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FP- Block 1 > Week 1 > Flashcards

Week 1 Flashcards

1
Q

What is Financial Planning

A

Financial planning is a process that determines how you can best meet your life goals through the proper management of your financial affairs

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2
Q

Key to effective Financial Planning

A

Ability to take into account all relevant aspects of your financial situation, and to identify and analyse the interrelationships among sometimes conflicting objectives.

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3
Q

What one word might describe Financial Planning?

A

Lifestyle:
It is a life-long process
It is NOT about making lots of money!
It is NOT the preserve of the rich or the money-grabbing

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4
Q

Goals in Financial Planning

A

1) Covering essentials
2) Ensuring Lifestyle
3) Preparing for the unexpected
4) Leaving a legacy

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5
Q

The Financial Planning Process

A

1) Set your objectives
2) Measure your position
3) Research your options
4) Act
5) Review regularly

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6
Q

The Financial Planning Process: Set your objectives

A
  • Arguably the most important part of a plan
  • Different people have different goals
  • Influenced by many factors
  • Identify then prioritise
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7
Q

The Financial Planning Process: Measure your position

A
  • Assess current financial position
  • Compare income and expenditure – where is the client now?
  • Use of a questionnaire / interview process
  • Review of relevant documentation from third parties
  • Needs concrete facts as well as attitudes and objectives
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8
Q

The Financial Planning Process: Research your options

A

-How do we progress towards these goals
Ascertain risk profile
How do we do this?
-Possible disaster scenarios and associated financial implications
-These could be personal or business related (“what if scenarios”)
-What products are available

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9
Q

The Financial Planning Process: Act

A
  • Put the plan into action

- Implementation

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10
Q

The Financial Planning Process: Review

A

-Must agree on the review procedure and timescales

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11
Q

Financial Planning in Context

A
  • Advice is “an opinion given as to future action”

- Planning is “devising a scheme to achieve a purpose”

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12
Q

In very general terms, financial advice can be differentiated from financial planning by the following:

A
  • Transactional / product-based
  • One-off / short-term
  • Commission based (but consider impact of RDR)
  • No follow up
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13
Q

One of the main problems for individuals is

A

Dealing with the mis-match between financial needs during the life-cycle

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14
Q

What are the common examples of non-taxable income?

A

1) Winnings- e.g. gambling
2) Tax Free Investments-NSCs, ISAs
3) Other- scholarships

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15
Q

Calculating an individual’s income tax – key points…

A

1) UK resident individuals are subject to income tax on worldwide income
2) Husbands and wives are taxed independently (“Independent Taxation” from April 1990)
3) Jointly held assets
4) An individual’s income tax is calculated for a tax year (or “fiscal year”)
- 6 April to 5 April

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16
Q

Qualifying loan interest: Interest on a loan to…

A

1) Buy plant or machinery for partnership us
2) Buy plant or machinery for employment use
3) Buy interest in a close company
4) Buy interest in an employee-controlled company

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17
Q

The Personal Allowance

A

1)£12,570 for 2021/22 (NOTICE THE CHANGE)
2) Restricted PA where “Adjusted Net Income” exceeds £100,000
ANI = Net Income Less gross cash payments to charity and personal pension schemes
3) (If net payment is given, gross payment = cash payment x 100/80)
Restricted by £1 for every £2 of ANI over £100,000
No PA where ANI is £125,140 or above

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18
Q

Marriage Allowance

A

Marriage Allowance lets someone transfer £1,260 of their Personal Allowance to their spouse / civil partner, if…

  • They are married / in a civil partnership
  • They do not pay income tax, or their income is covered by their PA
  • Their spouse / civil partner is a basic rate taxpayer
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19
Q

Income Tax Bands (2021/22)

A

1) £0-£37,700- Basic Rate
2) £37,701-£150,000- Higher Rate
3) £150,001- Additional Rate

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20
Q

Dividend Income rates

A

-£2,000 at 0% (Dividend Allowance)
-7.5% (BR)
-32.5% (HR)
-38.1% (AR)
Irrespective of income level

21
Q

Saving Income Rates

A

-£5,000 at 0% (Starting Rate)
-£1,000/£500 at 0% (PSA)
-20% (BR)
-40% (HR)
-45% (AR)
If SI within first £5,000 of
taxable income

22
Q

NSI Rates

A

-20% (BR)
-40% (HR)
-45% (AR)
Possible trading / property
Allowances (£1,000 each)

23
Q

Finance Act 2016 (FA2016) introduced some important changes to the taxation of both savings and dividend income:

A
  • Personal savings allowance (PSA)

- Dividend allowance

24
Q

Personal Savings Allowance (PSA)

A

-From 6 April 2016, in addition to the 0% savings band individuals are entitled to a PSA as follows:
Basic rate taxpayers (£1,000)
Higher rate taxpayers (£500)
Additional rate taxpayers receive nothing.

