Income Tax Overview and Components

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Questions and Answers

What happens to the personal allowance when someone's adjusted net income exceeds £125,140?

  • No personal allowance is available. (correct)
  • The personal allowance is reduced by 50%.
  • The personal allowance increases.
  • The personal allowance remains unchanged.

What is the effective tax rate for income between £100,000 and £125,140?

  • 40%
  • 50%
  • 20%
  • 60% (correct)

What is the maximum amount of personal allowance that can be transferred under the marriage allowance?

  • £1,260 (correct)
  • £252
  • £2,520
  • £10,000

Who is eligible to benefit from the marriage allowance?

<p>Both spouses being basic rate taxpayers. (B)</p> Signup and view all the answers

If a couple receives the full benefit of the marriage allowance, how much will it reduce the recipient's income tax liability?

<p>£252 (B)</p> Signup and view all the answers

Which of the following is NOT considered exempt income?

<p>Profits from a trade (D)</p> Signup and view all the answers

What is the maximum amount you can invest in an ISA each year?

<p>£20,000 (D)</p> Signup and view all the answers

How are married couples and civil partners taxed regarding their income?

<p>They are taxed separately on their individual incomes (A)</p> Signup and view all the answers

Gross trading income is exempt from taxation up to what amount per annum?

<p>£1,000 (B)</p> Signup and view all the answers

Which step follows after calculating taxable income for the tax year?

<p>Calculate income tax thereon (D)</p> Signup and view all the answers

What happens if you take money out of a cash ISA?

<p>You may lose the tax benefits for that amount (B)</p> Signup and view all the answers

Which of the following is NOT a component for aggregating taxable income?

<p>Income from ISAs (A)</p> Signup and view all the answers

What is the taxable threshold for rental income before it is exempt?

<p>Up to £7,500 (B)</p> Signup and view all the answers

What is the personal allowance for income tax across all income types in the 2024/25 tax year?

<p>£12,570 (C)</p> Signup and view all the answers

Which type of income is NOT classified as non-savings income for tax purposes?

<p>Dividend income (A), Interest received from UK sources (D)</p> Signup and view all the answers

In the income tax computation, how is the personal allowance applied if an individual does not have enough non-savings income?

<p>It carries over to savings and dividends. (B)</p> Signup and view all the answers

What is the maximum cash basis threshold for an individual's receipts before they are required to calculate income differently?

<p>£125,140 (C)</p> Signup and view all the answers

Which of the following is a deduction that employees can claim related to employment?

<p>Interest on loans to purchase plant and machinery (A)</p> Signup and view all the answers

How should trading losses be treated in relation to qualifying interest?

<p>Qualifying interest should be deducted before trading losses. (C)</p> Signup and view all the answers

What happens to dividend income when computing total taxable income?

<p>It is combined and taxed at the same rate as non-savings income. (A)</p> Signup and view all the answers

Which component of income is considered taxable under the non-savings income category?

<p>Business profits (B)</p> Signup and view all the answers

Flashcards

Taxable Income

Income subject to income tax calculation, most income are taxable unless explicitly exempt

Tax Year

The period from 6 April to 5 April for calculating income tax

Exempt Income

Income not subject to income tax, in various types such as ISAs, National Savings, etc.

ISA (Individual Savings Account)

Account allowing tax-free investment up to £20,000 per year

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Married Couples' Tax

Married couples are taxed independently, splitting joint income if applicable

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Income Tax Calculation

Two-step process: Determine taxable income and calculate tax due

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Gross Trading Income

Income from business activities, exempt up to £1,000 annually

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Taxable Income Components

Profits from trades, businesses, and professions are a main component of taxable income.

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ANI Limit for PA

When your Adjusted Net Income (ANI) surpasses £125,140, you lose your entire Personal Allowance (PA).

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Effective Tax Rate Between £100,000 & £125,140

The effective tax rate in this range is 60%, combining the 40% higher rate income tax and the 20% loss of your PA due to exceeding the PA threshold.

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Marriage Allowance Transfer

A spouse or civil partner can transfer a portion of their Personal Allowance (PA) to their partner, effectively reducing their partner's tax liability.

