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Questions and Answers
What is required to calculate total income before including any figures?
What is required to calculate total income before including any figures?
Which of the following is considered taxable income?
Which of the following is considered taxable income?
What is the role of employers regarding tax deductions from employment income?
What is the role of employers regarding tax deductions from employment income?
What does the term 'benefit in kind' refer to?
What does the term 'benefit in kind' refer to?
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Which of the following is NOT a type of income included when calculating total income?
Which of the following is NOT a type of income included when calculating total income?
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What is the cash equivalent of a benefit in kind typically based on?
What is the cash equivalent of a benefit in kind typically based on?
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Which of the following is a way in which net income must be addressed before calculating total income?
Which of the following is a way in which net income must be addressed before calculating total income?
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Tax-free benefits in kind are subject to which of the following conditions?
Tax-free benefits in kind are subject to which of the following conditions?
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What is the deadline for submitting a paper tax return for the 2024/25 tax year?
What is the deadline for submitting a paper tax return for the 2024/25 tax year?
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When is the first payment on account due for the tax year in question?
When is the first payment on account due for the tax year in question?
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Which of the following conditions allows an individual to avoid making payments on account?
Which of the following conditions allows an individual to avoid making payments on account?
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What is the due date for the second payment on account after the end of the tax year?
What is the due date for the second payment on account after the end of the tax year?
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What is the purpose of Making Tax Digital?
What is the purpose of Making Tax Digital?
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Which statement accurately describes the General Anti-Abuse Rule (GAAR)?
Which statement accurately describes the General Anti-Abuse Rule (GAAR)?
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Which factor does NOT exempt an individual from making payments on account?
Which factor does NOT exempt an individual from making payments on account?
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Which of the following actions is included in the online digital tax accounts?
Which of the following actions is included in the online digital tax accounts?
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What is the consequence of submitting a tax return after the deadline?
What is the consequence of submitting a tax return after the deadline?
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Which type of arrangements fall under the scope of the GAAR?
Which type of arrangements fall under the scope of the GAAR?
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What is the property income allowance for individuals with gross property income below £1,000?
What is the property income allowance for individuals with gross property income below £1,000?
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What personal savings allowance does a higher rate taxpayer have?
What personal savings allowance does a higher rate taxpayer have?
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Which type of income is taxed first in the income tax calculation process?
Which type of income is taxed first in the income tax calculation process?
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What is the tax rate for basic rate taxpayers on non-savings income?
What is the tax rate for basic rate taxpayers on non-savings income?
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At what income level does a taxpayer become ineligible for a personal savings allowance?
At what income level does a taxpayer become ineligible for a personal savings allowance?
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What is the maximum amount of dividend income one can receive tax-free?
What is the maximum amount of dividend income one can receive tax-free?
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If an individual has non-savings income exceeding £5,000, which savings income tax rate applies to them?
If an individual has non-savings income exceeding £5,000, which savings income tax rate applies to them?
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Which income type is taxed last in the tiered income tax calculation?
Which income type is taxed last in the tiered income tax calculation?
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What happens to dividend income that is within the dividend allowance?
What happens to dividend income that is within the dividend allowance?
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What is the tax rate on dividend income for higher rate taxpayers?
What is the tax rate on dividend income for higher rate taxpayers?
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What method does an employee use to pay income tax on their salary?
What method does an employee use to pay income tax on their salary?
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Which taxpayer type is eligible for a personal savings allowance of £1,000?
Which taxpayer type is eligible for a personal savings allowance of £1,000?
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What is the purpose of self-assessment for income tax?
What is the purpose of self-assessment for income tax?
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What income is classified as savings income for tax purposes?
What income is classified as savings income for tax purposes?
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Which of the following benefits provided by an employer are generally considered not taxable?
Which of the following benefits provided by an employer are generally considered not taxable?
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What is the cash equivalent of a beneficial loan defined as?
What is the cash equivalent of a beneficial loan defined as?
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What amount of a termination payment is not taxable for employees up to April 2018?
What amount of a termination payment is not taxable for employees up to April 2018?
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How is the taxable income calculated after deducting deductible annual payments?
How is the taxable income calculated after deducting deductible annual payments?
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What is the personal allowance for the tax year mentioned?
What is the personal allowance for the tax year mentioned?
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Under what condition does the personal allowance reduce for individuals?
Under what condition does the personal allowance reduce for individuals?
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Which of the following individuals can claim Blind Person’s Allowance?
Which of the following individuals can claim Blind Person’s Allowance?
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What is the impact of the Married Couple’s Allowance on tax liability?
What is the impact of the Married Couple’s Allowance on tax liability?
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Which of the following payments does not benefit from the £30,000 exemption?
