Income Tax

Question 1

What is income tax?

Answer 1

Annual tax which individuals have to pay to HMRC.

Question 2

What is the statute for income tax?

Answer 2

Income Tax Act 2007

Question 3

What is income?

Answer 3

Money will be regarded as income if there is an element of RECURRENCE - a salary received every month , or interest received on a bank account.

Question 4

Who pays income tax?

Answer 4

Individuals
Partners
Personal representatives and trustees

Question 5

When do individuals have to pay income tax?

Answer 5

If their tax earnings exceed a certain threshold.

Question 6

When do sole traders have to pay income tax?

Answer 6

Based on an assessment of their trading profits.

Ascertain the business’s chargeable receipts, subtract from chargeable receipts any deductible expenditure and capital allowance. This is the trading profit, and is used for income tax.

Question 7

When do partners have to pay income tax?

Answer 7

Repsonsible for tax due on their individual share of the partnership profits.

Same calculations s sole traders.

Question 8

When must PRs pay income tax?

Answer 8

Pay the deceased outstanding income tax and income tax chargeable during the administration of the estate

Question 9

When does trustees have to pay income tax?

Answer 9

Pay income tax on income produced by the trust

Question 10

What is the tax year?

Answer 10

From 6 April until 5 April the following year.

This means that an individual will pay tax on all income earned between these dates.

Question 11

How do you work out taxable income?

Answer 11

Allowances and reliefs are deducted from the income the individual earns.

Question 12

What are the 3 categories of income?

Answer 12

Non-saving, non-dividend income (NSNDI)

Savings income

Dividend income

Question 13

What are the 5 steps to calculate income tax payable?

Answer 13

Calculate total income

Deduct any reliefs (=net income)

Deduct any personal allowances (=taxable income)

Separate NSNDI, savings income and dividend income, and calculate tax on each time.

Add together the amounts, to give overall income tax liability

Question 14

What are the sources of income?

Answer 14

Trading income
Property income
Savings and investment income
Employment and pensions income
Miscellaneous

Question 15

Which incomes is not chargeable?

Answer 15

Interests on damages for PI or death
Interests on savings certificates
State benefits
Premium bond winnings
Income from investment in ISA

Question 16

What is a qualifying loan relief?

Answer 16

Tax relief available for interest paid on money which the tax payer has borrowed

Question 17

What is the personal allowance for 2023/24

Answer 17

12,570

Question 18

What rank do you deduct personal allowance off ?

Answer 18

Firstly against NSNDI
If surplus, then savings income
If surplus, then dividend income

Question 19

What happens if a taxpayers income exceeds 100,000?

Answer 19

Personal allowance is reduced by £1 for every 2 of income, above te 100,000 limit.

Question 20

How do you work out the adjusted personal allowance for peoples whose income is higher than 100,000

Answer 20

12,570 - (net income-100,000)
Divided by 2

Question 21

What is the marriage allowance?

Answer 21

Where a person does not have enough income to use up their personal allowance, they can transfer 1,260 of their personal allowance to their spouse or civil partner.

NOT available if recipient is a higher or additional rate tax payer

Question 22

What are property and trading allowances?

Answer 22

Allowances for small amounts of property income and trading income are available to al UK taxpayers.

Where individuals are in receipt of gross property income below 1,000, the income not be subject to income tax.

Question 23

What is the personal savings allowance?

Answer 23

Can be set against savings income, so that the first 1,000 of savings will be tax free.

Depends if taxpayer is basic or higher rate.

Question 24

What are the differnet personal savings allowances bands?

Answer 24

Basic rate (0-37,000) - 1,000 free
Higher rate (37,701-125,140) - 500 tax free
Additional rate taxpayer - none

Question 25

What is the dividend allowance?

Answer 25

1,000 First 1,000 will be tax free. All taxpayers are entitled to this.

Question 26

What is the order of slices in income tax calculation?

Answer 26

NSNDI first Savings Then dividends.

Question 27

What are the rates of income tax for NSNDI?

Answer 27

Basic rate: 20% Higher rate: 40% Additional rate: 45%

Question 28

What is the income tax rates for savings?

Answer 28

Starting rate : 0% Basic rate: 20% Higher rate: 40% Additional rate: 45%

Question 29

What are the income tax rates for dividends?

Answer 29

Ordinary rate: 8.75% Upper rate: 33.75% Additional rate: 39.35%

Question 30

What tax do sole traders have to pay?

Answer 30

Income tax Potential capital gains tax Inheritance tax, depending on circumstances

Question 31

What is the general rule on taxation of partnerships?

Answer 31

Any tax is through the individual. Therefore, income tax and or capital gains tax.

Question 32

How is partnerships trading profit calculated?

Answer 32

Chargeable receipts - deductible expenditure - capital allowance = trading profit/loss

Question 33

What is a qualifying loan

Answer 33

If an individual borrows money to buy a share in a partnership or to lend money to a partnership, they can deduce the interest they pay on this borrowing from total income.

Question 34

How do LLPs pay tax

Answer 34

Treated the same as a partnership

Question 35

How do shareholders pay tax?

Answer 35

When a CLOSE COMPANY makes a loan to a shareholder, there may be income tax consequences. When a shareholder SELLS their shares back to the company, they will be charged to income tax as a divided, and potential CGT

Question 36

What are the 2 income tax reliefs for shareholders?

Answer 36

1: when an individual borrows money to purchase ordinary shares in a close company that carries on a trade, or lends money to a close company that carries on trade 2: EIS, Enterprise Investment Scheme. Allows the individual to deduct from their income tax liability for the year a sun equal to 30%.

Question 37

What do employees not have to pay tax on?

Answer 37

Accommodation, if necessary for job Interest-free or low-interest loans Employers pension contributions. Share schemes

Question 38

How is income tax collected?

Answer 38

Either dedication of source Or self assessment collection

Question 39

How can income tax be deducted at the source?

Answer 39

Payer of the income acts as a tax collector. They will deduct the correct amount of income tax for the income payment, and pay it to HMRC.

Question 40

What is the self assessment for collection of income tax?

Answer 40

Must complete a tax return, declaring all their income for the tax year.

Question 41

When does tax have to be paid?

Answer 41

There are different tax returns for differnet types of income, and they are issued soon after 5 April each ear. Must be filed by 31 January following the tax year.

Question 42

What are penalties for default in declaring tax?

Answer 42

HMRC charges interest on any tax unpaid at the due date for payment. There are also fixed penalties, fines for late or non-payment.

Question 43

What is tax avoidance?

Answer 43

Using the tax law to the taxpayers benefit to reduce their tax bill, in a way that is arguably lawful, but not within the spirits of tax legislation.

Question 44

What is tax evasion?

Answer 44

Using illegal methods to reduce tax payment, and which is targeting by domestic legislation and international treaties.

Question 45

What is GAAR?

Answer 45

General anti-avoidance rule. This was brought into the system, and applies to income tax and CGt, corporation, IHT and NI. Tax avoidance is acceptable, but abusive arrangements are NOT

Question 46

What are examples of abusive tax arrangements?

Answer 46

If it would be reasonable to conclude that obtaining of a tax advantage was the MAIN PURPOSE, or one of the main purposes of the arrangement. Whether the effect of arrangement is consistent with the policy objectives, if it woudl result in abnormal steps.

Question 47

What is the procedure of GAAR?

Answer 47

HMRC will notify the taxpayer of why it considers that a tax advantage has arisen to the taxpayer, and set out the tax adjustments that the officer considers ought to be taken. If counteraction is proposed by HMRC, the taxpayer is permitted to make written representations in their defence, and teh matter will then be referred to the GAAR panel.