Chapter 1 - Income Tax

Question 1

Basis of Assessment

Answer 1

Self-employed people prepare annual accounts up to whatever date in the tax year they choose. Their accounts DO NOT have to coincide with the tax year.

Question 2

Current-Year Basis

Answer 2

Up to and including the tax year 2022/23.

Question 3

Tax-Year Basis

Answer 3

2024/25 onwards.

Question 4

Transition Year Basis

Answer 4

2023/24.

Question 5

Deductions

Answer 5

Expenditure must be wholly and exclusively incurred for the purpose of business and be of revenue. NOT CAPITAL.

Question 6

Trading Allowance

Answer 6

£1,000 annual trading allowance.

Question 7

Employment Income

Answer 7

Incl. salaries, fees, bonuses & benefits in kind (taxable benefits). These are all assessed in the tax year which the income in received/benefit is used.
Deducted under the PAYE system.

Question 8

Property Income

Answer 8

Income from UK property is taxable to UK or non-UK resident.
Income from overseas property is taxable to UK residents.

£1,000 ANNUAL PROPERTY ALLOWANCE.

Letting accounts need to be drawn up to 5TH APRIL or 31 MARCH using ordinary business accounting rules.
If income (before deducting expenses) is less than £150,000, accounts are drawn up on a SIMPLIFIED cash basis.
If the landlord opts-out of the above, ACCRUALS basis is used.

Income is assessed the same tax year is arises.

Question 9

Savings Income

Answer 9

Includes interest, purchased life annuity contracts, & gains from life assurance contracts.

UK RESIDENT - taxable whether in or outside the UK.

Taxed in the year it arises.

No deductions.

Question 10

Dividend Income

Answer 10

Includes stock dividends, & dividends from shareholdings in overseas companies.

UK RESIDENT - taxable whether in or outside the UK.

Taxed in the year it arises.

No deductions.

Question 11

Employee

Answer 11

CONTRACT OF SERVICE

Question 12

Self-Employed

Answer 12

CONTRACT FOR SERVICES

Question 13

Income paid gross

Answer 13

From:
-Bank & Building Society interest
-Interest distributions from UTs, OEICs & investment trusts
-Corporate Bonds
-Dividend Income

Question 14

Interest & Annuities - Deduction of Tax

Answer 14

Deducted at the basic rate of 20% from SOME interest & annuity payments by the PAYER.

Question 15

Interest - Deduction of Tax by PAYER

Answer 15

Tax is deducted before payment if a company (or partnership where the company is a member), pays interest to an individual, partnership (unless all the partners are UK companies), or non-UK company.

Question 16

Annuities - Deduction of Tax by PAYER

Answer 16

Basic rate of 20% tax deducted if an annuity is NOT paid wholly out the profits/gains subject to income tax.

REMEMBER - MOST PURCHASED LIFE ANNUITIES ARE PAID NET OF BASIC RATE TAX.

Question 17

Grossing Up Net Payments

Answer 17

People who receive income NET of basic rate tax (20%), must include the GROSS amount int heir tax calculation.
Although the NET amount is entered int he tax return, the GROSS amount is used to calculated the person’s tax liability.

Question 18

Total Income

Answer 18

Sum of the amounts of income which the taxpayer will be charged INCOME TAX for the year.

Question 19

Amount which tax will be calculated

Answer 19

(Total Income) - (Tax Relief) = Net Income

(Net Income) - (Personal Allowance) = Taxable Income

Question 20

Amounts that receive tax relief

Answer 20

-Qualifying interest payments
-Allowable business losses
-Gifts to charities of shares & securities
-Qualifying contributions to occupational pension plans & retirement annuity plans (where the provider doesn’t give relief at source).

Question 21

Interest Payments

Answer 21

Allowable deduction from total income if the loan was taken out for qualifying purposes.

Qualifying purposes:
-Purchase of shares in the borrower’s company, or the finance loans to the company.
-Investment in a partnership.
-Purchase of plant & machinery for use in a partnership.
-Payment of IHT.

GROSS figure used when doing tax calculation.

Amount of interest + allowable business losses deductible is capped at higher of £50k or 25% of person’s adjusted total income.

Question 22

Adjusted Total Income

Answer 22

(Total Income) + (charitable donations made through payroll) - (any pension contributions)

Question 23

Share Purchase & Loans to Companies

Answer 23

Relief is given for
-Interest paid on a loan for the purpose of acquiring shares in, or making a loan to a close trading company.

Question 24

Partnership Investment

Answer 24

Tax relief is given to a partner who pays interest on a loan.

Question 25

Purchase of Plant & Machinery

Answer 25

Tax relief is given to a partner who pays interest on a loan used to buy plant or machinery for use in the partnership business.