Which of the following payments does not benefit from the £30,000 exemption?
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What characterizes a taxable benefit in kind?
What characterizes a taxable benefit in kind?
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In what scenario would the employer have to apply tax on termination payments from April 2018?
In what scenario would the employer have to apply tax on termination payments from April 2018?
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What is the maximum personal allowance that can be transferred to a spouse or civil partner under Transferable Marriage Allowance?
What is the maximum personal allowance that can be transferred to a spouse or civil partner under Transferable Marriage Allowance?
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What happens to the Blind Person’s Allowance if it is not fully used by the recipient?
What happens to the Blind Person’s Allowance if it is not fully used by the recipient?
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Study Notes
Income Tax Calculation Steps
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Step 1: Calculate Total Income
- Sum all income received during the tax year, excluding exempt income (e.g., housing benefit, child tax credit).
- Include gross figures, not net. Net income must be adjusted to gross.
- Examples of taxable income: salary, wages, benefits in kind, bonuses, commissions, tips, pensions, bank interest, dividends, rental income (excluding room rental schemes), trade profits, taxable social security benefits.
- Employment income is typically paid net of tax (PAYE system).
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Benefits in Kind (BIK)
- BIKs are employee perks (company cars, insurance, loans).
- Most BIKs are taxable at the cash equivalent cost to the employer.
- Some benefits are tax-free (e.g., employer pension contributions, free/subsidized meals, parking, childcare, single mobile phone).
- Termination payments (pre-2018): first £30,000 non-contractual lump sums were tax-free.
- Termination payments (post-2018): taxable portion based on full notice pay; formula required, beyond this module's scope.
- Non-contractual payments (e.g., ex gratia, wrongful dismissal) still benefit from the £30,000 exemption. Anything above is taxable.
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Step 2: Calculate Net Income
- Subtract allowable annual payments from total income.
- Main deductible payments: interest paid on qualifying loans (for acquiring company/partnership interests, paying inheritance tax).
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Step 3: Calculate Taxable Income
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Income Reliefs:
- Personal Allowance: £12,570 for the tax year, reduced by £1 for every £2 of net income over £100,000.
- Blind Person's Allowance: £3,070 for 2024/25, added to personal allowance. Transferable to spouse/partner.
- Married Couple's Allowance: Reduces tax liability, for those born before 6 April 1935. Transferable.
- Transferable Marriage Allowance: Max £1,260 transferred; lower earner must have less than £12,570 income. Recipient must pay income tax at 20%.
- Trading and Property Income Allowance: £1,000 allowance on gross property/trading income if under £1,000. If over £1,000, £1,000 is used as a deduction.
- Personal Savings Allowance (PSA): £1,000 (basic rate) or £500 (higher rate) tax-free savings income.
- Dividend Allowance (DA): £500 tax-free dividend income for all taxpayers.
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Income Reliefs:
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Step 4: Calculate Income Tax
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Tax Calculation Order:
- Non-savings income, then savings income, then dividend income
- Progressive tax rates: higher income = higher tax rate
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Non-Savings Income Bands (2024/25):
- Basic rate: 0 - £37,700 (20%)
- Higher rate: £37,701 - £125,140 (40%)
- Additional rate: £125,140+ (45%)
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Savings Income Bands (2024/25):
- 0% Starting Rate (for income less than £5,000).
- Basic rate: Up to £37,700 (20%)
- Higher rate: £37,701 - £125,140 (40%)
- Additional rate: £125,140+ (45%)
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Dividend Income Bands (2024/25):
- Basic rate: 0 - £37,700 (8.75%)
- Higher rate: £37,701 - £125,140 (33.75%)
- Additional rate: £125,140+ (39.35%)
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Tax Calculation Order:
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Step 5: Add Income Tax from All Sources
Income Tax Collection
- Deduction at Source (PAYE): Employer deducts tax from salary. Employer pays to HMRC.
- Self-Assessment: For non-employment income (e.g., self-employment). Taxpayer files tax return and pays.
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Deadlines:
- Online returns: January 31st following tax year
- Paper returns: October 31st same year as tax year ends.
- Tax payment due: January 31st following tax year.
- Payments on Account: Two payments toward tax to be paid; ~half of previous year's self-assessed tax.
- Making Tax Digital: online tax accounts, HMRC receives info from third parties (employers, banks).
- Anti-Avoidance Provisions (GAAR): Designed to counter tax avoidance schemes.
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Description
This quiz covers the essential steps in calculating income tax, including how to determine total income and understand benefits in kind. You'll learn about taxable income examples and the implications of various perks and allowances. Test your knowledge on tax regulations and make sure you're well prepared for income tax assessments.
