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1
Q

What is taxation?

A

A compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organisations, on production costs or sales prices of goods and services.

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2
Q

What are the objectives of taxation?

A
  • To raise revenue for the provision of public goods
  • Redistribution of income and wealth
  • Promotion of social and economic welfare
  • Promotion of economic stability
  • To promote harmonisation
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3
Q

What are the desirable characteristics of an ideal tax according to Adam Smith?

A
  • Equity/proportionality (fairness)
  • Certainty
  • Convenience
  • Efficient
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4
Q

What is a tax base?

A

Something that is liable to tax, such as income, profits, or consumption.

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5
Q

What are the two main classifications of taxes?

A
  • Direct taxes
  • Indirect taxes
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6
Q

What is a direct tax?

A

Charged on income, profits, or other gains, deducted at source or paid directly to the tax authorities.

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7
Q

What is an indirect tax?

A

Taxes on spending, charged when a taxpayer buys an item and paid to the vendor as part of the purchase price.

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8
Q

What is the tax gap?

A

The difference between what should be paid by taxpayers to fund a certain level of economic activity versus what is actually collected.

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9
Q

What is the estimated tax gap for the year 2022/23?

A

Estimated at £39.8bn, or 4.8% of tax liabilities.

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10
Q

What is the difference between tax evasion and tax avoidance?

A
  • Evasion: Illegal, such as not declaring taxable income.
  • Avoidance: Legal arrangements to minimize tax liability.
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11
Q

What is the formal incidence of tax?

A

The organisation that has direct contact with the tax authorities.

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12
Q

What is the effective incidence of tax?

A

The person who ends up bearing the cost of the tax because they cannot pass it on to someone else.

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13
Q

What are hypothecated taxes?

A

Taxes where the revenue is allocated to specific types of expenditure.

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14
Q

List some important statutes related to taxation.

A
  • Taxes Management Act 1970
  • Value Added Tax Act 1994
  • Income Tax Act 2007
  • Corporation Tax Act 2010
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15
Q

What is the definition of tax burden?

A

The degree to which a tax affects a taxpayer or group of taxpayers.

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16
Q

What are the three types of tax burden distribution?

A
  • Progressive
  • Proportional
  • Regressive
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17
Q

What does the term ‘incidence’ in taxation refer to?

A

Who actually pays the tax.

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18
Q

Fill in the blank: A tax base includes income or profits, capital, and _______.

A

Consumption/expenditure

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19
Q

What are some examples of direct taxes?

A
  • Income Tax
  • Corporation Tax
  • Capital Gains Tax
  • Inheritance Tax
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20
Q

What is the role of double taxation treaties?

A

To prevent the same income or gains from being taxed twice in different countries.

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21
Q

What are the obligations of a tax adviser?

A
  • Integrity
  • Objectivity
  • Professional Competence
  • Confidentiality
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22
Q

What is tax minimization?

A

Practices aimed at reducing tax liability, which can be acceptable or not depending on the methods used.

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23
Q

What is a ‘tax year’?

A

The ‘tax year’ runs from 6 April to 5 April.

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24
Q

What is taxable income?

A

Taxable income is the income on which tax is charged after deducting personal allowances and reliefs.

