Podcast
Questions and Answers
What happens to the personal allowance when someone's adjusted net income exceeds £125,140?
What happens to the personal allowance when someone's adjusted net income exceeds £125,140?
What is the effective tax rate for income between £100,000 and £125,140?
What is the effective tax rate for income between £100,000 and £125,140?
What is the maximum amount of personal allowance that can be transferred under the marriage allowance?
What is the maximum amount of personal allowance that can be transferred under the marriage allowance?
Who is eligible to benefit from the marriage allowance?
Who is eligible to benefit from the marriage allowance?
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If a couple receives the full benefit of the marriage allowance, how much will it reduce the recipient's income tax liability?
If a couple receives the full benefit of the marriage allowance, how much will it reduce the recipient's income tax liability?
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Which of the following is NOT considered exempt income?
Which of the following is NOT considered exempt income?
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What is the maximum amount you can invest in an ISA each year?
What is the maximum amount you can invest in an ISA each year?
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How are married couples and civil partners taxed regarding their income?
How are married couples and civil partners taxed regarding their income?
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Gross trading income is exempt from taxation up to what amount per annum?
Gross trading income is exempt from taxation up to what amount per annum?
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Which step follows after calculating taxable income for the tax year?
Which step follows after calculating taxable income for the tax year?
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What happens if you take money out of a cash ISA?
What happens if you take money out of a cash ISA?
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Which of the following is NOT a component for aggregating taxable income?
Which of the following is NOT a component for aggregating taxable income?
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What is the taxable threshold for rental income before it is exempt?
What is the taxable threshold for rental income before it is exempt?
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What is the personal allowance for income tax across all income types in the 2024/25 tax year?
What is the personal allowance for income tax across all income types in the 2024/25 tax year?
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Which type of income is NOT classified as non-savings income for tax purposes?
Which type of income is NOT classified as non-savings income for tax purposes?
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In the income tax computation, how is the personal allowance applied if an individual does not have enough non-savings income?
In the income tax computation, how is the personal allowance applied if an individual does not have enough non-savings income?
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What is the maximum cash basis threshold for an individual's receipts before they are required to calculate income differently?
What is the maximum cash basis threshold for an individual's receipts before they are required to calculate income differently?
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Which of the following is a deduction that employees can claim related to employment?
Which of the following is a deduction that employees can claim related to employment?
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How should trading losses be treated in relation to qualifying interest?
How should trading losses be treated in relation to qualifying interest?
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What happens to dividend income when computing total taxable income?
What happens to dividend income when computing total taxable income?
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Which component of income is considered taxable under the non-savings income category?
Which component of income is considered taxable under the non-savings income category?
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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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Description
This quiz covers the fundamentals of income tax, including the tax year, taxable income calculations, and exempt income categories. Understand the various components of income that are subject to tax, as well as the basis of assessment. Test your knowledge on how income is categorized and taxed in the UK.
