LP2 - 2023/24 Flashcards
Vulnerable years meaning?
The vulnerable years: the early years of a long-term relationship:
Starting of a family, relatively low income additional child-related expenses
Protection against death and ill health is the highest priority.
When are the relaxed years?
The relaxed years: when people enter their 40s, with increased income and good health. Their children are reaching financial independence and their own parents do not yet need assistance with day-to-day care needs. Protection needs for children tend to reduce and pensions and savings needs can take priority.
When are the anxious years?
The anxious years: when people enter their 50s and beyond, disposable income is high but there is little time to make up gaps in pension provision; costs of protection cover and long- term care needs are a concern. Protecting existing savings and investments from inflation and investment risk becomes a priority.
UK resident/Domicile meaning?
In simple terms, an individual is deemed to be a UK resident if they spend more than half of the tax year in the UK. If an individual is a UK resident, they may be liable to UK income tax on not only their UK income but also their foreign income.
An individual’s domicile is the country they consider to be their permanent home. If an individual is UK domiciled, then they may be liable to UK inheritance tax on their worldwide assets and not just those based in the UK.
A number of financial services products, particularly those which offer tax advantages, may not be available to non-UK residents or non-UK domiciled individuals.
When would an individual be entitled to state benefits?
An individual may be entitled to State benefits at different stages of the lifecycle, ranging from sickness/illness benefit during their working years to the State Pension in retirement. An individual’s entitlement to such benefits will determine the level of financial planning required and, subsequently, the products that need to be used and to what extent.
Employment status (Employed/Self Employed) reward package?
If an individual is employed, their reward package may feature protection benefits and access to a pension scheme. This could go a long way to providing for their needs in these areas. Therefore, any subsequent financial planning would address the gaps that still exist.
Self-employed individuals are fully responsible for providing for their own protection and retirement needs. This often creates a financial planning conflict between ongoing expenditure of the business and setting aside funds in protection and pension products.
Very little financial planning can be done to help individuals meet the kind of needs that unemployment can trigger. It may be hard for an unemployed person to provide the bare necessities of life, let alone continue payments for savings, pension plans and other insurances. Having emergency funds and protection in place can help to alleviate the impact of unemployment should it arise.
Government Policy - Fiscal Policy
Fiscal policy is the process of balancing Government revenues (e.g. tax) with public spending to manage the economy. When public spending is too high in the UK economy, the Government will be under pressure to raise taxes to minimise, reduce or remove any deficits.
Government Policy - Monetary Policy
Monetary policy is the process of using interest rates to control the money supply in the UK. When inflation (the increase in prices of goods and services) is deemed too high, the Government increases interest rates to encourage more saving and investment over spending.
Purpose of protection planning
Protection planning: the main purpose of this is to provide a sum of money to those people who depend on you financially should you die or be unable to work through illness.
Purpose of business contingency planning
Business contingency planning: helps to prevent a person’s business from collapsing in the event of their illness, retirement or death.
Purpose of retirement planning
Retirement planning: saving for retirement helps to reduce a person’s chances of ending their life in poverty or being a burden on their family in old age.
Purpose of later life/death planning
Later life/death planning: people who intend to pass their wealth on to the next generation will want to do so safe in the knowledge that a substantial amount of tax won’t be deducted in the process.
Under the fifth ‘Core duty’ within the Code, members are required to: ‘treat people fairly regardless of (8)
Under the fifth ‘Core duty’ within the Code, members are required to: ‘treat people fairly regardless of:
age
disability
gender reassignment
marriage and civil partnership
pregnancy and maternity
race
religion and belief
sex and sexual orientations
The FCA have provided ‘good practice’ guidance to firms on how they can ensure positive outcomes for vulnerable customers. The guidance recommends:
• financial products are clear and easy to understand.
• customers should be provided with flexibility and choice in the manner in which firm communicates with them (with a focus on communications being clear, easy to understand and relevant to the customers’ needs).
