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AF1 2018/19 > Income Tax > Flashcards

Income Tax Flashcards

1
Q

Who is entitled to a personal allowance against UK income?

A

UK residents and qualifying non-residents ( residents of the EU,EEA and UK commonwealth and where there is a double treaty arrangement

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2
Q

What happens if you are a non domiciled UK resident and have income of more than £2000 and you are taxed on a remittance basis?

A

You do not have a personal allowance

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3
Q

How much can be transferred of the personal allowance from spouse to spouse and what are the rules?

A

10% of the personal allowance
Giver must be a non-tax payer (earn less than £11,850) - ie have allowance to give away
Receiver must be a basic rate tax payer (cannot happen if the recipient is a higher rate tax payer)

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4
Q

What is the marriage allowance?

A

TAX REDUCER
If either born before 6 April 1935. It benefits a couple where there is an unused personal allowance and the other is a basic rate tax payer
Maximum saving is £220 0r (£1100 x 20%)

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5
Q

What is adjusted net income?

A

Annual income less certain deductions, gross pensions and gift aid

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6
Q

What happens to personal allowance when income is over £100000?

A

It is reduced by £1 for every £2 over

£112000 the personal allowance is £5000 (£11000-£6000)

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7
Q

What is the income rate trap?

A

If someone has income between £100,000-£123,700 then they pay effective tax of 60%. They pay at 40% and the loss of the personal allowance is the equivalent of losing a further 20%.

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8
Q

What is the blind person’s allowance and is this transferable to spouse?

A

It is £2290 and additional to the personal allowance

Yes it can be transferred

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9
Q

What is taxable income?

A

Income after

  • certain allowable deductions
  • Deduction of a personal allowance
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10
Q

Name some examples of non savings income (5)

A
  • trading income
  • employment income
  • certain Social security benefits eg state pensions
  • income from property
  • patents
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11
Q

What is the PSA?

A

Personal savings allowance and this is £1000 for BRT and £500 for HRT. Nothing for additional rate band.

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12
Q

What are the 4 products where the interest is paid net?

A

Corporate bonds
Fixed interest unit trust
OEICs
PLAs

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13
Q

What is the starting rate band and what does it do?

A

There is a starting rate band of 0% on savings for £5000 of taxable income. This is reduced by any taxable non savings income
If they have £11000 non savings income and £5000 savings income. They will have no tax on the £11000 as this will be covered by personal allowance and the £5000 is covered by the starting rate band.

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14
Q

At what income level does the starting rate band disappear?

A

When income exceeds £16000 there would be no starting rate band available.

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15
Q

Does a child receive a personal allowance?

A

Yes and if they have income that exceeds this then they will pay tax to just like adults

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16
Q

If the annual income from all investments is below £100 is this taxed on the child or the parent?

A

Child - it is taxed on parent if over if £100.

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17
Q

Are income from junior Isas and CTFs included within the rule of the tax of £100 with a child

A

No they are not included however the interest from a cash ISA if the child is 16/17 then this is included in the rule

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18
Q

If a grandparent funds an investment for the child who pays the tax?

A

This would be the child

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19
Q

At what level of income does the child benefit start reducing?

A

At £50000.

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20
Q

How is the high income child benefit charge paid?

A

Through self assessment

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21
Q

What is the tax charge on the high income child benefit charge?

A

1% of the amount of child benefit received for every £100 of annual income above £50000. At £60000 this is equal to the amount of benefit that would be received and this is then not paid

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22
Q

If both parents earn over £50000 on which one is the high income child benefit charge paid

A

It is calculated on the higher one

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23
Q

If I were to own several UK properties how would this be dealt with from an income tax perspective?

A

All UK property owned by an investor would be treated as one letting business, with income and expenses pooled. Interest on the loans can also be deducted from the income including mortgage interest on buy to lets. (this is disappearing 6 April 2017).

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24
Q

What are the 2 advantages of being self employed over employed?

A
  • Class 4 NiCs paid by self employed are charged a maximum rate of 9%. Class 1 Nics for employed are charged at 12% maximum rate
  • The range of business expenses that can be claimed is far more generous for the self employed than the employed
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25
Q

If you provided a contract for services would this be more likely be for self-employed or employed?