Question 26

Payment of IHT

Answer 26

Interest is allowable if its payable on a loan used to pay IHT on death.

-Relief is restricted to a period of 1 year from the making of the loan.
-Relief is at the borrower’s top tax rate, but subject to a cap, which is the higher of £50k, or 25% of adjusted total income.
-Borrower must be a personal representative of the deceased.

Question 27

Gift Aid

Answer 27

Gift aid donation to the charity is treated as a payment which the donor has already paid BASIC rate tax (20%).
The charity then recovers the tax deducted.

Question 28

Payroll Giving

Answer 28

Employees can make regular charity gifts through their employer’s payroll system.
The employer deducts the charity gift from the salary BEFORE deducting tax.
In turn, the employee gets tax relief at their highest rate.

Question 29

Gifts of Assets

Answer 29

People who donate certain assets to charity can get INCOME TAX relief on the full market value of the gifts. This is in addition to the CGT exemption for gifts to charity.

The assets that qualify are:
-Listed shares & securities
-Unlisted shares & securities dealt on a recognised stock exchange (e.g. AIM)
-Units in authorised UTs
-Shares in OEICs
-Holdings in foreign collective investment schemes
-Any freehold or leasehold property (provided whole interested is given)

Question 30

Pension Payments Tax Relief

Answer 30

Given through:
-Relief at source
-Net pay arrangement
-Relief by making a claim

Question 31

Relievable Pension Contribution

Answer 31

Contribution paid to a registered pension scheme by a member of the scheme, who is a relevant UK individual, or by a third party on their behalf (e.g. parent paying into a pension set up or their child).

Question 32

Relevant UK Earnings

Answer 32

-Profits from UK self-employment or partnership
-Earnings from UK employment
-Earnings from certain overseas crown employments that are subject to UK tax

Question 33

Relevant UK Individual

Answer 33

Someone who:
-has relevant UK earnings for the year
-Is resident in the UK at some point in the tax year
-Was resident in the UK at some point during the five previous tax years and were UK resident when they joined the pension scheme

Question 34

Pension Contribution Limit

Answer 34

The maximum amount that you can claim tax relief in any tax year is the greater of £3,600, or the amount of your relevant UK earnings that are subject to income tax that tax year.
Th annual allowance however is £60,000 for 2023/24, and £40,000 from 2014/15 to 2022/23.

If this is exceeded, you get a charge at your marginal tax rate.

Any unused allowance can be carried forward for up to 3 years.

There is no longer a lifetime allowance, however this used to be £1,073,100.

Question 35

Tapered Annual Allowance

Answer 35

2023/24 - the annual allowance is tapered down to a minimum of £10,000.
This happens if your income for the year exceeds £260,000.
The rate of reduction is £1 for every £2 that exceeds £260,000 (divide the amount by 2).

If you’re self-employed, any TRANSITIONAL period additional profits are ignored regarding the £260,000 limit.

Question 36

Relief at Source

Answer 36

Operates by allowing you to make a relievable pension contribution after deducting a sum equal to the basic rate of income tax (20%).
The pension admin will then claim the tax relief from HMRC.

Question 37

Net Pay Arrangement

Answer 37

Where an employees’ payments to an occupational pension scheme are usually deducted from pay before calculating tax, so the employee doesn’t have to claim tax relief afterwards.

Question 38

Relief by Making a Claim

Answer 38

Some providers of retirement annuity contracts don’t operate the ‘relief at source’ system.
Payments are made gross and tax relief is given by deducting them from TOTAL INCOME.

You can contribute up to 100% of relevant UK earnings.

Question 39

Taxation of Employee Benefits

Answer 39

A type of non-monetary compensation e.g. pension provision, medical cover or a company car.

They are treated as earnings of employment, so are taxable.

Question 40

Cash Equivalent

Answer 40

You are taxed on the cash equivalent of the benefit. This is defined as the cost to the employer.

-Any contribution made by the employee towards the cost is deducted from the cash equivalent
-The cost to the employer of actually providing an ‘in-house’ benefit is known as the ‘MARGINAL COST’.

Question 41

Use of Assets

Answer 41

If you have use of an asset (excluding a car or accommodation), the cash equivalent is:
-the ‘annual value’ of the use of the asset (20% of the market value of the asset when you could first use it)
-any expenses incurred by the employer in maintaining the asset

If the asset is given to you outright, the tax charge is based on the market value of the asset AT TIME OF TRANSFER.
If you could use the asset BEFORE its given to you, the tax charge is the higher of:
-the market value of the asset at time of transfer, OR
-the market value of the asset when you were first able to use it (less any amounts already taxed as benefits)

Question 42

In-House Benefits

Answer 42

-Goods & services sold in the usual course of the employer’s business, provided free or at a discount
-Services and facilities provided in-house
-Assets used in the business and made available for an employee’s private use, and then subsequently transferred to the employee

Question 43

Calculation of Car Benefit

Answer 43

Calculated as a percentage of the list price of the car (the % based on the car’s CO2 emissions).