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25
What are personal allowances?
Personal allowances are the amount that can be earned 'tax-free'. For 2024-25, the basic personal allowance is £12,570.
26
Is any income exempt from income tax?
Yes, examples of exempt income include: * Income earned on Individual Savings Accounts (ISAs) * Premium bonds * Gambling winnings * Certain social security benefits
27
What rates of income tax apply for the tax year 2024-25?
The rates include: * 0% * 8.75% * 20% * 40% * 45% * 33.75% * 39.35%
28
What is the formula for calculating the reduction in personal allowance for high earners?
The reduction is calculated as: (ANI - £100k) x 50%.
29
What is 'adjusted net income' (ANI)?
ANI is calculated as net income minus gross gift aid donations and gross personal pension contributions.
30
True or False: Companies pay tax based on a tax year.
False. Companies pay tax for a financial year.
31
What is the effective tax rate on income between £100,000 and £125,140?
The effective rate is 60%, due to the loss of personal allowance.
32
What types of income are considered taxable?
Taxable income includes: * Income from employment * Self-employment income * Property income * Interest from banks * Dividend income
33
Fill in the blank: The personal allowance for 2024-25 is ______.
£12,570
34
What must be deducted from total income to calculate net income?
Reliefs and personal allowance must be deducted.
35
What is the first step in the tax computation process?
Exclude any exempt income and include all taxable income.
36
How is income from joint ownership typically taxed?
Joint income is broadly taxed 50:50 unless an election is made.
37
What happens if a child receives investment income from funds given by a parent?
The child is taxed on that income unless it is £100 or less.
38
What is the significance of the personal allowance in tax calculations?
Income above the personal allowance is taxable.
39
What is the total income calculation based on?
Total income is based on employment income, trading profits, property income, bank interest, and dividends.
40
What types of income are categorized in the tax computation?
Income is categorized into: * Other (non-savings) * Savings * Dividends
41
What is the effect of gross gift aid donations on ANI?
Gross gift aid donations reduce the adjusted net income.
42
What is the total income for Rosa in the example provided?
Rosa's total income is £110,000.
43
What is the personal allowance available to Rosa based on her ANI?
Rosa's personal allowance is £7,870.
44
How do reliefs affect taxable income?
Reliefs are deducted from total income to reduce the taxable amount.
45
What are the rates of income tax for the basic rate in 2024-25?
20% for income from £1-£37,700 ## Footnote Basic rate applies to non-dividend income within this range.
46
What is the dividend tax rate for the basic rate in 2024-25?
8.75% for dividends ## Footnote This applies to dividend income within the basic rate band.
47
What income range corresponds to the higher rate of income tax in 2024-25?
£37,701 - £125,140 ## Footnote The higher rate is taxed at 40%.
48
What is the additional rate of income tax for income above £125,141 in 2024-25?
45% ## Footnote This applies to income above £125,141.
49
What is the starting rate of 0% for savings income?
Applies to the first £5,000 of taxable income if non-savings income does not exceed this sum ## Footnote This starting rate is not applicable if non-savings income is £5,000 or greater.
50
What is the savings nil rate band (PSA) for basic rate taxpayers?
£1,000 ## Footnote Basic rate taxpayers can receive up to £1,000 of interest taxed at 0%.
51
What is the savings nil rate band (PSA) for higher rate taxpayers?
£500 ## Footnote Higher rate taxpayers can receive up to £500 of interest taxed at 0%.
52
What is the dividend nil rate band for 2024-25?
£500 ## Footnote All taxpayers benefit from this allowance for dividends.
53
What is the first step in calculating income tax liability?
Sort out the income into 'types' to calculate total income ## Footnote This includes employment income, trading profits, property income, interest, and dividends.
54
What should be deducted from total income to calculate net income?
Reliefs and Personal Allowance (PA) ## Footnote Watch out for reductions in PA if Adjusted Net Income (ANI) exceeds £100,000.
55
How should the basic rate band be applied in tax calculations?
First against non-savings income, then against savings income, finally against dividend income ## Footnote Care should be taken to utilize the £5,000 band at 0% for savings income if available.
56
What happens if all the basic rate band is used?
Continue to use the higher rate band ## Footnote This process continues through additional tax bands as needed.
57
What is Gift Aid?
A tax incentive to encourage donations to charity ## Footnote A declaration must be made for the donation to be eligible.
58
How does a Gift Aid payment affect tax calculations?
The donation is treated as if made net of basic rate income tax, and both tax bands are extended by the gross amount of the gift ## Footnote This ensures taxpayers at higher rates obtain relief at that rate.
59
What is the effect of personal pension contributions on tax bands?
They extend the basic and higher rate bands similar to Gift Aid contributions ## Footnote A net contribution of £100 results in a gross amount of £125 into the pension scheme.
60
True or False: The personal savings allowance (PSA) is available for additional rate taxpayers.
False ## Footnote Additional rate taxpayers do not receive a PSA.
61
What is the method for calculating income tax liability?
Income is included gross, tax already paid is deducted to calculate tax payable ## Footnote This includes tax paid via PAYE for employed individuals.
62
Fill in the blank: The maximum tax liability for a taxable income of £180,000 is ______.
67,203 ## Footnote This includes tax calculated from different income bands.
63
What should taxpayers do to become proficient in tax calculations?
Practice with many examples and tutorial questions ## Footnote This builds a thorough understanding of the rules.

TAX (9 decks)

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