Individual Taxation - Income Tax

Question 1

Step 1 in calculating income tax liability?

Answer 1

Calculate total income

Question 2

What is total income?

Answer 2

The individuals gross income from all sources, including salary, benefits, savings interest and dividends

Question 3

Step 2?

Answer 3

net income

Question 4

What is net income?

Answer 4

Total income minus tax reliefs

Question 5

What types of interest qualify for deduction at Step 2?

Answer 5

• Buying into a partnership
• Making loans to a partnership
• Buying shares in or lending to a close company
• Buying shares in an employee-controlled company or co-operative

Question 6

Are personal pension contributions deductible at Step 2?

Answer 6

Yes - contributions are deducted from Total income to calculate Net income

Question 7

Step 3?

Answer 7

Taxable income

Question 8

What is taxable income?

Answer 8

Net income - personal allowance

Question 9

When is the personal allowance reduced?

Answer 9

Reduced £1 for every £2 of net income above £100k, and eliminated entirely at £125,140

Question 10

Step 4?

Answer 10

Split the Taxable income

Question 11

In what order is income taxed?

Answer 11

1. Non-savings income
2. Savings income
3. Dividend Income

Question 12

What is the formula to determine non-savings income?

Answer 12

Taxable income - savings income - dividend income = Non-savings income

Question 13

Step 5?

Answer 13

Personal Savings Allowance

Question 14

What PSA applies for basic and higher rate taxpayers?

Answer 14

• Basic rate - first £1k of savings income taxed at 0%
• Higher rate - first £500 taxed at 0%
• Additional rate taxpayer - No PSA

Question 15

Step 6?

Answer 15

Apply tax rates

Question 16

Income tax rates 2024/25?

Answer 16

Band | Non-Savings | Savings | Dividends |
| Basic (0–£37,700) | 20% | 20% | 8.75% |
| Higher (£37,701–£125,140) | 40% | 40% | 33.75% |
| Additional (above £125,140) | 45% | 45% | 39.35% |

Question 17

Step 7?

Answer 17

Total tax liability

Question 18

How is total tax liability determined?

Answer 18

Add the tax calculated on each type of income at the relevant rate and deduct any tax paid at source

Question 19

What is the tax treatment of benefits in kind?

Answer 19

Taxable as employment income, added to Total income, but not subject to PAYE. Employer reports to HMRC

Question 20

When tax is paid under PAYE, what amount is used in the tax computation?

Answer 20

The gross amount is used for total income, even if the taxpayer received net pay