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Taxation FA22 > Basic income tax computation > Flashcards

Basic income tax computation Flashcards

1
Q

What is the length of tax year?

A

year from 6 April to next year to 5 April

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2
Q

What is Personal allowance?

A
  • is an amount of tax-free income that every taxpayer is entitled to each tax year
  • the amount is reduced, potentially to £Nil, for high income individuals
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3
Q

Who is assessable persons for income tax?

A
  • all individuals, including children
  • both spouse withing a married couple and both partners in a civil partnership are treated as separate individuals
  • all persons resident for tax purposes in the UK are assessed to UK tax on their worldwide income
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4
Q

Special rules between spouses where assets are jointly owned:

A
  • generally, income generated from assets jointly owned is split 50:50 between spouses regardless of the actual percentage ownership
  • election available if assets owned are not 50:50
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5
Q

Are children taxable persons?

A
  • under the age of 18 are taxable persons
  • income typically falls short of their personal allowance in any tax year and therefore no tax liability actually arises on their income
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6
Q

Income tax computation pro forma?

A

Trading income x
Employment income x
Property income x
Pension income x

Non-saving income
Saving income x
Building society interest x
Bank interest x
Dividends x

Total income x
Less: Relief (x)

Net income x
Less: Personal allowance(x)
Taxable income x

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7
Q

What are the different sources of income?

A
  • income earned from employment and self-employment
  • income arising from the ownership of property
  • investment income (e.g. savings income and dividends)
  • income from pensions
  • income exempt from income tax
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8
Q

What compromise non-savings income?

A
  • earned income
  • property income
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9
Q

What earned income compromise?

A
  • trading income : the profit of a trade, profession or vocation of a self-employed individual
  • employment income: earnings including salaries, bonuses and other benefits from an office or employment are assessed as employment income
  • pension income: income from an occupational or personal pension fund
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10
Q

What is property income?

A
  • is typically rental income, but also includes other items such as the income element of a premium on granting a short lease
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11
Q

What is the investment income?

A
  • savings income: usually bank and building society interest
  • dividend income
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12
Q

What income is exempt?

A
  • interest from National Savings and Investments certificates
  • betting, lottery and premium bonds winnings
  • income received from an individual savings account
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13
Q

Personal allowance

A
  • for 22/23 £12,570
  • order of deducting PA: Non-savings income
    Savings income
    Dividend income
  • cannot be set against capital gains
  • in certain circumstances, part of the PA can be transferred to a spouse of civil partner
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14
Q

Reduction of personal allowance - high income individuals

A
  • the PA is gradually reduced for individuals with income in excess of £100,000.
  • where the taxpayer’s ANI exceeds £100,000 the PA is reduced by: 50% x (ANI - £100,000)
  • a taxpayer with ANI in excess of £125,140 will therefore be entitled to no PA at all, as the excess above £100,000 is twice the PA.
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15
Q

Different rate of types of income

A
  • non-saving income: 20/40/45%
  • savings income: 0/20/40/45%
  • dividend income: 0/8.75/33.75/39.35%
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16
Q

What are examples of non-saving income?

A
  • trading income
  • employment income
  • pension income
  • property income
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17
Q

Rates for non-saving income for tax year 2022/2023?

A
  • basic rate of 20% applies to the first £37,700 of taxable income
  • a higher rate of 40% applies where taxable income falls in the range £37,701 to £150,000
  • an additional rate of 45% applies to taxable income in excess of £150,000
18
Q

Approach to the income tax computation

A
  1. Calculate the individual’s net income
  2. Consider the reduction of the PA if ANI exceeds £100,000
  3. Deduct the appropriate amount of PA to calculate the taxable income
  4. Calculate the income tax liability bearing in mind the higher rate threshold of £37,700 and the additional rate threshold of £150,000
19
Q

Marriage allowance (transferable amount)

A
  • allows a spouse or civil partner to elect to transfer a fixed amount of personal allowance to to his, her or their spouse or civil partner
  • may also be referred to as the transferable amount of the PA
  • is available provided neither spouse is higher rate or additional rate taxpayer
20
Q

What is allowed for MA transfer?

A
  • to other spouse
    -of a fixed amount of PA = 10% x the individual personal allowance = £1,260 for 2022/2023;
21
Q

What is the effect of the election MA?

A
  • the transferring spouse’s PA is reduced by the fixed amount of £1,260
  • the recipient spouse’s income tax liability is reduced by a maximum of £252 (£1,260MA x 20% basic rate (BR)income tax)
22
Q

How election can be made?

A
  • in advance:
    -by 5 April 2023
    -the election will remain in force for future tax years, unless the lection is withdrawn
  • the conditions for relief are no longer met
  • in arrears:
  • by 5 April 2027 within 4 years of the end of tax year
  • in this case the lection will only apply to the tax year 2022/23 in isolation
23
Q

What is income tax liability?

