Workshop 6: Taxation of Individuals, IT, CGT and IHT Flashcards
**Topic: Individual Taxation** - Introduction to taxation - general principles - Income tax - Capital gains tax - Inheritance tax and the Business Exemption relief - Taxation self-assessment exercises Part 1
What is the difference between receipts and expense?
Receipt - money paid to business
Expense - money business pays out
Why is it important to distinguish income receipts from capital receipts and
income expenditure from capital expenditure?
Because, the only way calculations when reducing tax bill work are:
- Income receipts - income expenditure and
- Capital receipts - capital expenditure
What is ‘income receipts’ generally defined as?
Money received on a regular basis
What are some examples of income receipts?
- Trading profits
- Interest bank pays in relation to savings held in account
- Rent received by landlord is landlord’s income receipt
What is ‘capital receipts’ generally defined as?
One-off transactions
What is an example of capital receipts?
Gain on sale of premises
What is ‘income expenditure’ generally defined as?
Money spent as a part of day-to-day trading
What are some examples of income ependiture?
- Heating and lighting bills
- Rent
- Marketing
- Stationery expenses
- Staff wages
- Fees in general running of business
- General repairs
- Interest payable on loans
What is ‘capital expenditure’ generally defined as?
Money spent to purchase capital assets as part of business infrastructure or enduring benefit for business
What are some examples of ‘capital expenditure’?
- Equipement
- Machinery
- Property
- Expenditure on enhancing capital asset
Are routine maintenance on capital assets classified as capital expenditure?
No
What result do you get from the following formula?
Income receipts - income expenditure =
Income receipts - income expenditure = trading profts
What calculation is used when seeking relief for capital expenditure?
Capital receipts (large property, machinery or equipment) - capital expenditure (cost of the asset) = reduced tax bill as his results in reduced gain/profit
When do tax reliefs (i.e., deductions from the tax bill) apply?
When capital asset is sold or disposed of (e.g., gifted)
What do capital allowances do for certain capital items?
Spreads the cost of capital expenditure on them over a period of time
What calculation is used for capital allowances spreading cost of capital expenditure over a period of time?
Income receipts - capital expenditure over a period of time
(Exception to general rule of income receipts - income expenditure and capital receipts - capital expenditure)
What do companies pay corporation tax on?
Their taxable total profit (TTP) which includes:
- Income profits
- Chargeable gains
What is the tax years individuals are assed on their income tax and capital gains tax?
6th Apr - 5th Apr
What is the ‘sum net of tax’?
Sum after tax has been deduced
Which amount is to be included when calculating tax liabilities?
Net amount [net of tax] or gross amount
Gross amount
Who is the annual exemption tax allowance applicable to and on what tax?
For CGT only
Individuals only
What type of allowance is an ‘annual investment allowance’?
A special type of capital allowance
Who is assessted to [x] tax based on the financial year?
Companies
are assessed to corporation tax
When does the financial year begin and end?
1 Apr - 31 Mar
What is the ‘gross sum’?
Total before tax is levied
What is ‘income tax’?
Tax paid by individuals on taxable income
Who pays tax through the self-assessment system?
Individuals and businesses incl.
- Sole traders
- Partnerships
- Companies
Individuals are assessed to income and capital gains tax based on __ year
Companies are assessed to corporation tax based on __ year
Individuals - tax year
Companies - financial year
What is an example of income tax being deducted at source?
PAYE
This is where a payee receives a sum of net tax when being paid (i.e., after tax has been deducted)
What are capital allowances and who are they available to?
They are tax allowances (i.e., deductions) for capital expenditure
Available to businesses
What is capital gains tax?
Tax paid by individuals on taxable chargeable gains
What is corporation tax?
Tax paid by companies on taxable total profit
What is meant by income tax is charged on a current year baiss?
That income earned in the current year, e.g. 6 Apr 2024 to 5 Apr2025, will be taxed in and according to rate applicable to 6 Apr 2024 to 5 Apr 2025
What is ‘dividend allowance’?
Band of tax free dividend income available to individuals for income tax purposes
What is the difference between ‘gross sum’ and ‘net sum’?
Gross sum - total sum before tax is deducted
Net sum - amount left after tax has been deducted
What is ‘net income’?
Total income less (i.e. minus) available tax relief
Money left after taking away taxes, costs and allowances
Who is ‘personal allowance’ relevant for?
Individuals paying income tax only
What is ‘personal allowance’?
A band of tax-free income
What is a company’s TTP made up of?
Income profits and chargeable gains
What is ‘total income’?
A taxpayer’s gross income from all sources before any deductions
What is income?
Provide an example
Income from savings
e.g., interest
What is ‘taxable income’?
Net income less/minus personal allowance
What are the two ways HMRC assesses and collects income tax?
- Self assessment
- Deduction at source
What is ‘total income’?
Taxpayer’s total gross income from all sources
Which types of savings are received gross (i.e., with no deduction)?
