Income Tax

Question 1

What is Self-Assessment?

Answer 1

• Tax-return showing all income and gains
• Tax is paid directly to HMRC on set payment dates
• Mainly for the self-employed, company directors and those paying a higher rate of tax on investment income

Question 2

What are the deadlines for completing and submitting the self-assessment?

Answer 2

• Online - 31 January following end of the tax-year to which it relates
• Paper - 31 October following end of tax year to which it relates

Question 3

When and what is the schedule of payments for self-assessment?

Answer 3

1. 1st Payment on Account - January 31st of current tax-year (half the previous tax years liability)
2. 2nd payment on account - following July 31st - (half the previous tax year’s liability)
   
   • Payments on account include income tax, NIC 4s and child benefit income tax charge.
3. Balancing payment - this is the difference between the amounts paid on account and the amount owed - this is paid 31st January following the end of the tax-year.

Class 2 NICs, CGT and student loan repayments are paid at the same time as the balancing payment.

Payments on account are not required if income tax payable outide PAYE in the previous tax-year was less than £1,000, nor if more than 80% of previous year’s income was taxed under PAYE.

Question 4

Self-assessment non-compliance penalties (balancing payment):

Answer 4

• Interest and surcharges applied on late and underpayments
• HMRC pays interest on overpaid tax
• Interest charges where reduction of payment on account is not justified
• 5% surcharge for unpaid tax more than 30 days after balancing payment due
  
  • Further 5% after further 5 months
  • Further 5% after further 6 months

Question 5

Self-assessment non-compliance penalties for later return:

Answer 5

• £100 if return not submitted by 31 January following end of tax year
• Return more than 3 months late, £10 daily penalty up to 90 days (even if no tax due)
• Return more than 6 months late, penalty is the higher of £300 or 5% of tax outstanding
• Similar penalty where return more than 12 months late, higher if deliberately not submitting
• Penalties also for failing to keep records and documents needed to complete tax-return, deliberate/ careless errors and for failing to notify HMRC of a liability to tax by 5 October following end of tax-year.

Question 6

What is PAYE and what does it consist of?

Answer 6

• ‘Pay as you earn’ - refers to income tax and NICs deducted from salary before you receive it. Money is sent to HMRC by the employer ‘at source’.
• RTI (real-time info) payroll software is used to automatically report pay and deductions from PAYE.
• This operates when an employee is entitled to receive payment. For directors, it is the earliest of the date the payment is made, the date the director becomes entitled to be paid, the date the amount is credited in the company’s books, or the date when the payment is fixed or agreed upon.
• Benefits in kind that are payrolled and treated as cash are not reported on P11D.

Question 7

What are the penalties for late or innaccurate PAYE submissions?

Answer 7

• 3-day grace period then penalties on a monthly basis for late submissions
• No penalty for 1st late submission in tax year
• Then between £100 and £400 depending on number of employees
• Additional 5% when 3 months late
• Penalty for inaccurate full payment submissions

Question 8

General tax-planning strategy consists of:

Answer 8

• Balancing cost, risk or complexity with potential to pay less tax
• Utilise available allowances and reliefs
• Beware additional rate of 45%
• Effective 60% marginal rate on earnings between £100,000 to £125,000 due to withdrawal of personal allowance.

Question 9

Tax mitigation, evasion and avoidance:

Answer 9

• Mitigation - acceptable, this is about selecting the best (legal) way to arrange your finances to pay the lowest amount of tax. Making the most of HMRC allowances and reliefs.
• Evasion - illegal, this is the practice of deliberately not paying tax owed e.g. schemes that rely on HMRC not finding out what has happened/ not reporting items/ giving HMRC false information.
• Avoidance - grey area, involves schemes designed to avoid tax through, for example, legislative loopholes. usually involve a series of transactions.

Question 10

Tax avoidance - DOTAS legislation and penalties:

Answer 10

• DOTAS (Disclosure of Tax Avoidance Schemes)
  
  • Finance Act 2004 - UK firms that market tax avoidance must register them with HMRC and those that use them must use this registration number on their tax-returns.
  • If the number is one that has been defeated in court, HMRC issues a follower notice and expects to be paid any tax-avoided as a result of the individual being in the scheme to be paid.
  • Promoters must give HMRC list of clients using scheme quarterly.
  • Penalties for failure to notify HMRC may include a daily penalty of up to £5,000.
• Finance Act 2014 reinforces DOTAS rules: HMRC can force taxpayers to settle disputes where schemes have been defeated in court. If they do not settle, penalty is 50% of disputed tax.
• Accelerated Payment Notice can be issued requiring payment of tax up front within 90 days where scheme has not yet been to court.

