1. Income Tax Flashcards

1
Q

On the SQE, in conjunction with what subjects will tax law be tested?

A

Business law, property law, and estates

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2
Q

On the SQE in conjunction with what subjects will income tax law be tested?

A

Business law only

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3
Q

What is income?

A

Money received on a recurring basis

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4
Q

What three groups of people pay income tax?

A
  1. Individuals
  2. Personal representatives on behalf of deceased persons
  3. Trustees on behalf of trusts
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5
Q

What is the weekly earning threshold for employees, above which the employer must make deductions within the PAYE system?

A

£184

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6
Q

When does a balancing payment for the previous tax year need to be paid?

A

By the self-assessment deadline of the year after the year to which the balancing payment relates

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7
Q

What are the three categories of income in the order they are collected?

A
  1. Non-savings income
  2. Savings income
  3. Dividend income
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8
Q

What are the the three categories of non-savings income?

A
  1. Earnings and pensions
  2. Trading income
  3. Property income
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9
Q

Does a UK tax resident pay UK income tax on foreign income?

A

Yes

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10
Q

What is the difference between tax exempt and zero-rated?

A

Tax exempt means the income is fully exempt from tax calculations and does not form part of income for the purposes of determining tax brackets.

Zero-rated means the income is not exempt from tax and still forms part of the income to determine tax bracket, but it is taxed at 0%.

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11
Q

What are five examples of income which are exempt from income tax?

A
  1. Interest from National Savings
  2. Interest or dividends from an ISA
  3. Winnings on Premium Bonds or any gambling
  4. Most social security benefits
  5. Child benefits and tax credits
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12
Q

If an expense is incurred for both personal and business purposes, how is it dealt with in the context of deducting from trading profits?

A

Proportionate to amount of the expense which was for business purposes

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13
Q

What is the annual investment allowance in the context of capital assets?

A

If a taxpayer buys a capital asset for their business, they may deduct all of the costs if it is plant or machinery, e.g. tools, machines, and computers, but not cars, land, or buildings

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14
Q

Similar to the annual investment allowance is the Structures and Buildings Allowance. What is the date after which construction of a structure qualifies, and what is the percentage allowance per year which can be deducted?

A

29 October 2018. 3% per year.

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15
Q

In what situation is a Writing Down Allowance available, and what are the percentage allowances which can be deducted per year for (1) life-long assets, and (2) other assets?

A

If the capital asset purchase exceeds the annual investment allowance.

Life-long assets: 6% per year
Other assets: 18% per year

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16
Q

In the context of the Writing Down Allowance, how are assets aggregated into pools and if pooled, what is the deduction based on?

A

Life-long assets at 6% and other assets at 18% are pooled separately.

The deduction is based on the value of all the assets in the relevant pool.

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17
Q

In the case of a partnership, how are partnership profits split for income tax purposes where one of the partners also receives either (1) a salary or (2) interest on capital contributions?

A

The salary and/or interest are allocated to the partner first, and then the net amount is distributed as partnership profits.

18
Q

In the context of the overlap profit problem, what is a taxpaying business’s basis period?

A

Where a business has an accounting period which is different to the tax year of April 6 to April 5, the period of their accounting period which overlaps with a relevant tax period is the basis period

E.g.:

  • Accounting period: Jan 1, 2023 - Dec 31, 2023;
  • Basis period is Jan 1, 2023 - April 5, 2023 as part of the 2022/23 tax year.
19
Q

What are overlap profits?

A

Where a business has an accounting period which is different to the tax year of April 6 to April 5, and does not make up accounts to April 5 of that year, some profits made in the business’s first and second year of trading will be taxed twice

20
Q

Only when are overlap profits usually recoverable?

A

Not until trade ceases, or if the business moves their accounting date closer to April 5

21
Q

On what three qualifying loans can a taxpayer offset the interest paid against income?