Savings income and dividend income
What are basic rate taxpayers entitled to regarding the benefit of a personal savings allowance?
First £1k of interest on savings is taxed at 0%
What are higher rate taxpayers entitled to regarding the benefit of a personal savings allowance?
First £500 of interest on savings is taxed at 0%
Do additional rate taxpayers get personal savings allowance?
No
What is the effect of the dividend allowance?
No individual pays any tax on the first £500 of dividend income they receive
Why was ‘dividend allowance’ introduced?
To attempt accommodating for companies paying dividends to shareholders out of profits that have already been charged to corporation tax
How does the dividend allowance vary amongst different taxpayers?
Dividend allowance is the same for all taxpayers, no matter how much non-dividend income they receive
What tax liability are benefits in kind subject to?
Subject to income tax but not deduction of tax under PAYE
What types of benefit in kind are subject to deduction of tax under PAYE, despite benefits in kind generally not being subject to deducted of tax under PAYE?
Cash payments of salary including bonuses
What are the 6 steps to working out an individual’s income tax?
- Calculate total income
- Calculate net income
- Calculate taxable income
- Applying tax rates
- Personal savings allowance
- Add tax payable on three types of tax payable on three types of income (non-savings, saving & income)
How do you calculate total income?
By adding together all receipts from all sources of income
How do you accomodate for income after deduction of tax at source?
You need to include gross amount in the calculation of Total Income
How do you work out net income?
By deducting available tax reliefs for individual
What tax relief can be sought to be applied when calculating net income for understanding an individuals income tax?
Interest that has been paid on
- Qualifying loans
- Pension scheme contributions
Why is interest that is paid to the bank as the cost of receiving qualifying loans from the bank a form of tax relief?
Because it can be deducted from the Total Income, thereby reducing tax bill
What do qualifying loans include?
Loans to:
- Buy interest in partnership
- Contribute capital or make loans into partnership
- Buy shares in or make loans to ‘close’ company
- Buy shares in employee-controlled company or invest in a co-operative
Are pension scheme contributions able to benefit from the relief of income tax?
Yes
What is the relief on pension scheme contributions?
An amount equivalent to pension scheme contribution is deducted from taxpayer’s Total Income for that year
How do you ascertain a taxpayer’s Taxable Income?
By deducting the taxpayer’s personal allowance from their net income
What is the personal allowance for the tax year 2024/2025?
£12,570
How does personal allowance vary when a taxpayer has a net income above £100,000?
Personal allowance of £12,570 is reduced by £1 for every £2 of Net Income
What will a taxpayer have to have a Net Income of to lose the personal allowance of £12,570 completely?
£125,140
What are the three different types of income that must be separated when applying tax rates?
What is the order they must be taxed in?
Non savings
Savings
Dividends
(Never say die)
How do you work out non-savings income?
Taxable income minus savings and dividend income = non-savings income
What are the taxable incomes per band?
Basic - £0 - £37k
Higher - £37,701 - £125,140
Additional - + £125,140
What are the non-saving and savings % tax rates for each tax band?
Basic - 20%
Higher - 40%
Additional - 45%
What are the dividends % tax rates for each tax band?
Basic - 8.75%
Higher - 33.75%
Additional - 39.35%
When do you apply savings tax rates to a taxpayer’s taxable income?
After their personal savings allowance has been applied
When do you apply dividends tax rates to a taxpayer’s taxable income?
After the nil rate has been applied to the first £500 of dividend income
What was the nil rate for dividend income applied in the tax year 2023/2024?
Applied to the first £1000 of dividend income
What is the savings nil rate taxed on?
First £1000 if taxpayer’s entire Taxable Income is within basic rate band
First £500 if taxpayer’s entire Taxable Income does not exceed higher rate band
Is there a savings nil rate for taxpayer’s Taxable Income exceeding additional/higher rate band?
No
Do National Insurance Contributions affect an individuals personal income tax computation?
No
What are the four conditions that need to be met for capital gains tax to be charge?
- A chargeable disposal
- of a chargeable asset
- by a chargeable person
- which gives rise to a chargeable gain
When is capital gains tax payable?
On or before Jan 31 following the tax year when the disposal occurs
What are the two main instances of the disposal of an asset?
- Sale of an asset
- Gift of an asset during taxpayer’s lifetime
What are main types of assets that are excluded from being a ‘chargeable asset’?
- Principal private residence
- Motor cars for private use (incl. vintage cars)
- Certain investments
- UK sterling and foreign currency held for your own or your family’s personal use
Are gains made by charities exempt for capital gains tax?
Yes provided that the gain is applied for charitable purposes
Why is CGT not payable on disposals between spouses?
Because legislation says neither a gain or loss has ocurred
What value does a spouse receive an asset that their spouse is disposing of?
At the initial value (not the value that has seen a decrease or increase in)
