Taxation Topic 2 - Income Tax

Question 1

What is the UK tax system used to do

Answer 1

raise revenue, control inflation and encourage savings

Question 2

What is published every year following the budget

Answer 2

A finance bill

Question 3

What is a finance bill

Answer 3

publication stating the new taxation proposals made in the budget, once passed by parliament it can receive royal assent (where monarchy accepts the implication of this bill) and only then will become a finance act

Question 4

Usually, how often are finance acts published

Answer 4

Every year

Question 5

What are the 5 main sources of income

Answer 5

• Employment
• Trading (self-employment)
• Pension
• Income from property
• Income from savings and investments (dividends included)

Question 6

Married couples can transfer 10% of their personal allowance for income tax as long as…

Answer 6

the recipient is not in the higher or additional tax band.

Question 7

What happens to your personal allowance when you earn above £100k a year

Answer 7

Personal allowance is deducted by £1 for every £2 earned, , so anyone earning £125,140 or above (assuming the personal allowance is £12,570) will have no personal allowance left and will be taxed on all of their income.

Question 8

What is the amount for Blind person’s allowance and can it be transferred

Answer 8

Yes it can be transferred, and the allowance is £2600 on top of your personal allowance

Question 9

What 3 main deductions can be made to somebody’s gross salary before tax is calculated

Answer 9

• Pension contributions
• Charitable donations
• Allowable expenses (self-employed tax relief etc.)

Question 10

If income tax rates are changed, what will this be shown in

Answer 10

The finance act

Question 11

With Scottish income tax, what can the Scottish parliament control

Answer 11

Rates and bands for income, but the rates and bands do not apply to savings or dividends

Question 12

What control does the welsh gov. have over their income tax

Answer 12

The UK gov. deducted 10p from the income tax rate paid by the Welsh, and the Welsh gov. can then decide how much to top it up by.

Question 13

What are the personal savings allowance brackets

Answer 13

£1k for basic rate taxpayers and £500 for higher-rate payers, additional receive no allowance.

Question 14

What is the starting rate band and hwo much is it

Answer 14

A starting rate band is also applied to anyone earning under the personal allowance band (£12,570) and this current starting rate is £5k.

Question 15

What happens to your starting band if you begin to earn more than the personal allowance

Answer 15

for every £1 over the personal allowance, £1 is taken off the starting rate band.

Question 16

What is the current dividend allowance

Answer 16

£2k

Question 17

What are the tax implications when withdrawing funds from a life policy

Answer 17

The policy will satisfy a basic rate tax, so upon withdrawal if you only pay basic rate tax, you owe nothing. If you pay higher or additional, you have to pay the difference

Question 18

What are some of the main types of income that are not taxable

Answer 18

• Redundancy payments up to £30k (anything over this can be taxed)
• Interest on National savings certificates
• Income from investments held in ISAs
• Proceeds of a qualifying life policy
• Lottery winnings

Question 19

Company cars are taxable based on the cars what

Answer 19

CO2 emission rating and is equal to a percentage of the car’s list price.

Question 20

Main examples of non-cash benefits

Answer 20

• Readily convertible assets – company shares
• Vouchers, credit cards and other forms of credit
• Non-cash vouchers – for recreational facilities (spa etc.)
• Providing housing and basic living costs for employees
• Private medical insurance
• Loans made to employees for beneficial rates of interest

Question 21

Under what value are employees taxed for non-cash benefits

Answer 21

‘Annual value’

Question 22

What is the annual value when talking about non-cash benefits

Answer 22

Annual value’ is 20% of the market value of the asset when the employer bought it, or if the asset is rented and the rent is over 20% of the market value, the employee is charged on the total rent.

Question 23

When employees receive in-house benefits, what does HMRC generally accept as a “benefit with a marginal cost to the employer”

Answer 23

• At least wholesale price is paid, no taxable benefit
• Professional services that require no additional employees or partners mean the employee will only pay any disbursements

Question 24

The 2 legislations including the tax rules on different types of income

Answer 24

Income tax (earning and pensions) Act 2003 covers income from employment, pensions and taxable social security benefits.

Income tax (trading and other income) Act 2005 covers trading income (self-employment), property rental trades income and savings and investment (dividends and interest included)

Question 25

What system to HMRC use that collects tax automatically for the employed

Answer 25

Pay As You Earn (PAYE)

Question 26

What regime plans to take tax from other types of income in the future

Answer 26

Making Tax Digital regime

Question 27

When calculating someone’s tax liability, it is dealt with in a strict order of income types, what is the order

Answer 27

1. Earned and pension
2. Rental, savings then finally dividends
3. Gains under life policies after everything

Question 28

Who are Class 1 NICs paid by

Answer 28

paid by employees earning between the primary threshold and upper earnings limit (reduced level paid above upper limit). Also paid by employers on employees’ earnings above a lower limit called secondary threshold (no upper limit). Employers do not pay NICs for employees who are ages under 21 or under 25 for apprentices.

Question 29

Who are Class 2 NICs paid by

Answer 29

flat-rate contributions at specified rate per week for self-employed if there annual earnings are above the small profits threshold.

Question 30

Who are class 3 NICs paid by

Answer 30

voluntary contributions to people who would not otherwise receive state benefits (career break etc.)

Question 31

Who are Class 4 NICs paid by

Answer 31

additional contributions paid by self-employed on their annual profits – similar to Class 1 they are paid between lower and upper limit with contributions above upper limit at a reduced rate.

Question 32

What is entailed in a P60 form and when do you get it

Answer 32

A P60 form is given out every year, detailing how much tax was taken, NICs and final tax code

Question 33

What is a P45, when is it given to you and what must it contain

Answer 33

A P45 should be given to the employee upon leaving the firm, and it should detail:

• Name
• District reference
• Code number
• Week or month of last entries
• Total gross pay to date
• Total tax due to date