• customers are to be treated as individuals and firms should be prepared to offer a flexible and tailored response should customers experience a change in circumstances. This may include involving other family members to provide familiarity and reassurance.
• sufficiently trained customer facing/frontline staff that can identify vulnerability and know how to support customers in light of this (with a focus on listening skills).
• customers should be referred to specialist sources of help and advice where appropriate, thus ensuring that the customer is always dealing with the most appropriate and qualified individual to assist them.
Purpose of Her Majesty’s Revenue and Customs (HMRC)
HMRC
Her Majesty’s Revenue and Customs (HMRC)
HMRC acts as the UK’s tax authority and is responsible for collecting all taxes and setting out tax legislation.
The personal allowance amount is £12,570. However, the amount can vary depending on two factors, what are these?
A personal allowance is an amount of income that can be received free of income tax; the Government confirms the amount each year. The personal allowance can be used to offset any type of income, for example, earnings, savings interest or dividends. For the 2023/24 tax year, the personal allowance amount is £12,570. However, the amount can vary depending on two factors:
• An individual who is registered blind qualifies for an additional personal allowance.
• An individual with an adjusted net income of over £100,000 has their personal allowance reduced by £1 for every £2 of excess. Therefore, any individual with an adjusted net income in excess of £125,140 in the 2023/24 tax year will lose all their personal allowance for that tax year.
Net income is…
Net income is the amount of income received once income tax has been deducted (for example, your net pay).
Gross income is…
Gross income is the amount of income received prior to income tax being deducted (for example, your quoted salary).
Taxable income is gross income less the personal allowance.
Adjusted net income is
Adjusted net income is total taxable income less trading losses, pension contributions and gifts. This is only used to determine whether an individual’s personal allowance should be reduced.
Personal savings allowances for basic and high rate tax payers?
Every individual (with the exception of additional-rate taxpayers) is also entitled to a personal savings allowance. This is a set amount within which savings interest can be received free of income tax. The savings allowance in 2023/24 is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.
The dividend allowance is?
The dividend allowance enables individuals to receive up to £1,000 in dividend income in 2023/24 free of income tax.
Tax bands, tax rates & dividend rates?
£0 to £37,700 - 20% basic - 8.75%
£37,701 to £125,140 - 40% higher - 33.75%
£125,140 and above - 45% additional - 39.35%
How many Scottish tax bands are there?
Individuals living in Scotland are subject to income tax bands set by the Scottish Government. There are a total of five income tax bands in Scotland (starter rate, basic rate, intermediate rate, higher rate and top rate), compared to the rest of the UK where three bands are operated. Specific detail of how the Scottish income tax system operates is outside of the scope of this exam unit.
Pablo earns a salary of £65,000 in the 2023/24 tax year. This is his only source of income for the tax year and he qualifies for a full personal allowance of £12,570. What is his annual tax liability?
He therefore has taxable income for 2023/24 of: £65,000 – £12,570 = £52,430
Basic rate liability - The first £37,700 of this taxable income falls into the basic rate band so is taxed at 20%: £37,700 × 20% = £7,540 = tax payable at basic rate
Higher rate liability - The remaining £14,730 (£52,430 – £37,700) of taxable income falls into the higher rate band and so is taxed at 40%:
£14,730 × 40% = £5,892 = tax payable at higher rate
Total income tax liability - As a result, Pablo’s total income tax liability in 2023/24 is: £7,540 + £5,892 = £13,432
The Government has indicated that it will change the basic rate tax of 20% to ? from 2024.
The Government has indicated that it will reduce the basic rate tax of 20% to 19% from 2024. Read more on the Spring Budget 2022 here: www.gov.uk/government/news/ chancellor-announces-tax-cuts-to-support-families-with-cost-of-living
What’s the priority order for multiple sources of income?
- Non-savings income (e.g. earnings, pension income, State benefits, self-employment profits)
- Savings income (e.g. bank interest, taxable income from 3. Dividend income National Savings products)
- Dividend income
How is income tax on employment deducted? What system?
