is reduced by £1 for every £2 they earn above the £100,000 limit

Question 20

What is Marriage allowance?

Answer 20

it is possible for spouses and civil partners to transfer up to 10 per cent of the basic personal allowance, providing the transferor is not liable to income tax, and the recipient is not liable to income tax at the higher or additional rate.

Question 21

What is Married couple’s allowance?

Answer 21

this allowance is available if one partner in a marriage or civil partnership was born before 6 April 1935. In 2019/20, the minimum amount is £3,450, and the maximum is £8,915 but the relief is limited to 10 per cent. This means that a couple’s tax bill could be reduced by between £345 and £891.50.

Question 22

What is Blind person’s allowance?

Answer 22

this allowance of £2,450 is 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 23

What is Personal savings allowance (PSA) ?

Answer 23

this enables savers to receive a certain amount of interest tax‐free. For the 2019/20 tax year, the first £1,000 of savings interest is tax‐free for basic‐rate taxpayers. The first £500 of savings interest is tax‐free for higher‐rate taxpayers and there is no tax‐free interest allowance for additional‐rate taxpayers.

Question 24

What is Dividend allowance (DA)?

Answer 24

where an individual’s aggregate dividend income in a tax year falls within the DA, no tax is payable. In the 2019/20 tax year the DA is £2,000.

Question 25

What are Allowances for property and trading income?

Answer 25

There are two separate allowances of £1,000, one for trading income and one for property income. The allowances apply to those who, for example, make small amounts of money by selling on e‐bay or by renting a room in their house or a parking space. If trading/property income is less than £1,000 then no tax is payable on that income; if more than £1,000 then the individual has the choice to either deduct the allowance from trading/property income or calculate profit in the usual way and deduct allowable expenses.

Question 26

Name 3 types of deductions

Answer 26

certain pensions contributions certain charitable contributions allowable expenses

Question 27

What are the rates and bands of income tax?

Answer 27

Basic rate - 20% - 0–37,500 Higher rate - 40% - 37,501–150,000 Additional rate - 45% - 150,001+

Question 28

What is the set set order in which income tax is applied?

Answer 28

1) Non‐savings income (earned income, rent received, pension income etc) 2) Savings income. 3) Dividends. 4) Chargeable gains on a non‐qualifying life assurance policy.

Question 29

Self‐employed people pay their income tax and what 2 other things in two equal parts?

Answer 29

Class 2 and 4 NICs

Question 30

The first payment is due on 31 _______ of the tax year in which their business year ends; the second is due on 31 _______, six months later.

Answer 30

January July

Question 31

What is Gift Aid?

Answer 31

the charity can recover the basic‐rate tax (20 per cent) that is assumed to have been paid on the amount of the gift, increasing the value of the net gift by 25 per cent.

Question 32

What is Payroll giving?

Answer 32

This enables employees to make tax‐efficient gifts by having a charitable gift deducted from their salary before income tax is charged. By making a gift in this way, tax relief is granted on the value of the gift at the individual’s highest rate of income tax. So, someone who earns £60,000 annually and gives £1,000 to charity via payroll will only be deemed to have a gross income of £59,000.

Question 33

What are National Insurance contributions?

Answer 33

National Insurance contributions are a form of taxation in everything but name. They are in effect a tax on earned income and are payable in different ways according to whether the earner is employed or self‐employed.

Question 34

What are the different `NIC classes?

Answer 34

Class 1,2,3 &4. (Self employed pay class 2 and 4)

Question 35

What is the personal savings allowance (psa) for 2019/2020?

Answer 35

The first £1000 of savings interest is tax free for basic rate taxpayers The first £500 of savings interest is tax free for higher rate taxpayers There is no tax free allowance for higher/additional rate taxpayers

Question 36

Outline class 3 NIC

Answer 36

Voluntary contributions that can be paid by people who would not otherwise be entitled to the full state pension or sickness benefit. This can occur because a person has, for instance, taken a career break or spent some time working overseas. They are flat rate contributions.

Question 37

What is a blind persons allowance?

Answer 37

£2450 (if not used by individual can be passer to spouse or civil partner)

Question 38

Which deductions are taxpayers permitted to make from their gross income before their tax liability is calculated?

Answer 38

Certain pensions contributions Certain charitable contributions Allowable expenses

Question 39

How do self employed people pay income tax?

Answer 39

They pay income tax and class 4 NIC in two equal parts. The first is due January 31st of the tax year in which their business year ends; the second is due on 31st July, six months later.

Question 40

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

Answer 40

False

Question 41

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

Answer 41

True

Question 42

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 42

c) Lottery prizes.

Question 43

In what order of priority is income taxed?

Answer 43

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

Question 44

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 44

True

Question 45

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 45

Class 3.

Question 46

Outline Class 1 National Insurance Contributions

Answer 46

Paid by employees at 12% on earnings between certain levers, known as the primary threshold and the upper earnings limit with a reduced level of 2% payable on earnings above the upper limit. They are also paid by employers at 13.8% on most employees’ earnings above a lower limit called the secondary threshold - but with no upper limit. No employer NICs are paid in respect of employees aged under 21 and apprentices under 25 on earnings between the primary threshold and the upper earnings limit.

