week 9: personal taxes 2 Flashcards
What is included in employment income?
Employment income including all salaries, fees, wages etc. [Inc. tips, Benefits in Kind (Non-wage receipts in return for labour e.g., car, accommodation etc) and pensions income /taxable state benefits]
What is the main different between emplyment and self employment?
Contract of service = employment
vs.
Contract for services = self employment
What are other factors that determine if youre employed vs self employed?
degree of control exercised over person doing work
whether they must accept further work
whether the other party must offer further work
whether they provide their own equipment
whether they hire their own helpers
what degree of financial risk they take on
whether they can profit from sound management
whether they can work when they choose
What are some ITEPA allowable dedecutions?
Contributions / premiums to approved occupational pension schemes
Subscriptions to approved professional bodies if relevant to employment
Charity payments using payroll deduction scheme
VERY few others - ‘wholly, exclusively and necessarily in performance of the duties of employment’ (rules are much more stringent than for self employment).
e.g. specialist clothing, travelling expenses whilst working etc. but food expenses usually not allowable
What are the two Income Tax Collection Systems?
The systems by which Income Tax is collected in the UK are:
1- The self-assessment system
2- PAYE System
What is the PAYE System?
The PAYE System is where the Tax payer is given a ‘code’ which allows for:
Personal allowance
Small amounts of other income
Deductible amounts such as expenses
Employer deducts the appropriate tax and NIC from salary for that code each pay day.
Employer pays the tax to HMRC.
If fails to do so must pay over tax himself and possible penalty.
Most employees don’t need to fill in a tax return
UK system is cumulative (Unlike the systems in most other countries)
What are the two main forms for PAYE?
Information from last employer needed when move from one job to another (P45) to show earnings/tax paid to date in tax year
Employer gives employee a P60 form at end of each year to explain tax deducted on their behalf
What are the pros and cons of PAYE?
Advantages:
Very accurate
Update the code
Income not subject to withholding tax
Disadvantage:
Difficult to maintain
Systems adjustment
Q: Who is liable to pay National Insurance Contributions (NIC)?
A: People over 16 and under pension age (currently 66; will be 67 by 2028).
Q: What are primary NIC contributions?
A: Paid by employees on earnings and on benefits in kind that are readily converted into cash.
Q: What are secondary NIC contributions?
secondary NIC contributions are paid by employees
Q: What are Class I NICs?
Class I NICs are Paid by both employees (primary) and employers (secondary) on earnings.
Q: What are Class IA NICs?
Class IA NICs are Paid by employers on benefits in kind (excluding childcare) at a rate of 13.8%.
What is Class 2 NIC?
Class 2 NIC is For the self-employed: £3.45 per week.
Q: What is Class 3 NIC?
Class 3 – Voluntary £17.45 PW
Q: What is Class 4 NIC for the self-employed?
Class 4 NIC for the self-employed:
6% on profits between £12,570 and £50,270 per year.
2% on profits over £50,270.
What counts as earnings for NIC purposes?
Earnings include amounts before pension scheme contributions, expenses paid by the employee, payroll giving, and tips.
They exclude benefits in kind not readily converted into cash.
Q: How is National Insurance calculated?
National Insurance is calculated According to earnings in a contribution period (either weekly or monthly).
Is National Insurance a cumulative or non-cumulative system?
national insurance is Non-cumulative, except for company directors, who are assessed on an annual basis.
Q: What does it mean to be “contracted out” of National Insurance?
Employees in an authorised salary-related pension scheme used to pay a lower rate (contracted-out rate).
Note: This no longer applies to employees, only employers can be contracted out
What are the Class I National Insurance Contributions rates?
|Employees |employers
0-£242 (PT) | 0% | 0%
0-175 ST
242.01- 967 | 8% | 13.8%
over 175.01
over 967 | 2% | 13.8%
(50,270)
What is trading income?
trading income Includes “the profits of a trade, profession or vocation”
“Trade normally involves the exchange of goods or services for reward… ..there must be something which the trade offers to provide by way of business. Trade moreover presupposes a customer”
What is excluded from Income from self employment?
Excluded therefore are :
1- Income from employment (taxed under ITEPA)
(NB The employee has “ a contract of service”, the self-employed has “contracts for services”)
2- Receipts from sale of investments (which may be taxed under Capital Gains Tax)
3- Receipts from hobbies which are not taxable as trading income (and therefore expenditure on hobbies is not allowable against trading income)
4- Non trading income taxable under ‘Miscellaneous income’
What is the Basis of Assessment for trading income?
Tax is assessed on a current year basis
i.e. normally the profits of the basis period ending in the year of assessment are taxed. The basis period is normally the accounting year.
Special rules apply to starting trading, ceasing to trade and change of accounting date.
what are the three installmenst for tax payemnts for the self employed?
Tax is paid in three instalments:
on 31 January in the year of assessment
on 31 July following the year of assessment (each based on 50% of the previous years’ tax as an estimate for the current year,)
and a final adjusting payment on 31 Jan following the year of assessment.
what is the Expenses Wholly and exclusively rule ?
Expenditure must be wholly and exclusively for the purposes of trade
Does not have to be necessary
Disallow expenses if not ‘wholly and exclusively’
Disallow if not for the purposes of the trade
In principle expenditure which serves both a business purpose and a private purpose, will be disallowed. In practice the Revenue allows some apportionment.
What are some expensises specifically dissallowed for taxes?
Expenses specifically disallowed Include:
Depreciation (and profits/ losses on disposals etc.) disallowed Replaced by capital allowances
Entertaining (except for reasonable staff entertainment)
Most gifts
Payments which constitute a criminal offence
how do you start from net profits per accounts ?
Starting from net profit per accounts:
Add Expenditure in the accounts which is not deductible for tax purposes
Add Income which is taxable but which is not credited to the P&L
Deduct Income which is credited to the P&L which is not taxable as income from self employment
Deduct expenditure which is not in the accounts which is deductible for tax purposes
how can losses on an accounting period be treated?
Losses for an accounting period can be relieved:
Against other income and capital gains in the year of assessment in which the loss arises and the previous year.
Against trading profits from the same trade in future years.
In addition there are special rules for losses arising in early years of trading, for losses arising on cessation of the business and for relief of charges.