Question 11

Drawbacks to using tax avoidance schemes:

Answer 11

• Spotlight of HMRC on individual’s whole tax affairs
• costs to defend scheme and negotiate with HMRC
• scheme may be ineffective
• retrospective legislation
• uncertainty

Question 12

General Anti-Abuse Rule: Key Points

Answer 12

• Aims to counteract tax advantages arising from abusive arrangements.
• Applies to income tax, corporation tax, CGT, IHT petroleum revenue tax, SDLT, annual tax on eveloped dwellings and NICs.
• Only applies if the answer is yes to the following:
  
  • Is there a tax arrangement?
  • Does the tax advantage relate to one of the taxes covered by GAAR?
  • Is the tax advantage the main purpose of the arrangement?
  • Is the arrangement abusive?
• Tax-geared penalty of 60% applies to cases tackled by GAAR.

Question 13

Income tax calculation - 6 step process:

Answer 13

1. Add up all income that could be subject to income tax in tax year (gross income)
2. Take off allowable deductions (net income)
3. Deduct personal allowance (taxable income)
4. Extend basic/ higher rate tax brackets (for personal pension contributions/ gift aid donations)
5. Calculate tax
6. Take off tax reducers

Question 14

Factors pointing towards someone being employed or self employed:

Answer 14

• Employed
  
  • expenses must be wholly and exclusively and necessarily incurred in performance of duties
  • contract of service
  • set hours or holiday pay
  • working wholly/ mainly for one employer
  • employer has high degree of control over worker
• Self-employed
  
  • contract for service
  • expenses need to be wholly and exclusively incurred for the purposes of business
  • ability to take business risks
  • can choose hours

If in doubt about status, then employer should apply PAYE.

Question 15

IR35 - main points:

Answer 15

• HMRC rules to stop contractors (disguised employees) dodging income tax/ NICs by setting up as personal services companies (ltd)
• Does not impact self-employed (sole traders)
• Tax charge applies if excess profit is left in company to avoid income tax/ NICs
• If IR35 rules apply, cannot save tax by paying dividends/ employing a partner.

Question 16

Taxation of salaried members of LLPs:

Answer 16

• Taxed under SA rather than PAYE if more than 20% pay based on profits of LLP or have significant say in running of LLP. Or have made significant contribution to LLP (25% of LLP income plus)

Question 17

Marriage allowance - key points:

Answer 17

• Married couples/ civil partners can transfer 10% of their personal allowance to each other.
• Provided neither pays tax at more than the BR
• Full 10% must be transferred.
• £1,260 of Personal Allowance can be transferred to spouse/ civil partner

Question 18

Taxation of employee benefits - key points:

Answer 18

• Most benefits to employees are deemed to be employment earnings and therefore taxable.
• Unless specified otherwise, employees are taxed on the cash equivalent benefit (usually cost to employer) rather than 2nd hand value.
• Less any employee contribution
• Benefits provided ‘in house’ are taxable at the marginal cost to the employer as determined in Pepper v Hart.
• For an asset given to an employee outright, the tax charge is based on the market value at the time of the gift unless the asset is brand new in which case it will be based on the cost to the employer of providing the asset.

Question 19

Company Cars - key points:

Answer 19

• There are two sets of company car bands - pre 6 April 2020 and post 6 April 2020
  
  • Pre-registration cars, with emissions of more than 55g/km, there is a base charge of 16%. This increases by 1% for every 5g/km on top of the base charge.
  • Post-registration cars, with emissions of more than 55g/km, the base charge is 14%.
• The maximum charge is 37% of the car’s list price.
• Diesel cars that do not meet RDE2 standards are subject to a 4% excess. Though the max charge is still 37%.
• Additional accessories are added to the list price of the car.
• An employee can contribute to the cost, the maximum that can be deducted is £5,000.
• If the employer pays for private fuel use, there is a standard charge of £24,500 x by the same CO2 % used when calculating the taxable value.