The bases of taxation for 2023/24 is:
-2% charges for cars that can only be driven in zero-emission mode
-For hybrid car with emissions between 1 & 50 g/km, the electric range of the car is used to determine the car benefit package

Question 44

Free Fuel for Private Use

Answer 44

-Charged as a % of a set figure announced each year. 2023/24 figure is £27,800
-% used is the same used for car benefit purposes and ranges from 2% to 37%.
-The fuel benefit is reduced proportionately if the car is only available for part of the year or not available for a period of 30 days or more.
-The fuel benefit is reduced proportionately if the car fuel is only provided for part of the year.

Question 45

Green Transport

Answer 45

NO TAX CHARGE for benefits aimed to encourage employees to travel to work other than by private car.

Question 46

Mileage Allowances

Answer 46

NO TAX CHARGE if you use your private vehicle for business use and then get reimbursed.
TAX CHARGE if you are reimbursed for costs of private travel.

Question 47

Company Vans

Answer 47

TAXABLE BENEFIT of £3,960 for employees provided with a company van + £757 fuel benefit for private journeys.
These can be reduced if the van cannot be used for more than 30days in a row or if an employee reimburses the private fuel use.

Question 48

Beneficial Loans

Answer 48

If you receive interest-free or ‘cheap’ loans from your employer, you are taxed on the benefit you receive from the arrangement.
This is measured as the difference between the amount of interest you actually paid vs. the official interest rate (2.25% for 2023/24).

Question 49

Living Accomodation

Answer 49

Where an employee lives in a rent-free accommodation or pays very low rent, there is a tax charge on the benefit.

Question 50

Other Taxable Benefits

Answer 50

-Cash vouchers
-Non-cash vouchers
-Credit tokens
-Employee liabilities
-Medical Insurance

Question 51

Benefits Wholly or Largely Exempt from Tax

Answer 51

• Group IP
  -Meals
  -Mobile phones
  -Long service awards
  -Suggestion schemes
  -Work training
  -Relocation & removal expenses
  -Home-working
  Workplace nurseries
  -Liability insurance
  -Pension advice
  -Trivial benefits

Question 52

Personal Allowances

Answer 52

The personal allowance is deducted after working out your aggregate income minus reliefs from total income.
Married couple’s allowance is a TAX REDUCER.
You can transfer 10% of your personal allowance to a spouse or civil partner - this is a TAX REDUCER.

Question 53

Eligibility for Personal Allowances

Answer 53

Any UK resident.

For non-UK resident if you are:
-a UK citizen
-nationals of a country in the EEA
-are, or were employed in the service on the Crown or a missionary society
-employed in the service on territory under HM protection
-resident of IoM or Channel Islands
-previous UK resident however are abroad for the sake of your health or health of a family member
-person whose late spouse/civil partner were in the service of the Crown

Anyone paying tax on the remittance basis is not entitled to personal allowances - EXCEPT if their unremitted overseas income for the year is less than £2,000.

Question 54

Personal Allowance

Answer 54

All qualifying individuals have a personal allowance of £12,570.
No minimum age requirement.

The allowance is gradually reduced to £0 where someone’s adjusted net income is more than £100,000.

Question 55

Adjusted Net Income

Answer 55

NET INCOME (total income - deductions for loss relief and interest payments) - GROSS AMOUNT OF PERSONAL PENSION CONTRIBUTIONS & GIFT AID DONATIONS.

Question 56

Marriage Allowance

Answer 56

You can transfer 10% of the personal allowance to a spouse/civil partner

Question 57

Married Couple’s Allowance

Answer 57

IF YOU OR YOUR SPOUSE WERE BORN BEFOE 6 APRIL 1935, you have a married couple’s allowance of £10,375.
If you have an adjusted net income of over £34,600, the married couple’s allowance is reduced by £1 for every £2 over a base allowance of £4,010.

Question 58

Blind Person’s Allowance

Answer 58

£2,870 for registered blind people

Question 59

Tax Charge - Step-By-Step

Answer 59

STEP 1
Calculate all the pre-tax income for the year. Income is then taxed in the following order:

1. Earnings, pensions, rental income & any income not classed as savings or dividend income
2. Savings income
3. Dividend income
4. Chargeable gains under life assurance policies

STEP 2
Deduct reliefs from total income in the following order:

1. from earnings & pensions
2. from savings income
3. from dividend income
4. from chargeable gains under life assurance policies

STEP 3
Deduct the personal allowance
£12,570 (+ blind person’s allowance if applicable).