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Marriage Allowance Amount

The transfer amount is capped at 10% of the individual's PA, rounded up to £1,260.

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Marriage Allowance Tax Benefit

The recipient's tax liability is reduced by a maximum of £252, which is 20% of the transferred PA amount.

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Non-Savings Income

Income that isn't derived from savings, including income from employment, property, and other sources.

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Savings Income

Income generated from savings, such as interest received from a savings account.

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Tax Adjusted Profits

The profit from a business after accounting for allowable expenses, used to calculate taxable income.

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Cash Basis Taxation

A method of taxation where income is taxed when it's received, and expenses are deducted when paid.

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Qualifying Interest

Interest on loans taken to purchase assets used specifically for income-generating activities.

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Trading Losses

When a business incurs expenses that exceed its income, resulting in a loss.

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Personal Allowance

A tax-free allowance applied to all income types, reducing your overall tax liability.

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Income Tax Computation

The process of calculating your total income tax liability, applying deductions and allowances to your income.

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Study Notes

Income Tax Overview

  • Tax year runs from 6 April to 5 April of the following year (e.g., 2024/25).
  • Taxable income is calculated in two steps: first determine taxable income, then calculate income tax.
  • Most income is taxable unless exempt.
  • Exempt income includes: ISAs, National Savings Certificates, employee benefits (certain types), pension lump sums, rent income up to £7,500, premium bond prizes/betting winnings, some social security benefits.
  • Gross trading income and gross property income are exempt up to £1,000 per annum.

Income Taxable Components

  • Profits from trades, professions, or vocations (non-savings income).
  • Property income (non-savings income).
  • Employment income (non-savings income).
  • UK source interest (savings income).
  • Dividend income (savings income).

Basis of Assessment

  • Tax adjusted profits based on accounts ending in the current tax year.
  • Cash basis for receipts under £150,000 per year (income received and expenses paid in the tax year).
  • Income received in the tax year.

Interest Income

  • Most interest is received gross (e.g., quoted loan stock, banks, building societies, NS&I).
  • Some interest is received net (e.g., debentures) requiring a 100/80 gross-up.

Personal Allowances (2024/25)

  • Standard personal allowance is £12,570.

Tax Rates (2024/25)

  • Non-savings income: 20% (basic rate), 40% (higher rate), 45% (additional rate) on different income types.
  • Savings income: Same rates as non-savings income, but certain amounts may be taxed at 0% based on the personal savings allowance
  • Dividends: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate).

Scottish Taxpayers

  • Have different rates for non-savings income compared to other UK taxpayers.
  • Six tax bands (Starter rate: 19%)

Tax Computation (2024/25)

  • Step 1: Aggregating income components (Employment income, Trading profits, Property income, Pension income, Interest income, Dividend income). Calculate total income, then Less: Reliefs, and finally Net income.
  • Step 2: Less: personal allowance from the net income = taxable income.

Taxable Income Calculation Examples

  • Example 1: Non-savings income of £20,000: Tax due is £4,000
  • Example 2: Non-savings income of £40,000: Tax due is £8,460
  • Example 3: Non-savings income of £2,000, savings income £20,000: Tax due is £3,600
  • Example 4: Non-savings £10,000, savings £15,000, dividends £20,000: Tax due is £8,431
  • Example 5: Non-savings £150,000, savings £20,000, dividends £15,000: Tax due is £68,409

Marriage Allowance (MA)

  • Allows a spouse or civil partner to transfer a portion of their personal allowance to the other.
  • Calculation involves determining whether either spouse or civil partner is in higher or additional rate tax bracket.
  • Fixed transfer amount is £1,260 (10% of individual's personal allowance).
  • Recipient's income tax liability reduced by a maximum of £252 (transfer amount x 20% basic-rate tax).

Personal Allowance Reductions (for higher earners)

  • Reductions take place if annual adjusted net income (ANI) exceeds £100,000 on a sliding scale.
  • Reductions may be applied to annual adjusted net income in excess of £125,140.

###Gift Aid and Personal Pension Contributions impact on UK and Scottish Income Tax payers.

  • Gift Aid = paid net of basic rate taxes
  • Personal Pension Contributions = calculated like Gift Aid.

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