Question 20

Beneficial Loans - Key points:

Answer 20

• The taxable value of beneficial loans in excess of £10,000 is based on the difference between the interest rate paid by the employee and the official rate - 2% in 2022/23.
• Beneficial loans below £10,000 are not taxable.

Question 21

Employer accommodation - key points:

Answer 21

• Provided by employer - assessment on benefit of occupying property.
• Assessed on annual value of rent that could be obtained or rent actually paid if greater.
• If owned by employer and cost more than £75,000:
  
  • Additional charge on excess of cost over £75,000 x 2%
  • If acquired more than 6 years prior to being provided to employee - MV of property when first provided is used to calculate additional charge.
• Exempt from charges if:
  
  • Necessary for performance of duties
  • Helps employee perform duties eg publican
  • Threat to employees security
• Furnished accommodation - additional 20% taxable benefit

Question 22

Employee benefits wholly or largely exempt from tax:

Answer 22

• Group income protection
• Provision of meals (but not luncheon vouchers)
• Long service awards - £50/pa - min 20 years
• Mobile phone - 1 per employee
• Employer sponsored training
• Suggestion schemes - £25 or less, larger awards up to £5,000 subject to conditions
• Relocation and removal expenses - up to £8,000
• Home working - up to £6 per week without evidence
• Workplace nurseries
• Liability insurance
• Trivial benefits - under £50
• Pension advice - £500

Question 23

To perform a full income tax calculation, you need to carry out ten steps:

Answer 23

1. Establish the type of income; ADD earnings + pensions + rental income + any other income that isn’t savings or investment income.
2. TO deposit interest + any other savings income
3. AND to dividends
4. AND life polict chargeable gains
5. DEDUCT reliefs or deductions which apply to the above income types (same order)
6. DEDUCT personal allowance (higher earners reduction £1 for £2)
7. EXTEND basic and higher rate bands for relievable payments (non-occupational pension contirbutions, gift aid).
8. Apply tax at the appropriate rates and don’t forget the starting rate band for savings income/ personal savings allowance/ div allowace.
9. DEDUCT tax reducers (EIS/ SEIS/ VCT/ MCA/ marriage tax allowance)
10. AND any already tax already deducted at source.

= TOTAL TAX

Question 24

High income child benefit charge - key points:

Answer 24

• If adjusted income is more than £50,000 a year the charge withdrawals all or part of the child benefit received
• Removes 1% of child benefit received for every £100 of excess adjusted net income over £50,000
• Income over £60,000 - no child benefit
• Adjusted net income is income after gross pension payments and gift aid donations

Question 25

State two qualifying purposes where the interest payments on a loan can be tax-deductible:

Answer 25

1. Purchase of shares in borrower’s company or to finance loans to the company
2. Investment in a partnership
3. To buy plant and machinery for use in a partnership
4. Payment of IHT

Question 26

Give an example of where tax relief on pension contributions is given through the net-pay arrangement:

Answer 26

• Employee’s payments to an occupational pension scheme including AVCs

Question 27

How are interest-free or cheap loans to employees treated for tax purposes?

Answer 27

• Taxed on the benefit they receive/ difference between the amount of interest at the official rate (2% - 2022/23) and the amount of interest actually paid.
• Loans of no more than £10,000 are not taxable.

Question 28

What order of priority is income taxed at?

Answer 28

• Earnings, pension, rental income
• Savings income
• Dividend income
• Chargeable gains on life policies

Question 29

If a parent invests money on behalf of their child and the interest earned is less than £100 who is this taxed on?

Answer 29

• Where interest is no more than £100 the income is treated as the child’s
• If interest is more than £100 the whole amount is taxed on the parent

Question 30

Income tax and trusts - bare/absolute trusts:

Answer 30

• Trustee
  
  • None
• Beneficiary
  
  • Taxed at beneficiary’s rates.
  • Their personal allowance, PSA and dividend allowance can be used to offset any tax.
• Settlor
  
  • Parental settlement rules apply (where trust income exceeds £100 and settlor is parent of a child under 18 and unmarried/ not in a civil partnership, it is taxed on the parent.)

Question 31

Income tax and trusts - trusts for the vulnerable:

Answer 31

• Broadly speaking, a trustee’s tax liability under a trust for a vulnerable person is limited to the tax liability that would have been suffered by the beneficiary were the trust not in existence.