A

Self-employed

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26
Q

If you are to provide a contact of service then would this be more likely for self-employed or employed?

A

Employed

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27
Q

List some of the factors that HMRC may look at to determine whether the individual is self-employed (over employed)? (6)

A
  • Right of control by the engager - can the engager control how the worker performs services, when and where can they be performed
  • Can sub-contract or send a substitute, so long as they pay them (not the co)
  • Provide their own equipment
  • If the worker is to suffer a loss and have to pay for it then this would mean self-employed
  • Agreement for a specific amount of money, not a regular wage
  • No set hours, holiday, overtime, sick pay etc
  • Working for several clients
  • Responsibility for correcting own hours
  • Ability to refuse work
  • A contract to provide services, not a contract of services
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28
Q

Does an accounting period for the self employed have to coincide with the tax year?

A

No they can choose which every period they want

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29
Q

Net profits are calculated in the tax year, so if the accounting period is different to the tax year, what happens in the first year of trading?

A

The profits are time apportionated
(in the first year they are divided by the number of months of trading and then for the next tax years the net profits are taxed in the tax year in which the accounting period ends)
Sometimes there is overlap and tax is paid twice and relief is normally given for this in the last year of trading

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30
Q

When deducting expenses from the net profits, what are the rules around the expenses?

A

That they must have incurred wholly and exclusively for the purposes of the trade

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31
Q

What are revenue expenses?

A

These are things such as stationary, rent rate. They can be deducted immediately as they will normally have a useful life of less than 2 years

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32
Q

What are capital expenses?

A

fixed assets and these are deducted differently
If you buy a van for £20000 then this is a deduction but the asset is still held. The depreciation of this asset/running costs can therefore be deducted as a revenue expense

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33
Q

What happens if a car or van is not used 100% for the business when it comes to deducting expenses?

A

You need to reduce the expense proportionately with the amount of time that this is used in the business

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34
Q

Name some taxable benefits to employed individuals? (10)

A
  • Company accommodation if rent free
  • Cash vouchers/tokens (exchanged for cash)
  • Non cash vouchers ( exchanged for goods/services) [with the exception of child care vouchers]
  • Company credit cards if used for personal expenditure
  • Employee liabilities - where an employee pays a subscription on behalf of the company
  • Readily convertible assets - to cash ie shares
  • Private use of company car and fuel benefits
  • Assets loaned to the employee by the business
  • Beneficial loans over £10000 (taxed on the difference between the official rate of interest - currently 3%)
  • Private Medical insurance
  • Group critical illness cover, accident and sickness cover
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35
Q

Are pooled cars taxed?

A

No if they are only used for business only

36
Q

Name some tax free benefits? (17)

A
  • Group income protection insurance
  • Mobile phone with private use ( only 1 phone though)
  • Job related living accommodation
  • Industrial clothing
  • Approved share options
  • Free or subsidised meals in staff canteen
  • In house sports facilities
  • workplace nurseries
  • Overnight expenses ( defined limits)
  • Childcare vouchers ( up to £55 per week)
  • Long service awards (20 years or more, max cost £50 cost to employer per year, no other award in previous 10 years)
  • Work training
  • Relocation expenses
  • Staff suggestion schemes
  • Liability and indemnity insurance
  • Scholarships ( with some exceptions)
  • Pension contributions and DIS benefits
37
Q

What is the taxable annual benefit in relation to a company car?

A

Percentage of the car’s list price, including any accessories other than a car phone.
[List price may be different to the actual purchase price]
The percentage is calculated on the CO2 emissions up to a max of 37%

38
Q

What is the extra charge for a diesel company car?

A

3% - up to a maximum of 37%

39
Q

What happens if an employee makes a contribution to the cost of the company car?

A

This is then deducted from the list price

40
Q

What is the fuel benefit charge?

A

Where fuel is provided for the employee by the employer to be used for private use.
It would not be charged if
* the employee reimburses the employer with the all the fuel used privately or
*the car is only used for business purposes

41
Q

How is the fuel benefit charge calculated?

A

It is calculated on a set figure of £22000 for this tax yr.
You then use the percentage from tax tables that relate to the emissions against this set figure and that’s the annual cost

42
Q

Name the 4 deductions that can be deducted from income prior to applying the personal allowance?

