Income Tax

Question 1

When does the Tax Year start and end?

Answer 1

6th April to 5th

Question 2

What are two benefits of being self employed?

Answer 2

(1) More generous range of claimable expenses

(2) Lower NI Contributions

Question 3

Whose responsibility is it to determine employment status?

Answer 3

Employer

*If in doubt must treat as PAYE

Question 4

List seven identifiers of being self employed.

Answer 4

1. High level of control
2. No set hours, holiday, over time, sick pay
3. Ability to sub contract
4. Takes financial / business risk with ability to benefit
5. Provides own equipment
6. Hires workers
7. Contact for service as opposed to contract of service

Question 5

(1) What is meant by a “Cash Basis” as opposed to traditional accounting ”Accrual Basis”
(2) What do you need to do to use it?
(3) Who uses it and why, including max turn over

Answer 5

(1) Income and Expenses are only recorded when they are received /paid
(2) Need to tick the “cash basis” box on tax return.
(3) Used by small unincorporated businesses (with turn over less than £150k) for simplicity

Question 6

How are the Self Employed taxed in the first 3 years?

Answer 6

(Year 1) Profits made in that tax year.
(Year 2) Profits for accounting period ending in that year or 1st 12 months profit if not a full year.
(Year3) Profits ending in that year.
Will cause overlap between years 1 and 2 if the business year does not match the tax year, this is reclaimed when business ceases

Question 7

When calculating Net Profit Self Employed expenses must be XXXX and XXXX incured for the purpose of trade and be of a XXXX as opposed to XXXX nature.
Unlike capital expenses they have a shelf life of less than ……years. Employed expenses have the additional requirement if being…..

Answer 7

Wholly / Exclusively / Revenue /Capital / 2 years / necessary.
Stationery, rent, rates, power

Question 8

(1) What are capital allowances and what are they known as?
(2) Can they be claimed if using a cash basis of accounting?
(3) When is the only time they can be claimed for furnishings in let property?

Answer 8

(1) Deductions from profit claimable when you buy assets you to use in your business, known as “plant and machinery”
(2) No
(3) On furnished holiday lets

Question 9

(A) What  four items can you not claim capital allowances on?
(B) Can you claim the following?
*Cars
*Cost of demolishing plant and machinery
*Building integral features and fixtures such as 
fitted kitchens 
*Alterations to install machinery
(C) Can you claim for repairs?

Answer 9

(A)
1) Items leased
2) Buildings
3) land structures for example a bridge
4) Items  for business entertainment for example a boat
(B)Yes
(C) No

Question 10

What are the two methods of claiming capital allowances?

Answer 10

(1) The full cost of the item up to the Annual Investment Allowance
(2) Writing Down Allowance where you deduct a percentage of the value from your profits each year, it is used when an item does not qualify for AIA.

Question 11

Explain how the Trading and Property Allowance work.

Answer 11

(1) Trading income less than £1,000 before deducting expenses is tax free if more, £1,000 can be claimed instead of deducting actual expenses
(2) Property income less than £1,000 before deducting expenses is tax free if more, £1,000 can be claimed instead of deducting actual expenses
* If income less than the allowance it does not need to be declared*

Question 12

What two sources of income are received gross?

Answer 12

Interest includes gilts and Dividends

Question 13

What three sources sources of income are paid net of 20% tax and how are they treated when (a) calculating tax (b) on tax return?

Answer 13

(1) Interest paid by a company to an individual or partnership, this is reclaimable by non tax payers
(2) Purchase Life Annuities
(3) REITS
(a) Gross up when calculating tax then deduct tax paid in step 7, (b) enter net amount on tax return

Question 14

list the three allowable deductions from gross income.

Answer 14

1. Interest on Qualifying Loans
2. Gifts to charity
3. Net pay pension payments and gross payments to RA contracts
   * No deductions are allowable against investment income

Question 15

List four Qualifying Loans whose interest is an allowable deduction from income?

Answer 15

(1) Borrow to buy shares in or make a loan to, borrower’s company. It has to be close trading company (max of 5 shareholders or directors) and borrower has at least 5 % of the shares or works in the company.
(2) Investing in your partnership (Not if limited partner)
(3) To buy machinery (not a car)
(4) Paying IHT, available 1 year from taking the loan.

Question 16

What is the maximum allowable amount of interest or loss that can be deducted from income?

Answer 16

The higher of £50,000 or 25% of adjusted total income, which in this case is total income excluding only pension payments.

Question 17

(A) List the three ways of making gifts to charity.
(B) What is a pre-eminent gift, who decides what qualifies, can it be used against CGT as well as income tax, and how long can the relief be spread over

Answer 17

(A)
(1) *100% tax relief on Gifts of Shares/UT/Property to charity or 30% tax relief for pre-eminent gifts to the nation by deduction from gross income
(2) Payroll Giving employer deducts the gift before tax
(3) Gift Aid where basic and higher rate limits increased by amount of the grossed up gift
* This is in addition to CGT exemption on gifts to charity,
(B) A gift that is very distinguished determined by a panel of experts, can be used against income or CGT and can be spread over 5 years.

Question 18

list the the three ways of making Pension Payments.

Answer 18

(1) Net Pay Arrangement
(2) Tax Relief at Source
(3) Relief by Making a Claim on gross Retirement Annuity Payments tax relief obtained by deduction from total income via self assessment.

Question 19

List the seven stages of an income tax calculation.

Answer 19

(1) Calculate Total Gross Income by type
(2) Deduct Relief’s in priority order
(3) Deduct the Personal Allowance and the Blind Persons allowance in priority order = Taxable Income
(4) Extend the bands for Pensions Paid Net or Gift Aid
(5) Calculate Tax in priority order include Savings and Dividend in tax bands
(6) Deduct Tax Reducers, add any High Income Child Benefit Tax Charge
(7) Deduct tax already paid at source PLA and REITS.

