Chapter 2 - Introduction to tax

Question 1

What do you understand by the term tax year?

Answer 1

Tax year: 6 April in one calendar year to 5 April in the next calendar year.

The tax year running from 6 April 2021 to 5 April 2022 is called the 2021/22 tax year.

Question 2

What is a direct tax?

Answer 2

Direct taxes (eg, income tax, capital gains tax, corporation tax, national insurance contributions) are only paid by those who generate the funds to pay the tax. i.e. a tax when you receive money

Question 3

What is an indirect tax?

Answer 3

Indirect taxes (eg, value added tax, excise duty, stamp duty) relate to consumption i.e. a tax when you spend money

Question 4

What is a progressive tax?

Answer 4

Progressive taxes rise as a proportion of income as that income rises. e..g income tax rates get higher as income gets higher

Question 5

What is a regressive tax?

Answer 5

Regressive taxes rise as a proportion of income as income falls. The amount of duty paid on a packet of cigarettes is the same, regardless of the income of the purchaser. i.e. any flat rate tax

Question 6

How many examples of exempt income can you name?

Answer 6

1. Interest on National Savings Certificates
2. Income (interest or dividends) from Individual Savings Accounts (ISAs, also sometimes referred to as NISAs) including Junior ISAs
3. Betting, competition, lottery and premium bond winnings
4. Some social security benefits such as housing benefit
5. Scholarships
6. Income tax repayment interest

Question 7

What are the 3 columns in an income tax computation and what goes in each?

Answer 7

1. Non-savings income: Employment income, Trading profits, Property income, and any other income not belonging in the other 2 columns
2. Savings income: Interest received
3. Dividend income: Dividends received

Question 8

What is ‘Net income’ ?

Answer 8

Net income: The total chargeable income before deducting the personal allowance

Question 9

What is ‘taxable income’

Answer 9

Taxable income: Net income after deduction of the personal allowance

Question 10

In which order is the personal allowance deducted?

Answer 10

The personal allowance is deducted from the different types of income in the following order:

1. Non-savings income
2. Savings income
3. Dividend income

Question 11

What is the treatment for personal allowance for the ‘superrich’?

Answer 11

The full personal allowance of £12,570 is not available for individuals with an adjusted net income of more than £100,000.

The personal allowance is reduced by £1 for every £2 that the individual’s adjusted net income exceeds £100,000.