The PSA is based on an individual’s ANI and the amount (£1,000 or £500 as applicable) is tax free (NOT exempt!).

Care is needed where ANI is c. £50,270

25
Q

Dividend Allowance

A
  • From 6 April 2016 the dividend tax credit has been replaced by the new dividend allowance.
  • The first £2,000 of dividend income is taxed at 0% for all individuals (irrespective of the rate of tax they pay – contrast PSA).
  • It is important to note that the allowance is NOT an exemption
26
Q

Tax reducers

A

Do not affect income, but reduce tax on income
Key reducers are:
-Venture Capitalist
-Enterprise Investment Scheme (SEED)
-Marriage Couple’s Age Allowance- Available if husband OR wife born before 6 April 1935
Depends on whether marriage was before 5 December 2005 (only rules relating to before will be examined)

27
Q

Marriage Age Allowance

A

1) If you earn £30,400 or less you get the max allowance of 10% of £9,125
2) If you earn £41,590 you get the min allowance of 10% of £3,530
3) You will only get the minimum amount if you earn £41,590 but what if you earn between £30,400-£41,590?-You reduce the marriage age allowance by £1 for every £2 they earn

28
Q

Marriage age allowance example:

A

Michael is 84, married and earns £33,000, calculate how much marriage age allowance he is entitled to:

Salary – lower limit = 33,000 – 30,400 = 2,600

Divide the amount by 2 = 2,600 / 2 = 1,300 (how much we should reduce MAA by)

Max MAA – reduction = 9,125 – 1,300 = 7,825

Michael is entitled to 10% = £782

This amount is deducted from Michael’s tax payable

29
Q

Charitable donations via Gift Aid

A

-Donor (individual) gets tax relief at their highest rate of tax
-Must make gift aid declaration
How tax relief is given:
-Donation is deemed to be net of 20% (basic rate) tax
Higher rate / additional rate tax relief by extending the basic / higher rate bands by gross donation (x 100/80)

30
Q

Gift Aid example

A

Imran had taxable NSI of £50,000 in 2021/22, and donated £3,600 via gift aid. What is his income tax liability?

BRB-£42,200 (£37,700 plus £3,600 x (100/80)
HRB- £154,500 (£150,000 plus £3,600 x (100/80)

NSI- £42,200 @ 20% Tax- £8,440
£7,800 @ 40% Tax-£3,120
=£11,560

31
Q

Benefits in kind

A

Benefits in kind:
-Need to determine the “cash equivalent” of benefit
Tax the cash equivalent as Non-Savings Income (i.e. like employment income)
-General rule for benefits – adjust for non-availability, business use and employee contributions

32
Q

Benefits in kind – cash equivalent?

A 
- General rule – marginal cost to company
Special rules for:
-Provision of living accommodation
-Company car & fuel benefit
-Use of an asset
-Low-interest loans (‘beneficial loans’)
33
Q

Provision of living accommodation – Cash Equivalent

A

Property owned by employer:
-Annual Value, plus
-Additional charge if cost > £75,000 (cost” = original cost plus improvements less EE reimbursements)
(excess x official rate of interest)
-Watch 6 year rule
-(use MV at date employee starts to occupy)
NB: No taxable benefit if job-related accom

34
Q 
Company Car (1) – Cash Equivalent- Provision of a car available for private use is a taxable benefit.
For 2021/22 there are two different tables for rates depending on the car is registered BEFORE or AFTER 6 April 2020.
A 
Car registered BEFORE 6/4/20
-50 g/km       = 14%
-51-54 g/km = 15%
-55 g/km        = 16%
-Every additional 5 g/km add 1%
 -Add 4% for Diesel
-Capped at 37% - 
	Diesel = 140
	Petrol = 160
35
Q 
Company Car (2) – Cash Equivalent- Provision of a car available for private use is a taxable benefit.
For 2021/22 there are two different tables for rates depending on the car is registered BEFORE or AFTER 6 April 2020.
A 
Car registered AFTER 6/4/20 
-50 g/km       = 13%
-51-54 g/km = 14%
-55 g/km       = 15%
-Every additional 5 g/km add 1%
-Add 4% for Diesel
-Capped at 37% - 
	Diesel = 145
	Petrol = 165
36
Q

