Income Tax Lecture Notes PDF

Lecture notes 13 September 2024 11:45 Title Topic Notes Income tax Summary - Tax year 6 April - 5 April overview - 2024/25 - Step 1: Calculate taxable income for tax year...

Lecture notes 13 September 2024 11:45 Title Topic Notes Income tax Summary - Tax year 6 April - 5 April overview - 2024/25 - Step 1: Calculate taxable income for tax year - Step 2: Calculate income tax thereon The basics Most income is taxable unless explicitly is exempt. Exempt income includes: - Income from ISAs (Individual Savings Account) - Income from National Savings Certificates - Certain minor benefits provided to employees - Certain lump sums from pension schemes - Rent a room income up to £7,500 - Premium bond prizes and betting winnings - Some social security benefits Gross trading income and gross property income are exempt up to £1,000 per annum. ISA What is it? £20,000 you can invest every year tax free. Two types: Cash and Stocks and Shares £20,000 maximum per year split between the two, not each. If you take money out of cash ISA, you can't replace it. Married Summary - Married couples are taxed independently couples and - The husband's income and the wife's income are taxed completely separately civil partners - If a married couple receive joint income, the amount of that income is normally divided between them equally for tax purposes - If the source of joint income is held in a different proportion, the couple may elect that the income should be allocated in the correct proportion - These rules also apply to same-sex civil partners Taxable Step 1 - Aggregating Income assessable income Components of 1. Profits from a trade, profession or vocation (non-savings income) income 2. Property income (non-savings income) 3. Income from employment (non-savings income), Interest received from UK sources (savings inc.) (£1k/£500/£0 allowance), Dividend income (£500 allowance) Basis of assessment 1. Tax adjusted profits of the accounts ending in the current tax year (trans) 2. Cash basis (i.e. income received and expenses paid in the tax year) if receipts £125,140, 48% - This is just for non-savings income. Savings income and dividends are taxed at same rate as UK taxpayers Income tax computation Personal allowance is £12,570 across ALL three. It's not £12,570 each. (2024/25) Start with non-savings and then if they don't have enough non-savings income, then the personal allowance carries on to savings and then dividends. - Qualifying interest Deductions (Info) Employees: P&M = Plant and Machinery ○ Interest on loans to purchase P&M for use in employment Partners: Qualifying interest NOT in exam ○ Interest on loans to purchase share in, or invest in, partnership - Trading losses - Always deduct qualifying interest before trading losses - Subject to a maximum amount, which will only be examined in the context of losses Calculate it in increments. Week 1_2 Page 2  - Treat as higher slice of income than non-savings (but lower than dividends) Savings This means that the BRT band is made available to the non-savings income first Don’t really understand that part - If savings income falls into the first £5,000 of taxable income it is taxed at 0%. Note NOT first £5,000 of savings income! The bands don’t get £37,700 each it's cumulative of both savings and - Basic rate and higher rate taxpayers are entitled to a savings nil rate band of £1,000 and £500 respectively. non-savings and dividends - PAs usually deducted first from non-savings income. - Calculate income tax on 'non-savings income' - Apply the different rates of tax on savings income in the following order: Procedure 1. Starting rate 2. Savings nil rate band 3. Normal rates (i.e. basic, higher, and additional rates - In tax year 2024/25, savings income is taxed at the 'starting rate' of 0% if it falls within the first £5,000 of taxable income Income tax on - The normal rates of income tax are applied thereafter (i.e., 20%, 40%, 45%) except that the 'savings nil savings income rate' of 0% applies to savings income which falls within the taxpayer's 'personal savings allowance' - The tax bands are allocated first to non-savings income and then to savings income - Any income tax deducted at source is subtracted from the income tax liability. Because non-savings income is less than £5,000 the difference is taken off of the savings income and that is taxed at 0%. Not examined usually (probs won't be examined) - Dividend income is taxed as the top slice of income (i.e. after non-savings income and savings income) - The dividend nil rate band applies to the first £500 of dividend income Tax on dividends - The dividend nil rate band always applies to the first £500 of dividend income no matter income levels. - The dividend income taxed at the dividend nil rate reduces the basic rate and higher rate bands when determining the rate of tax on the remaining dividend income. Week 1_2 Page 3  determining the rate of tax on the remaining dividend income. - Any remaining dividend income is taxed at the special dividend rates set out earlier. All income goes through the bands cumulatively - Gift aid Extending basic rate Paid net of basic rate tax (20%) band If a higher rate taxpayer: ○ Extend BR band by gross amount ○ = (net x 100/80) If additional rate taxpayer: ○ Extend HR band by gross amount Week 1_2 Page 4  ○ Extend HR band by gross amount Ignore if a BR payer! - Personal pension contributions As for Gift Aid payments Reduction of - From 2010/11 onwards, the PA is gradually reduced for individuals, regardless of age, when their income personal allowance: exceeds £100,000 higher income - The reduction is based upon the taxpayer's adjusted net income (Ani), which is calculated as follows: individuals Net income X Less: GROSS Gift Aid donations (X) Less: GROSS personal pension contributions (X) Adjusted Net Income (ANI) X Where the taxpayer's ANI exceeds £100,000, the PA is reduced by: Question in exam could be 'what would you advise client' and the answer - 50% x (ANI - £100,000) could be to make a personal pension contribution or gift aid donation. - Where necessary, the reduced PA is rounded UP to the nearest £. - When ANI exceeds £125,140, no PA will be available - The effective rate of tax between £100,000 and £125,140 is 60% Higher rate income tax = 40% Lost PA (1/2 x 40%) = 20% - If earning at around £100,000, consider making Gift Aid donations to lower ANI Week 1_2 Page 5 Marriage allowance - A spouse or civil partner can elect to transfer a fixed amount of the personal allowance to their spouse/civil partner - This is known as the marriage allowance (MA) - Neither spouse/civil partner may be a higher or additional rate taxpayer. MA - Method - The fixed amount of PA to transfer: 10% of the individual's PA rounded up = £1,260 - Leaves a PA of £11,310 (12,570-1,260) There is no provision for transferring less than this amount Relief is given by reducing the recipient's income tax liability by a maximum of £252 (i.e. £1,260 x 20% BR income tax) - - Week 1_2 Page 6