Income Tax Flashcards
what are the sources of law of Income Tax
- Statutes
(1) the Income Tax Act 2007 (ITA 2007)
(2) the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
(3) the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). - case law
3.Official Statements made by HMRC
(1) Extra-Statutory Concessions
These are published by HMRC in a booklet. If a taxpayer satisfies the terms of an Extra
Statutory Concession, HMRC waives its right to collect tax which would otherwise be due.
(2)Statements of Practice
These are announced by press release and published in the professional journals. They
indicate what view HMRC will take of particular tax provisions.
Note that these Official Statements do not bind the courts.
what is income tax?
- no statutory definition or definition from case law
- A distinction must be made between income and capital profits:the former is subject to income tax; the latter are subject to capital gains tax.
- Generally, money received will be income if there is an element of recurrence, for example, a salary or partnership profit share received every month, or interest paid on a bank or building society account every
quarter.
Who pay the income tax
(a) individuals;
(b) partnerships (partners are individually responsible for the tax due on their share of
partnership profits);
(c) personal representatives (who pay the deceased’s outstanding income tax and income
tax chargeable during the administration of the estate); and
(d) trustees (who pay income tax on the income produced by the trust fund).
tax year
From 6 April until 5 April the following year
Types of Income
(a) non-savings, non-dividend income (‘NSNDI’), comprising all sources of income except income derived from savings and dividends;
(b) savings income, which is interest from various sources, for example building society accounts, most National Savings accounts, unit or investment trusts and corporate or
government bonds and gilts; and
(c) dividend income.
The steps to work through to calculate the amount of tax payable
Step 1: Calculate the total income
Step 2: Deduct any allowable reliefs
The resulting sum is net income
Step 3: Deduct any personal allowances
The resulting sum is taxable income
Step 4: Separate NSNDI, savings income and dividend income, and calculate the tax on
each type of income at the applicable rate(s) (starting rate, basic rate, higher rate
and additional rate)
Step 5: Add together the amounts of tax from Step 4 (to give the overall income tax liability)
what income is charged to income tax?(the ITTOIA 2005 and the ITEPA 2003)
- trading income–profits of trade, profession or vocation (which applies to sole trader, trading partnership,sole practitioner,professional partnership)
- property income–rents and other income from land in UK
3.savings and investment income–interests, dividends,annuities - certain miscellaneous income-annual income not otherwise charged
- employment and pension income
Exempt Income
Certain items are free of income tax. They include:
(a) certain State benefits;
(b) interest on Savings Certificates;
(c) scholarships;
(d) interest on damages for personal injuries or death;
(e) income from investments in an individual savings account (ISA) (see 5.3);
(f ) gross income up to £7,500 a year from letting a furnished room in the taxpayer’s home;
(g) annual payments under certain insurance policies, for example, where insurance
benefits are provided in times of sickness; and
(h) premium bond winnings.
tax deducted at source
For most taxpayers, their main source of income will be employment income, from which tax
will have been deducted at source. The payee receives the net amount, not the gross amount.
Salaries and other employment income are assessable under ITEPA 2003 using the Pay As You
Earn system (PAYE). Under the PAYE system, the employer deducts from the employee’s
salary and then pays to HMRC income tax at the appropriate rate at the time the salary is paid.
The PAYE system also takes account of personal allowances.
net income
Net income=Gross Income- Allowable Reliefs
Interest payments on qualifying loans
- Most interest payments receive no tax relief at all, for example ordinary bank overdrafts, credit
card interest and hire purchase interest payments. The borrower pays the interest out of taxed
income. - exception: qualifying loans
(1)A loan to buy a share in a partnership or to contribute capital or make a loan to a
partnership
(2)A loan to invest in a close trading company
(3) A loan to personal representatives to pay inheritance tax
Types of allowances
- personal alloawnce
- marriage allowance
- blind person’s allowance
4.property and trading allowance
5.personal savings and dividend allowance
The availability of allowances depends not on the type of income involved, but on the taxpayer’s personal circumstances, for example disability or the amount of income received
each tax year.
Personal Allowance
- £12,570
2 sequeance:
It is applied in this order: first against NSNDI;
then, if there is a surplus, against savings income;
and finally any remaining surplus is applied against dividend income.
For most employees, their Personal Allowance will be used up by their employment income,
unless such income is below £12,570. - If the Personal Allowance exceeds the net income of the taxpayer, the surplus is unused and cannot be carried forward for use in future years.
- This allowance may be claimed by taxpayers resident in the UK, male, female, adult or child,
married or single. Husband and wife are treated as separate single people. Each spouse is
independently liable for tax on their own income, and each has their own Personal Allowance
5.The Personal Allowance is reduced where the taxpayer’s income exceeds the income limit of
£100,000. This reduction applies irrespective of age. The Personal Allowance is reduced by £1
for every £2 of income above the £100,000 limit. The effect of the reduction is that for a
taxpayer with income of £125,140 or more, no Personal Allowance will be available.
- £12,570 – (net income – £100,000)/2 = adjusted Personal Allowance
Marriage allowance
Where one spouse or partner does not have enough income to use their
Personal Allowance fully for that tax year, they may transfer £1,260 of their Personal
Allowance to their spouse or civil partner. The recipient must not be a higher or additional
rate taxpayer.
Blind person’s allowance
A taxpayer who is a registered blind person receives an allowance of £2,600. If a husband and
wife are both registered blind, they can each claim the Blind Person’s Allowance.
Property and Trading Allowance
- gross property income or gross trading
income below £1,000, - the income will not be subject to income tax and taxpayers are not required to submit a tax return
- Where gross property or trading income is in excess of £1,000, the taxpayer can choose to
take the £1,000 allowance as a deduction against gross income instead of deducting actual
expenses to arrive at their taxable income figure.