Unit 2 Income Tax (not finished)

Question 1

Income Tax

Answer 1

Yearly tax. Tax year runs from 6 April until 5 April the following year.

Money will be regarded as income if there is an element of recurrence e.g. a salary received every month, or interest received on a bank account.

Question 2

Income Tax - who pays?

Answer 2

• Individuals

Employed, normally employer pays it.
Sole traders based on trading profits.
Tax on other types of income like investments, pensions etc.

• Partners
  On their individual share of the partnership profits.
• Personal representatives
  Pay deceased outstanding tax.
• Trustees on income produced by trust

Question 3

Income Tax - calculation

Answer 3

Step 1: Calculate total income
Step 2: Deduct any allowable reliefs
The resulting sum is net income
Step 3: Deduct any personal allowances
The resulting sum is taxable income
Step 4: Separate NSNDI, savings income and dividend income, and calculate the tax on each type of income at the applicable rate(s) (starting rate, basic rate, higher rate and additional rate)
Step 5: Add together the amounts of tax from Step 4 to give the overall income tax liability

Question 4

Income Tax - calculation - step 1 total income

Answer 4

(a) trading income: profits of trade, profession or vocation. This applies to sole traders, trading partnerships, sole practitioners and professional partnerships;
(b) property income: rents and other receipts from land in the UK;
(c) savings and investment income: interest, annuities and dividends;
(d) employment and pensions income, including social security payments such as sick pay and maternity pay; and
(e) certain miscellaneous income which is beyond the scope of this book.

Income not chargeable to income tax = interest on damages for personal injuries or death, interest on savings certificates, certain state benefits, premium bond winnings and income from investment in an individual savings account (ISA).

Question 5

Income Tax - calculation - step 2 allowable reliefs

Answer 5

Total income less allowable reliefs = net income

To benefit from this relief, interest must be payable on a ‘qualifying loan’, including:
* a loan to buy a share in a partnership, or to contribute capital or make a loan to a partnership;
* a loan to invest in a close trading company; and
* a loan to personal representatives to pay inheritance tax.