A
  • Qualifying interest payments
  • Allowable business losses
  • Gifts to charites or shares and securites
  • Contributions to RACs ( retirement annuity contracts)
43
Q

What 2 contributions/payments can extend the basic rate tax band for higher rate tax payers?

A
  • Pensions contributions - such as personal pensions and stakeholder ( these are ones which are individual arrangements
  • Certain donations to charity
44
Q

Name 4 tax reducer?

A

*VCT - venture capital trusts
EIS - enterprise investment schemes
Married couple’s allowance
SEIS - Seed enterprise investment schemes

45
Q

How do tax reducers work?

A

The tax relief is given as a percentage rather then based on the individuals marginal rates of tax. Relief is then deducted from the individual’s tax liability

46
Q

Name 4 types of qualifying interest payments?

A

*Purchase of shares in a company (loan to a company for a business purpose)
*Purchase of an interest in a partnership( where the tax payer is a partner but not a limited partner)
*Purchase of plant and machinery ( not a car) to use in the partnership and used for employment
* Payment of inheritance tax - where a loan has been taken out by a PR to pay an IHT liability.Limited to 12 months from taking out the loan
*

47
Q

What is the capped rate on the amount of interest on a qualifying interest payment?

A

Higher of £50000 or 25% of the borrower’s adjusted net income

48
Q

What are the rules around the qualifying interest payment on purchase of shares in a company? (5)

A
  • it must be a close company resident in the EEA
  • Must be trading
  • A company that is controlled by five or less shareholders and is controlled by the directors (no limit on no of directors)
  • borrower must have a material interest in the company (hold more than 5% of shares or entitled to at least 5% of assets if company were wound up)
  • If less than 5% interest then work most of their time in management
49
Q

Name some qualifying assets that income tax relief can be claimed if they are given to charity? (6)

A
  • Share and securities listed on a recognised stock market
  • Unlisted shares if on the AIM
  • Units in authorised unit trusts
  • Shares in OEICS
  • Overseas collective schemes - similar to UT and OEICS
  • Interest in land in the UK
50
Q

What is the maximum relief on assets to charity?

A

Up to 30% relief of agreed value

The gift has to be verified by experts as bing a pre-eminent gift

51
Q

What is gift aid?

A

It allows a charity to increase the donation value by claiming basic tax relief on it. The donor does not need to be a UK resident but needs to be a UK tax payer.

52
Q

How do you claim gift aid?

A

Donor must declare that they pay tax ( income tax or CGT)
It must be at least equal to the tax deducted from the donation
A non tax payer cannot reclaim

53
Q

Can higher rate and additional tax payers claim any more tax and if so how?

A

They can claim further tax
This is done through self assessment
If higher rate tax payer then this extends the basic rate by the gross amount of the donation
Additional rate tax payer it extends the basic and higher rate tax

54
Q

How are charity donations dealt with for employees whom pay tax through PAYE?

A

The employer deducts the payments from the salary before deducting the income tax
Tax is therefore received immediately and self assessment is not required

55
Q

Who is eligible to obtain tax relief on a pension?

A
  • Be classed as a relevant UK individual
  • Be under 75
  • Are UK resident ( there are some exceptions)
  • Have relevant UK earnings
56
Q

If an individual is not UK resident - what are the other rules that may apply for them to receive tax relief?

A
  • Has been resident at some time in the previous 5 tax years or
  • Is a crown employee ( or spouse of a crown employee) regardless of where they have earnings subject to UK tax
57
Q

What are classed as relevant UK earnings?

A
  • Employment income
  • Income from a trade/profession
  • Income from patents
  • Earnings from overseas Crown employment, subject t UK tax
58
Q

In what ways can individual tax relief be received on contributions? (3)

A
  • Net Pay
  • Relief at source
  • Relief on making a claim
59
Q

What is the most common way that employer occupation pensions receive tax relief?

A

Using the net pay method

This is deducted from the salary by PAYE before income tax is calculated

60
Q

What is the benefit of the net pay arrangement?

A

No self assessment and tax relief immediately

61
Q

How are contributions to personal and stakeholder pensions paid?