All non-savings income that an individual receives is classed as gross income and taxed accordingly. Individuals who are employed have the income tax due on their employment earnings deducted through the Pay As You Earn (PAYE) system.
What is Pay As You Earn (PAYE)?
PAYE allows the employer to deduct income tax from the individual’s pay. The employer then pays this amount to HMRC each month to settle the liability. Employee National Insurance contributions are also deducted in this manner.
How do self employed settle their income tax liability?
Self-employed individuals will settle their full income tax liability through self-assessment each year as they do not use the PAYE system.
What is the 0% starting rate of income tax?
As an incentive for low earners to save, the Government has introduced a 0% starting rate band on the first £5,000 of taxable savings income an individual receives in the 2023/24 tax year. The starting rate is only available if individuals have taxable non-savings income (after the personal allowance) of less than £5,000.
What is the Marriage allowance?
This is an additional allowance available to married couples/civil partners which enables a maximum of £1,260 of the 2023/24 personal allowance to be transferred between them.
This can be used in situations where one spouse/civil partner is a low earner and is not using all of their personal allowance. It can lead to an additional income tax saving of £252 in the 2023/24 tax year.
What is the Married couples’ allowance
This allowance is applied as a tax reducer, but is only available where one of the individuals in a marriage/civil partnership was born prior to 6 April 1935. Eligibility for this allowance could lead to an income tax saving of up to £1,037.50 in the 2023/24 tax year.
How much tax relief are you entitled to on a pension?
Individuals may also be entitled to tax relief on their pension contributions. This can either reduce the individual’s taxable income (in the case of contributions to a workplace pension) or provide a 20% ‘top-up’ to contributions made to a personal pension arrangement. This type of relief is of particular relevance to the life and pensions sector as firms selling pension products are providing the facility for individuals to claim it. The relief makes saving through a pension particularly attractive, and higher rate or additional-rate taxpayers benefit from being able to claim further tax relief through their self-assessment.
Marcy earns a salary of £38,000 in 2023/24. This is her only source of income for the tax year. Calculate her income tax liability for 2023/24.
The first £12,570 of Marcy’s income will be covered by her personal allowance and suffer no income tax liability.
Name the State benefits which link eligibility to a claimant’s NIC record (there are 5)
• State Pension
• Jobseeker’s Allowance
• Employment and Support Allowance
• Maternity Allowance
• Bereavement Payment
Detail classes of National Insurance contributions…
Class 1 Payable by employees and employers (at different rates)
Class 2 Payable by the self-employed (flat rate)
Class 3 Voluntary contributions payable by individuals with a National Insurance shortfall
Class 4 Payable by the self-employed (driven by profits)
Class 1 NICs are payable on earnings in excess of?
Employees pay Class 1 NICs on earnings in excess of £242 per week (2023/24). Individuals with a lower level of earnings than £242 per week may still be credited with a National Insurance record and remain entitled to State benefits.
!!Assuming post 6 July 2022 thresholds!!
What’s the employer % rate of NIC’s on earnings between £242 and £967?
And over £967?
Earnings between £242 per week and £967 per week are subject to an NIC rate of 13.25%.
Earnings in excess of £967 per week are subject to an NIC rate of 3.25%.
Susan, aged 45, is employed and earns £1,000 per week in September 2023. What is her NIC liability
Susan pays no NICs on the first £242 of her weekly earnings. She pays 12% on earnings between £242 and £967 per week:
(£967 – £242) × 12% = £725 × 12% = £87 per week
Susan pays 2% on earnings in excess of £967 per week: (£1,000 – £967) × 2% = £33 × 2% = £0.66 per week
Susan’s weekly Class 1 National Insurance liability is the sum of the two calculations: £87 + £0.66 = £87.66 per week
These payments will ensure Susan remains entitled to State benefits, both during her working life and in retirement.
What’s the flat rate of Employer NIC’s?
Unlike employee Class 1 NICs, the National Insurance rate for employer Class 1 NICs is a single rate of 13.88%. These contributions must be paid to HMRC on a monthly basis.