STEP 4
Calculate the amount of any payments for which higher & additional rate relief is given by extending the basic & higher rate bans.
E.G. pension contributions paid net & gift aid donations.

STEP 5
Calculate the tax on the remaining income in the order shown in STEP 1.

STEP 6
Deduct any TAX REDUCERS.

Question 60

Payment of Tax

Answer 60

Tax deducted at source from investment income or by PAYE is set against the tax liability as calculated.

-If a balance of tax payable remains, you are liable to pay it to HMRC under self assessment, or adjusting next year’s PAYE code.
-If tax deducted is MORE than the initial tax liability, the excess is repaid.

Question 61

Tax - Marriage/Civil Partnership

Answer 61

Couples are taxed separately.
In certain conditions you can transfer 10% of your personal allowance to your partner (£1,260).

Question 62

Taxation of Children’s Income

Answer 62

Children are subject to tax the same way adults are.

Question 63

High Income Child Benefit Charge

Answer 63

There’s an income tax charge for those who receive Child Benefit (or their partner does), and have an adjusted net income of more than £50k.

-If salary = £50k to £60k, the charge is 1% of the child benefit amount for every £100 over £50k.
-If salary = >£60k, the charge is the equivalent of the full child benefit amount.
-If both partners have income >£50k, the charge is made to the partner with the higher income.
-Tax is collected through self-assessment.
-Child Benefit for 2023/24 is £24 pw for the 1st child, and £15.90 pw for each subsequent child.

Question 64

Income Tax Liability of Trusts

Answer 64

If a trust has at least one trustee resident in the UK, there is potentially a liability to income tax on the total income.

Question 65

Bare Trusts

Answer 65

The asset is in the name of the nominee (trustee), but the actual asset and income belong to the BENEFICIARY.

Income is taxable as the beneficiary’s income, therefore are the ones liable to tax.

Trust income must be included on the beneficiary’s self-assessment tax return.

Question 66

Qualifying Beneficiaries & Trusts

Answer 66

Special tax treatment is available to trusts where the individuals fit within certain definitions.

1. A disabled person refers to someone who is eligible for the following benefits:
   -Attendance allowance
   -DLA
   -PIP
   -Constant attendance allowance
   -AFIP
2. A relevant minor is a child under 18 and at least one parent has died.
   The eligible trusts for relevant minors are:
   -Statutory trusts
   -Trusts established under the will of the deceased parent
   -Trusts established under the Criminal Injuries Compensation Scheme

Question 67

Life Interest & Interest in Possession Trusts

Answer 67

There is an interest in possession when one or more beneficiaries have a right to the trust income.

Question 68

Tax on the Trustees

Answer 68

-Tax on SAVINGS INCOME is at 20% (the personal savings allowance is NOT applicable to trustees)
-Bank & building society interest is paid gross
-Tax on dividends is at 8.75% (the dividend allowance is NOT applicable to trustees)
-Tax on other income received by the trustees is 20% and paid through self-assessment

Trustees complete a R185 form (Trust Income) which details the net income & tax deducted, and give this to the beneficiaries for their tax returns.

Question 69

Tax on the Beneficiaries (BARE)

Answer 69

They must add trust income from the R185 to their other income for that tax year to calculate their income tax liability.

If they’re a non-taxpayer, they may be able to reclaim tax deducted.

-The beneficiary will have no further tax to pay if they’re a basic-rate taxpayer and the additional income doesn’t push them into the higher bracket.
-A beneficiary who is higher or additional-taxpayer, will have a further tax liability at the appropriate rate, LESS the rate at which tax has already been paid by the trustees.

Question 70

Dividends from Shares & UTs

Answer 70

Dividend Allowance = £1,000

In excess of this they’re subject to:
-Basic-rate tax payers = 8.75%
-Higher-rate tax payers = 33.75%
-Additional-rate tax payers = 39.35%

TRUSTEES are NOT entitled to the dividend allowance and their liability is for BASIC RATE ONLY.

Question 71

Discretionary Trusts and Accumulation & Maintenance Trusts

Answer 71

With a discretionary or A&M trust, the trustees have discretion on how the income & capital of the trust is distributed.

Income Tax position -
-Trustees do NOT get PSA or DA
-Trustees have a standard rate band of £1,000. Where there’s more than one trust, this band is dividend equally between them. The minimum standard rate band is £200.
-Standard rate band means income within this band will see tax at 20% for NON-DIVIDEND income and 8.75% for DIVIDENDS.
-Standard rate band will be used for non-dividend income first, and then dividend income.
-Income above this band, will see tax at 39.35% for DIVIDENDS and 45% for other income.

Question 72

Tax on the Beneficiary (DISCRETIONARY & A&M)