Question 20

For the Personal Allowance state;

(1) Who qualifies
(2) Who it can be transferred to and the limitations
(3) If Taper applies
(4) What is the Personal Allowance Trap and how to reduce it

Answer 20

(1) UK Resident and Qualifying Non Residents
(2) Spouse if BRT, maximum 10% (£1,250), known as the “Marriage Allowance”, which is different to the Married Couples Allowance.
(3) Taper applies, see taper section
(4) For adjusted income between £100k and £125,000 marginal rate is 60%, due to the taper, you can reduce it by bringing down adjusted net income
* Residents of EU, EEA, UK Commonwealth, double taxation agreements

Question 21

Can the Blind Persons allowance be transferred to a spouse?

Answer 21

Yes

Question 22

For the Married Couples Allowance state;

(1) Who qualifies
(2) Who is it applied to
(3) At what % of the allowance is relief given
(4) How is it calculated
(5) How is it applied

*This is different to the transferable NRB, known as the “marriage allowance”

Answer 22

(1) If either born before 1935, same for tax relief on maintenance payments.
(2) The husband if married before 2005 otherwise to higher earner, It can be transferred to partner.
(3) 10%
(4) The *max’ allowance reduced (£1 for every £2) to the *minimum, when over £29, 600
(5) Tax Reducer
* In tax tables.

Question 23

Do the Dividend and Savings allowances fall in or out of the tax bands?

Answer 23

In, that is why they are described as 0% rather than Tax Free like ISA’s.

Question 24

0% of tax applies to the Personal Savings Allowance, how much is it and what three sources of income qualify?

Answer 24

(BRT) £1,000
(HRT) £500
(ART) Nil
Claimable on;
(1)Interest including, Gilts, Bonds, National Savings
(2)Interest element of Purchased Life Annuity
(3)Gains from life policies

Question 25

How much is the Dividend Allowance and who is it available to?

Answer 25

0% on first £2,000

Available to all tax payers

Question 26

Income Tax is calculated before CGT so the marginal tax rate can be established but what is the Income Tax Priority Order?

Answer 26

1. Non savings (Earnings, Pension, Rent)
2. Savings Income
3. Dividend Income
4. Chargeable gains from life policies

Question 27

On what two occasions can you extend the income tax bands and how do you do it

Answer 27

(1)Pensions contributions paid net
(2)Gift aid
Both basic and higher rate extended by the gross payment

Question 28

When does a starting rate of 0% income tax apply

Answer 28

If savings income falls within the first £5,000 of taxable Income

Question 29

Tax reducers are for when non marginal rates apply and some are listed in the tax tables, list all six.

Answer 29

(1) Transferable Personal Allowance
(2) Married Couples Allowance
(3) 20% (BRT) of 75% of let property mortgage interest,
(4) *EIS
(5) *VCT
(6) *SEIS

Question 30

For the High Income Child Benefit Charge, state;

(1) Who does it apply to
(2) Which partner is it applied to
(3) How is it collected
(4) Benefit of claiming even if no benefit paid

Answer 30

(1) If you or partner receive child benefit
(2) Higher earner
(3) Collected through self-assessment
(4) Claiming child benefit gives you state pension credits you, can tick a box to say you do not wish to receive payment if only claiming to obtain NI credits.
* How it is calculated is in the tax tables, note the £50k limit is adjusted income.

Question 31

How is Children’s Income taxed on money gifted by a parent and how does it impact ISA’s held by a child? Note this does not apply to gifts from anyone else such as grandparents.

Answer 31

(1) Interest on money given to a child by a parent is taxed as the parents if more than £100 per parent
(2) Includes funds gifted by parents and held in child’s ISA ( aged 17/18) apart from;
(3) Junior ISA aged under 18, parent can contribute up to £4, 368 no withdrawals until age 18

Question 32

What does a K tax code mean?

Answer 32

Where BIK and other deductions are more than allowances, the resulting figure is added to pay before calculating tax owed.

Question 33

How to calculate “Adjusted Net Income”?

Answer 33

TOTAL Taxable Income minus
(1) Trading losses
(2) Contributions paid gross to pension schemes
(3) Grossed pension contribution where relief giv3n at source
(4) Grossed Up Gift Aid
Add up to £100 to trade unions
= Adjusted Net Income

Question 34

When is “Adjusted Net Income” used?

Answer 34

When calculating

1. Adjusted Net Income over £100k reduces the Personal Allowance, see tax table.
2. Adjusted Net Income over £50k causes the High Income child Benefit charge, see tax table

Question 35

Mortgage interest relief

Answer 35

Tax relief for finance costs in respect of residential property, such as mortgage interest, is to be restricted to a basic rate tax deduction. However, this restriction is being phased in over four years, and for 2019/20, 75% of finance costs are subject to the basic rate restriction. For example, if finance costs are £4,000, then £1,000 (25%) can still be deducted as an expense (resulting in tax relief at the taxpayer’s marginal rate), with £3,000 given as a basic rate tax deduction (£3,000 at 20% = £600). The restriction does not apply where finance costs relate to a furnished holiday letting or to non-residential property such as an office or warehouse.
An annual £1,000 property allowance means that property income is exempt from tax and does not have to be declared on a tax return if it is less than £1,000 (before deducting expenses). If property income is more than £1,000, then the £1,000 allowance can be claimed against income – instead of deducting actual expenses. Rent-a-room relief of £7,500 can be claimed against income from letting part of one’s home. It is not available against other property income.