A

Loans used to fund:

  1. Capital contributions or loans to a partnership
  2. Investments in a closed trading company
  3. Payments of inheritance tax for personal representatives
22
Q

To what degree is the income tax personal allowance (currently £12,570) tapered for income above £100,000, and therefore at what level of income is the personal allowance reduced to £0?

A

The income tax personal allowance is reduced by £1 for every £2 above £100,000. Therefore, the allowance is reduced to £0 for incomes of £125,140 and above.

23
Q

What does the Marriage Allowance allow?

A

It allows a person to transfer part of their personal allowance to their spouse or civil partner

24
Q

In addition to being married/in a civil partnership, what two conditions must be met to transfer under the Marriage Allowance?

A
  1. Transferring spouse’s income must be less than the personal allowance, i.e. they have allowance to transfer
  2. Recipient spouse must be a basic rate taxpayer
25
Q

How does the Marriage Allowance actually operate in practice? Does the recipient spouse get an additional amount on their personal allowance?

A

No. They simply get an income tax reduction for 20% of the amount transferred, directly applied to their tax liability.

26
Q

What are the tax bands called, what are the monetary thresholds, and what are the percentage rates applying to each?

A
  • Personal allowance: Up to £12,570 – 0%
  • Basic rate: £12,571 - £50,270 (next £37,700)20%
  • Higher rate: £50,271 - £125,140 (next £74,869)40%
  • Additional rate: £125,140 and above – 45%
27
Q

What is the personal savings allowance amount for each tax band which must be deducted from savings income before tax?

A
  1. Basic rate band: £1,000
  2. Higher rate band: £500
  3. Additional rate band: No savings allowance at all
28
Q

Are the personal allowance and personal savings allowance considered exemptions or zero-rated?

What is the effect of this?

A

Zero-rated

The amounts are counted as income for the purposes of determining the applicable tax band, but are taxed at 0%

29
Q

What is the dividend allowance amount and what tax bands is it available to?

A

£2,000. Available to all taxpayers, irrespective of band.

30
Q

Is the dividend allowance considered an exemption or zero-rated?

A

Zero-rated

31
Q

What are the dividend tax rates for each tax band which must be deducted from dividend income before tax?

A
  1. Basic rate band: 7.5%
  2. Higher rate band: 32.5%
  3. Additional rate band: 38.1%
32
Q

Who can claim a trading loss? Can it be transferred to a spouse or civil partner?

A

Only the taxpayer. Losses cannot be transferred.

33
Q

What are the four ways with which a taxpayer may be able deal with a loss?

A
  1. Current year/prior year loss relief
  2. Carry forward of loss relief
  3. Carry forward relief on incorporation of a business
  4. Terminal loss relief
34
Q

How is current year/prior year loss relief achieved?

A

Setting off all of the loss against total income in the current year or previous year. No partial claims are allowed.

35
Q

Although partial claims are not allowed in a current year/prior year loss relief situation, what option is available to a taxpayer who does not offset all of their trading loss against total income?

A

They can use the balance to offset any capital gains tax

36
Q

In order to prevent artificially increasing the amount of loss that may be carried back or applied to CGT in a current year/prior year loss relief situation, what is the order in which losses and the personal allowance are applied to income?

A

The loss to be offset is applied to the fullest extent possible, before the personal allowance

37
Q

How is carry forward of loss relief achieved?

A

Losses are carried forward and offset against the next available profits in the same trade

38
Q

How is carry forward relief on incorporation of a business achieved?

A

If a sole trader or partner transfers their business to a company and receives shares in return, they can offset any unused trading losses against salary or dividends they receive whilst they own the shares

39
Q

What does terminal loss relief allow?

A

When a trader ceases trading, it allows a loss to be deducted in the tax year of cessation and then to be carried back to the three preceding tax years on a last in first out basis

40
Q

What is the double reasonableness test in the context of anti-avoidance?

A

HMRC can set aside a transaction if they can prove the arrangement cannot reasonably be regarded as a reasonable course of action