A

*Tax relief at source
Contributions are paid net of 20% income tax
The pension provider claims the tax relief from the HMRC and then adds this to the pension fund

62
Q

What happens with additional tax that a higher rate tax payer or additional tax payer pays in the net pay arrangement?

A

Higher and additional tax payers can further claim the additional amount by self assessment
Extra tax relief is achieved by extending the basic rate band

63
Q

On whom is the relief based on the pension holder or the person paying the contribution?

A

The pensions holder

64
Q

What are the maximum amounts that ab employer can contribute to a pension?

A

There are none

The employer will received tax relief provided that this is wholly and exclusively for business purposes

65
Q

How many years can unused allowance by carried forward from previous years?

A

3 years ( provided that the person was a member of the registered pension scheme and entitled to the annual allowance)

66
Q

What are the 2 rules so that you can use carry forward?

A

Need to have been a member of a registered pensions scheme and was entitled to a personal allowance in that tax year

67
Q

What is the MPAA and when was it introduced?

A

Money purchase annual allowance
Introduced 6th April 2015
For this tax year it is £10000

68
Q

What are the tax reducers (4) and their rates of tax regardless of the rate the holder pays in income tax?

A

*Married couples allowance 10%
Venture capital trust relief 30%
Enterprise Investment scheme 30%
Seed enterprise investment scheme 50%

69
Q

Why are these deducted when you know the income tax liability and not at the beginning of a tax calculation?

A

As this would result in the wrong rate of relief being given

70
Q

When are the requirements to claim married couple’s relief?

A

Married and civil partners were one was born prior to 6th April 1935 ie one of them will be 81 in the tax year
If married before Dec 5th 2005 then the husband claims it ( this can then be transferred to his wife)
If married after Dec 5th 2005 then whoever is the higher tax payer will claim it

71
Q

What is a definition of a VCT?

A

Indirect pooled investment in unlisted shares

72
Q

What are the features of a VCT? (3)

A
  • tax reducer
  • 30% income tax relief
  • maximum investment £200000
73
Q

Would you get tax relief on a VCT for a secondary purchase of shares?

A

No

74
Q

How long do you need to hold onto the VCT investment for to keep the tax relief?

A

5 years ( unless a transfer on death to spouse)

75
Q

What is a definition of an EIS?

A

*Tax incentive for a direct investment into new issues of shares in a qualifying unlisted company

76
Q

Where must an EIS be invested in order for it to qualify?

A

They cannot be invested on any major stockmarket

It would be ok if invested on the AIM (Alternative investment market)

77
Q

What are the features of the EIS?

A

30% income tax relief
Tax reducer
Maximum investment £1m per tax year
If the amount invested exceeds the amount of income tax then this can be offset against the previous year

78
Q

How long do you need to hold onto the EIS investment for to claim the tax relief?

A

3 years ( unless a transfer on death to spouse)

79
Q

What is a SEIS?

A

investment into smaller start up companies

80
Q

What are the features of a SEIS?

A

Tax reducer
*income tax relief at 50%
* Maximum investment of £100000 per tax year
If the amount invested exceeds the income tax then this can be offset against a previous year
Only available on purchase of new shares and not secondary ones

81
Q

How long do you need to hold a SEIS to retain the tax relief?

A

3 years

82
Q

What do you pay with a payment on account?

A

Half of the last tax years income tax payable

83
Q

What is the internal taxation position of REITs

A
  • Profits from property/ring-fenced business are not subject to Corporation Tax
  • Profits from remainder of business activities/non-ring-fenced are subject to Corporation Tax
84
Q

State the requirements that the REIT must satisfy to qualify for its favourable tax treatment

A
  • At least 75% of the profits must come from the property letting business
  • 90% of these profits must be paid out (to investors within 12 months)
  • Interest on borrowings need to be covered by 125% of the rental income
  • REIT must be UK tax resident/UK resident company
  • Closed Ended Company
  • Must be listed on any recognised Stock Exchange
  • A REIT cannot be a Close Company
85
Q

Explain how the disposal of a REIT shareholding will be treated for the individual

A
  • Individual liable to Capital Gains Tax
  • Calculated by proceeds less acquisition cost / gain on disposal
  • Less annual exemption
  • Gains taxed at 10%/20%

AF1 2018/19 (16 decks)

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