Company Car – Cash Equivalent

A
  • List price x “relevant percentage” (depends on CO2 emissions)
  • Round down CO2 to nearest 5g/km
  • CO2 55g/km: relevant percentage of either 16% or 15% depending on pre or post registered
  • Increase by 1% for each 5g/km over 55g/km (max 37%)
  • Extra 4% (up to max of 37%) for diesel cars, unless certified to the Real Driving Emissions 2 Standard (RDE2 Standard)
37
Q

Private Fuel – Cash Equivalent

A
  • £24,600 x “relevant percentage” (from company car calc)

- No taxable benefit if employee reimburses FULL cost of private fuel

38
Q

Mileage allowance – Cash Equivalent

A
  • Paid to employees for use of own car on business journeys
  • Mileage allowance taxable if in excess of HMRC limits (see tax tables) – claim allowance if less
  • Tax free amount of 5p/mile if another employee is passenger
39
Q

Asset made available for private use – Cash Equivalent

A

This will create a taxable benefit, which is calculated as the higher of:
-Annual value (20% of MV of asset when first made available)
-Hire charges paid by employer
Add other costs incurred by employer (eg running costs)

40
Q

Beneficial loans – Cash Equivalent

A

Average Method- Average loan balance x
(ORI less interest rate)

Strict Method- Actual loan balance x
(ORI less interest rate)

41
Q

Beneficial Loan- Average Method

A
  • Add together the two loan amounts in a year
    Divide by 2
    Multiply by the ORI
42
Q

Beneficial Loan- Strict Method

A

Treat each loan amount separately

  • Multiply each loan amount by the number of months at that amount divided by 12
  • Multiply that figure by the ORI

Use the lowest figure, however, HMRC can request you use the strict method

43
Q

Classes of NI

A

Class 1- (Primary/Secondary- Class 1A/B paid by employers)
Class 2- paid by self-employed
Class 3- paid voluntary
Class 4- paid by self-employed

44
Q

3 useful tax benefits of planning your finances as a couple: 1)You may be able to pay less Income Tax

A

If married to partner, or in a civil partnership you can transfer up to £1,260 of your Personal Allowance to your spouse or civil partner. This can help to reduce their Income Tax bill by up to £252. Lower earner in partnership must have an income below PA.

45
Q

3 useful tax benefits of planning your finances as a couple: 2) You could pay a lower amount of Capital Gains Tax

A

If you have investments/more than one property, planning finances together can be beneficial. CGT Allowance is £12,300 for 2021/22, if over you will pay between 10% and 28% depending on your earnings and type of asset. You could transfer some of your assets to your partner, meaning that they could use their own allowance, doubling the allowance to £24,600.

46
Q

3 useful tax benefits of planning your finances as a couple: 3) You may be able to reduce your Inheritance Tax liabilities when you pass away

A

You have to pay IHT on estate value over £325,000. If you leave your main residence to your family, this limit is raised by an additional £175,000, bringing the total tax threshold up to £500,000. When the remaining partner passes away, they can add their deceased partner’s nil-rate band to their own, doubling the amount. This means that you can leave up to £1 million of assets in your estate before it is liable to be taxed.

47
Q

Income Tax Computation- Step plan 1-4 (Taxable Income)

A

1) Identify taxable income- NSI, SI, DI
2) Add up each column to reach ‘total income’
3) Deduct allowable deductions (qualifying loan interest/loss relief) to reach ‘net income’
4) Deduct personal allowance (restrict for ‘high earners’) to reach ‘taxable income’.

48
Q

Income Tax Computation- Step plan 5-8 (Income tax due)

A
  1. Tax each source of income at appropriate rates
  2. Add up tax to reach ‘Income tax liability’
  3. Add back child benefit charge / deduct marriage allowance (if relevant).
  4. Deduct tax witheld at source to reach income tax payable /repayable.

FP- Block 1 (6 decks)

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