Question 47

Outline Class 2 National Insurance Contributions

Answer 47

Flat-rate contributions paid by the self-employed if their annual profits exceed the small profits threshold. They are quoted as a weekly amount. They are collected through self-assessment.

Question 48

Outline Class 3 National Insurance Contributions

Answer 48

Voluntary contributions that can be paid by people who would not otherwise be entitled to the full state pension or sickness benefits. This can occur because a persona has, for instance, taken a career break or spent some time working overseas. They are flat-rate contributions.

Question 49

Outline Class 4 National Insurance Contributions

Answer 49

Additional contributions payable by self-employed people on their annual profits between specified minimum and maximum levers with a reduced rate payable above the upper limit, as for Class 1. They are paid to HMRC in half-yearly instalments by self-assessment.

Question 50

What is the 2019/20 annual dividend allowance and tax rates on dividend income for exceeding this allowance?

Answer 50

Dividend allowance £2000, for dividend income exceeding allowance, tax rates are taxed at: - 7.5% falling in the basic-rate tax band - 32.5% falling in the higher-rate tax band - 38.1% falling in the additional-rate tax band

Question 51

What is the Personal Savings Allowance (PSA) for 2019/20?

Answer 51

The first £1000 of savings interest is tax free for basic rate taxpayers. The first £500 of savings interest is tax free for higher rate taxpayers. There is no tax-free interest allowance for higher rate taxpayers.

Question 52

How is Residence determined for tax purposes?

Answer 52

Any person who is present in the UK for at least 183 days in a given tax year is regarded as automatically UK resident for tax purposes. Where someone is not resident for at least 183 days in a tax year, the statutory residence test is applied (unless they are regarded as automatically not UK resident). This determines whether or not they will be treated as resident for a particular tax year.

Question 53

Define Capital Gains Tax

Answer 53

Tax payable on the gain made when certain assets (eg personal property above a specific value, or business assets) are disposed of, usually by selling them.

Question 54

Define Earned income.

Answer 54

Income from employment or self-employment (profits, salary, tips, commission, bonuses and pension benefits).

Question 55

Define Unearned income.

Answer 55

Income that is not derived from employment or self-employment (interest/dividends from investments, rental income, trust income, etc).

Question 56

What is Domicile?

Answer 56

Domicile is best described as the country that an individual treats as their home, even if they were to live for a time in another country.

Question 57

What does Domicile affect?

Answer 57

Domicile mainly affects liability to inheritance tax (IHT). If a person is domiciled in the UK, inheritance tax is chargeable on assets anywhere in the world, whereas for persons not domiciled in the UK, tax is due only on assets in the UK. People who are not UK-domiciled but have been resident in the UK for tax purposes in at least 15 of the previous 20 tax years are deemed to be UK-domiciled for inheritance tax purposes.

Question 58

What is the Personal allowance in the 2019/20 tax year?

Answer 58

£12,500. People whose annual income exceeds £100,000 have a restricted personal allowance. The allowance is reduced by £1 for every £2 they earn above the £100,000 limit.

Question 59

What is the Marriage allowance in the 2019/20 tax year?

Answer 59

It is possible for spouses and civil partners to transfer up to 10% of the basic personal allowance, providing the transferor is not liable to income tax, and the recipient is not liable to income tax at the higher or additional rate.

Question 60

What is the Married couple’s allowance in the 2019/20 tax year?

Answer 60

This allowance is available if one partner in a marriage or civil partnership was born before 6 April 1935. In 2019/20, the minimum amount is £3,450, and the maximum is £8,915 but the relief is limited to 10%. This means that a couple’s tax bill could be reduced by between £345 and £891,50.

Question 61

What is the Blind person’s allowance in the 2019/20 tax year?

Answer 61

This allowance of £2,450 is available to those registered as blind with a local authority. If the allowance annot be used by the individual, it can be transferred to their spouse or civil partner.

Question 62

What is the Allowances for property and trading income in the 2019/20 tax year?

Answer 62

There are two separate allowance of £1,000, one for trading income and one for property income. The allowances apply to those who, for example, make small amounts of money by selling on e-bay or by renting a room in their house. If trading/property income is less than £1,000 then the individual has the choice to either deduct the allowance from trading/property income or calculate profit in the usual way and deduct from allowable expenses.

Question 63

Which deductions are taxpayers permitted to make from their gross income before their tax liability is calculated?

Answer 63

• Certain pensions contributions - Certain charitable contributions - Allowable expenses

Question 64

What the the income tax rates and bands of income for the 2019/20 tax year?

Answer 64

Basic rate - 20% (0 - 37,500) Higher rate - 40% (37,501 - 150,000) Additional rate - 45% (150,000+)

Question 65

How do self-employed people pay income tax?

Answer 65

Self-employed people pay their income tax and Class 4 NICs in two equal parts. The first payment is due on 31 January of the tax year in which their business year ends; the second is due on 31 July, six months later.

Question 66

What is the tax threshold and rate for savings income for those on low income?

Answer 66

For those on low income a starting rate of 0% applies to the first £5,000 of savings income. However, for every £1 of taxable non-savings income, the starting-rate band reduces by £1

Question 67

What is Payroll giving?

Answer 67

This enables employees to make tax-efficient gifts by having a charitable gift deducted from their salary before income tax is charged. By making a gift in this way, tax relief is granted on the value of the gift at the individual’s highest rate of income tax.