Question 32

Income tax and trusts - IIP trust:

Answer 32

• Trustee
  
  • Charged at basic rate, i.e. 7.5% dividend income, 20% all other income
  • No allowances
  • No liability to HR tax
  • No relief for expenses of managing the trust, though these are deductible in arriving at beneficiary income
  • Complete R185 and pass to beneficiary
• Beneficiary
  
  • Taxed at beneficiary’s rates with tax already paid by trustees deducted from their liability/ reclaimable as appropriate.
  • PA, PSA, DA can be used to offset any tax due
  • If trust income is paid direct to beneficiary rather than via the trust - taxed as per bare trusts.
• Settlor
  
  • Parental settlement rules apply
  • If settlor interested trust, trust income taxed on the settlor.

Question 33

Income and taxation of trusts - discretionary trusts - Trustees:

Answer 33

• Trustees
  
  • Have a standard rate band (£1,000 spread across all settlor’s discretionary trusts, minimum £200 per trust).
  • Income falling within standard rate band is charged at BR
  • Thereafter, AR on dividends (38.1%) and all other income (45%).
  • Trustees’ expenses are allowable in calculating income chargeable. Expenses are set against dividends, then savings then income.
  • Expenses are grossed up at the appropriate rate.
  • Income relieved remains chargeable at the basic rate.

Question 34

Income and taxation of trusts - discretionary trust - beneficiary’s:

Answer 34

• Income paid out as trust income and carried 45% tax credit.
• Non-taxpayer can reclaim the 45% tax paid. BRT can reclaim 25% and HRT 5%.
• ART has nothing more to pay but cannot reclaim anything.
• Reclaims are paid by completing for R40.
• Because dividend income is only taxable at 39.35%, but income distributed becomes trust income at 45%, the trustees must pay the additional tax to cover the 45% tax credit.
• If income is accumulated in the trust rather than paid out, tax paid on the income is carried forward in a tax pool.

Question 35

Relief at source pension payment - key points:

Answer 35

• Pension contirbution is made after deducting BR tax.
• Applies to PP/GPP/SIPP
• Scheme administrator reclaims from HMRC.
• HR/ AR tax relief is given via self-assessment.

Question 36

Net pay arrangemet - key points:

Answer 36

• Employee payments to occupational schemes are deducted before calculating tax (includes AVCs), i.e. deduct from gross income.

Question 37

Property Income - taxation treatment:

Answer 37

• Income arising from UK property is taxable whether UK res or not.
• Inocme from overseas property is taxable if property business by UK resident
• Accounts for property letting are drawn up to 05/04 or 31/03
• Accruals basis used, unless income befor eexpenses is £150,000 or less - in this case can use simplified cash basis.
• Property allowance - if property income less than £1,000 (before expenses) then it is exempt from tax and does not need to be declared. If greater than £1,000, then can claim the allowance agains tthe income in lieu of deducting actual expenses.

Question 38

Savings income - taxation treatment:

Answer 38

• Includes PLAs and gains from life assurance contracts
• UK res - income taxable regardless of source
• non-UK res - taxable only if source is inside UK
• No deductions allowed.
• Bank, BS, NS&I, interest distributions from OEICs/UTs, LA bonds, CP bonds are all paid gross.
• BR (20%) deducted at source from other sources including interest element of PLAs.
  
  • Non-taxpayers and SR taxpayers (i.e. those with taxable savings income falling within the £5,000 0% band) can reclaim.
• Gross income is required on tax-returns, so gross up interest from net amount.

Question 39

Gift Aid - Taxation treatment:

Answer 39

• Extend basic and higher rate bands by gross contribution/ donation.
• Gift aid:
  
  • Charity donation treated as payment on which BR tax (20%) has been deducted.
  • Charity can then recover the tax.
  • Donor’s BR and HR tax limites are increased by gross amount.
  • No minimum or maximum donation.
  • Limit on reciprocal benefits - gift up to £100, benefit cannot exceed 25%. Gift over £100, benefit cannot exceed £25 + 5% of gift value over £100 capped at £2,500.

Question 40

Married Couple’s Allowance - key points:

Answer 40

• Available to married couples/ civil partners where one was born before 6 April 1935.
• Income is relieved at a rate of £9,075, reduced to £3,510 (minimum floor) by £1 for every £2 of income over £30,200.
• Income is relieved at the rate of 10%.
• This is a tax-reducer.