week 9: personal taxes 2

Question 1

What is included in employment income?

Answer 1

Employment income including all salaries, fees, wages etc. [Inc. tips, Benefits in Kind (Non-wage receipts in return for labour e.g., car, accommodation etc) and pensions income /taxable state benefits]

Question 2

What is the main different between emplyment and self employment?

Answer 2

Contract of service = employment

vs.

Contract for services = self employment

Question 3

What are other factors that determine if youre employed vs self employed?

Answer 3

degree of control exercised over person doing work

whether they must accept further work

whether the other party must offer further work

whether they provide their own equipment

whether they hire their own helpers

what degree of financial risk they take on

whether they can profit from sound management

whether they can work when they choose

Question 4

What are some ITEPA allowable dedecutions?

Answer 4

Contributions / premiums to approved occupational pension schemes

Subscriptions to approved professional bodies if relevant to employment

Charity payments using payroll deduction scheme

VERY few others - ‘wholly, exclusively and necessarily in performance of the duties of employment’ (rules are much more stringent than for self employment).

e.g. specialist clothing, travelling expenses whilst working etc. but food expenses usually not allowable

Question 5

What are the two Income Tax Collection Systems?

Answer 5

The systems by which Income Tax is collected in the UK are:

1- The self-assessment system

2- PAYE System

Question 6

What is the PAYE System?

Answer 6

The PAYE System is where the Tax payer is given a ‘code’ which allows for:

Personal allowance

Small amounts of other income
Deductible amounts such as expenses

Employer deducts the appropriate tax and NIC from salary for that code each pay day.

Employer pays the tax to HMRC.
If fails to do so must pay over tax himself and possible penalty.

Most employees don’t need to fill in a tax return

UK system is cumulative (Unlike the systems in most other countries)

Question 7

What are the two main forms for PAYE?

Answer 7

Information from last employer needed when move from one job to another (P45) to show earnings/tax paid to date in tax year

Employer gives employee a P60 form at end of each year to explain tax deducted on their behalf

Question 8

What are the pros and cons of PAYE?

Answer 8

Advantages:

Very accurate

Update the code

Income not subject to withholding tax

Disadvantage:

Difficult to maintain

Systems adjustment

Question 9

Q: Who is liable to pay National Insurance Contributions (NIC)?

Answer 9

A: People over 16 and under pension age (currently 66; will be 67 by 2028).

Question 10

Q: What are primary NIC contributions?

Answer 10

A: Paid by employees on earnings and on benefits in kind that are readily converted into cash.

Question 11

Q: What are secondary NIC contributions?

Answer 11

secondary NIC contributions are paid by employees

Question 12

Q: What are Class I NICs?

Answer 12

Class I NICs are Paid by both employees (primary) and employers (secondary) on earnings.

Question 13

Q: What are Class IA NICs?

Answer 13

Class IA NICs are Paid by employers on benefits in kind (excluding childcare) at a rate of 13.8%.

Question 14

What is Class 2 NIC?

Answer 14

Class 2 NIC is For the self-employed: £3.45 per week.

Question 15

Q: What is Class 3 NIC?

Answer 15

Class 3 – Voluntary £17.45 PW

Question 16

Q: What is Class 4 NIC for the self-employed?

Answer 16

Class 4 NIC for the self-employed:

6% on profits between £12,570 and £50,270 per year.

2% on profits over £50,270.

Question 17

What counts as earnings for NIC purposes?

Answer 17

Earnings include amounts before pension scheme contributions, expenses paid by the employee, payroll giving, and tips.
They exclude benefits in kind not readily converted into cash.

Question 18

Q: How is National Insurance calculated?

Answer 18

National Insurance is calculated According to earnings in a contribution period (either weekly or monthly).

Question 19

Is National Insurance a cumulative or non-cumulative system?

Answer 19

national insurance is Non-cumulative, except for company directors, who are assessed on an annual basis.

Question 20

Q: What does it mean to be “contracted out” of National Insurance?

Answer 20

Employees in an authorised salary-related pension scheme used to pay a lower rate (contracted-out rate).

Note: This no longer applies to employees, only employers can be contracted out

Question 21

What are the Class I National Insurance Contributions rates?

Answer 21

|Employees |employers
0-£242 (PT) | 0% | 0%
0-175 ST

242.01- 967 | 8% | 13.8%
over 175.01

over 967 | 2% | 13.8%
(50,270)

Question 22

What is trading income?

Answer 22

trading income Includes “the profits of a trade, profession or vocation”

“Trade normally involves the exchange of goods or services for reward… ..there must be something which the trade offers to provide by way of business. Trade moreover presupposes a customer”

Question 23

What is excluded from Income from self employment?

Answer 23

Excluded therefore are :
1- Income from employment (taxed under ITEPA)
(NB The employee has “ a contract of service”, the self-employed has “contracts for services”)

2- Receipts from sale of investments (which may be taxed under Capital Gains Tax)

3- Receipts from hobbies which are not taxable as trading income (and therefore expenditure on hobbies is not allowable against trading income)

4- Non trading income taxable under ‘Miscellaneous income’

Question 24

What is the Basis of Assessment for trading income?

Answer 24

Tax is assessed on a current year basis
i.e. normally the profits of the basis period ending in the year of assessment are taxed. The basis period is normally the accounting year.

Special rules apply to starting trading, ceasing to trade and change of accounting date.

Question 25

what are the three installmenst for tax payemnts for the self employed?

Answer 25

Tax is paid in three instalments: on 31 January in the year of assessment on 31 July following the year of assessment (each based on 50% of the previous years’ tax as an estimate for the current year,) and a final adjusting payment on 31 Jan following the year of assessment.

Question 26

what is the Expenses Wholly and exclusively rule ?

Answer 26

Expenditure must be wholly and exclusively for the purposes of trade Does not have to be necessary Disallow expenses if not ‘wholly and exclusively’ Disallow if not for the purposes of the trade In principle expenditure which serves both a business purpose and a private purpose, will be disallowed. In practice the Revenue allows some apportionment.

Question 27

What are some expensises specifically dissallowed for taxes?

Answer 27

Expenses specifically disallowed Include: Depreciation (and profits/ losses on disposals etc.) disallowed Replaced by capital allowances Entertaining (except for reasonable staff entertainment) Most gifts Payments which constitute a criminal offence

Question 28

how do you start from net profits per accounts ?

Answer 28

Starting from net profit per accounts: Add Expenditure in the accounts which is not deductible for tax purposes Add Income which is taxable but which is not credited to the P&L Deduct Income which is credited to the P&L which is not taxable as income from self employment Deduct expenditure which is not in the accounts which is deductible for tax purposes

Question 29

how can losses on an accounting period be treated?

Answer 29

Losses for an accounting period can be relieved: Against other income and capital gains in the year of assessment in which the loss arises and the previous year. Against trading profits from the same trade in future years. In addition there are special rules for losses arising in early years of trading, for losses arising on cessation of the business and for relief of charges.