A
  • the total income tax due on the taxpayer’s taxable income (i.e. total income, after deducting available personal allowance)
24
Q

What is income tax payable?

A
  • the final tax bill to be paid via self-assessment after deducting tax already paid on employment income (PAYE).
25
Q

Reliefs against total income

A

Tax relief is available for certain payments made by an individual and for trading losses
Relief is available by deducting the payments/losses from total income, subject to a maximum amount of relief.

26
Q

What qualifying purposes must loan be applied for relief?

A

Employees:
- the purchase of plant or machinery by an employed person for use in his, her or their employment
- the purchase of shares in an employee-controlled trading company by a full-time employee
Partners:
- the purchase of share in a partnership, or the contribution to a partnership of capital or a loan. The borrower must be a partner in the partnership
- the purchase of plant or machinery for use in the partnership, by a partner
Relief is given by deducting the amount of interest paid in a tax year from total income.

27
Q

What are two ways of charitable giving of tax relief?

A
  • donations under the gift aid scheme
  • payroll giving under the payroll deduction scheme
28
Q

Donations under the gift aid scheme

A
  • donations made under the scheme attract relief at the donor’s highest rate of tax
  • there are no minimum or maximum contribution limits, and gifts can either be one-off or a series of donations
  • the payments are made with basic rate tax deducted at source. Effectively providing basic rate relief (20%) at the time of payment
  • the basic rate tax is then claimed by the charity from HMRC
    -example: individual wants charity to receive £100, then the individual pays the charity £80, charity claims £20 from HMRC
29
Q

What means donation for basic taxpayer?

A
  • obtain the tax relief at the time of payment, by only paying 80% of the amount of the donation
30
Q

What means donation for higher and additional rate taxpayers?

A

-it comes in two parts:
- 20% tax relief is granted at the time the payment is made
- higher and additional rate relief is obtained by adding the gross amount of the donation to the basic and higher rate bands in the income tax liability calculation
- the gross amount of the donation is calculated as:
(amount paid by the individual to the charity x 100/80)
- the effect of extending the basic and higher rate bands is that income equivalent to the value of the gross donation is taxed at:
- 20%, rather than 40% for a higher rate taxpayer or
- if an additional rate taxpayer, at 20% rather than 45%

31
Q

What is the child benefit?

A
  • is a tax-free payment from the Government that can be claimed in respect of children
32
Q

When child benefit income tax arises?

A
  • an individual receives child benefit or
  • that individual ,or the individual’s spouse or civil partner, or the individual’s partner, whom he, she or they are living with as if they were married or in a civil partnership, has ‘adjusted net income’ of £50,000 or more
33
Q

How is calculated adjusted net income for child benefit tax charge?

A
  • is calculated in the same way as for the restriction of the personal allowance for high income individuals
  • tax charge are rounded down to the nearest whole number
34
Q

What is tax charge for child benefit tax charge?

A
  • Income between £50,000 and £60,000 - tax charge is 1% of child benefit for each £100 of income over £50,000
  • Income over £60,000 - tax charge is the amount of child benefit received
35
Q

What if both partners have adjusted net income over £50,000 regarding child benefit tax charge?

A
  • the charge is levied on the person with the higher income
36
Q

Definition of residence

A
  • does not meet one of the automatic non-UK residence test
  • meets one of the automatic UK residence tests
  • meets one or more of the sufficient ties tests
37
Q

Procedure to determine residence

A

Step 1:
Check automatic non-UK residence tests
- if satisfy one test = non-UK resident
- if not = go to Step 2
Step 2:
Check automatic UK residence tests
- if satisfy one test = UK resident
- if not = go to Step 3
Step 3:
- determine how many sufficient ties wit the UK exist
- how many days are spent in the UK in the tax year
- use tax tables to decide status

38
Q

What are automatic non-UK residency tests?

A
  • an individual is automatically not UK resident if the individual is ‘in the UK’ in the tax year for less than:
    -16 days
  • 46 days, and has not been UK resident in any of previous three tax years
    -91 days, and works full-time overseas
39
Q

What are automatic UK residency tests?

A
  • an individual is automatically UK resident if:
  • the individual is in the UK for at least 183 days in the tax year or
  • the individual’s only home is the UK or
  • the individual works full-time in the UK
40
Q

What if the individual does not satisfy any of the automatic tests?

A
  • residency status is determined by:
  • how many of the five ‘sufficient ties tests’ are satisfied, and
  • the number of days spent in the UK
41
Q

What are the sufficient ties tests?

A
  1. Close - spouse/civil partner/ minor child
  2. Accommodation in UK - used in tax year
  3. Substantive work in UK
  4. Days in UK in last two tax years - >90 days in either year
  5. Country tie - most time spent in UK
42
Q
A

Taxation FA22 (25 decks)

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