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INCOME TAX LIABILITY

INCOME TAX LIABILITY. WEEK 1. Learning Outcome. Understand the scope of Income tax (IT) Compute tax liability from employment income. The Scope of Income Tax. Assessment UK residents are taxed on their income for a tax year.

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INCOME TAX LIABILITY

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  1. INCOME TAX LIABILITY WEEK 1

  2. Learning Outcome • Understand the scope of Income tax (IT) • Compute tax liability from employment income.

  3. The Scope of Income Tax • Assessment • UK residents are taxed on their income for a tax year. • The ended 5th April and is labelled by the calendar year it straddles • The tax year is 6th April 2010 to 5th April 2011 is referred to as tax year 2010/2011 • Personal Allowance (PA) • This is the basic amount of tax free income every person is entitled to in each tax year. • The basic PA for 2010/11 is £6,475

  4. Assessable Persons • Each person is required to pay IT on their taxable income for the tax year • Individuals include children • Married couples are treated as separate individuals for IT purposes. • The income from jointly owned assets will be split 50:50 between the spouses regardless of the % of ownership • Where this in not the case an election needs to be made to HMRC stating the actual % ownership • Children under 18 are taxable persons though there income usually falls below the PA

  5. Residence • All persons resident in UK are assessed to UK tax on their income • Person is deemed resident if they are present in the UK for a period of six months or more or has paid frequent and substantial visits to the UK (In aggregate three months a year for four consecutive years)

  6. Taxable Income • Earned income • Trade income: this is profits of a trade, profession or vocation of self-employment • Employment income: earnings from an office or employment • Property and Investment Income • Property income: it is typically rental income but includes short lease • Saving income: bank or building society interest. This can be received net (20%) or gross. • Divided income: received net of 10% tax credit

  7. Exempt Income. This includes • Income from certain National Savings products • Gaming, lottery and premium bonds winnings • Income received from an individual Savings Account (ISA) • Some social benefits • Reliefs like certain capital gains losses are deductable. Considered later (CGT) • Proforma

  8. Income Tax liability • Tax rates Normal; • Basic rate of 20% to the first £37,400 of taxable income • Than a higher rate of 40% to amounts between £37,401 and £150,000 • An additional rate of 50% form amounts of £150,001 and over. Divided; • Basic rate of 10% to the first £37,400 of taxable income • Than a higher rate of 32.5% to amounts between £37,401 and £150,000 • An additional rate of 42.5% form amounts of £150,001 and over • A starting rate of 10% applies to savings income where it falls within the first £2,440 of taxable income

  9. Example. • 1. Abi has trading income of £ 19,535 and employment income of £3,000 for 2010/11. Abi has no savings income or divided income. • Calculate Abi’s IT liability for 2010/11 • 2. Terry has assessable trading income of £40,765 and employment income of £4,000 for 2010/11. He had no assessable divided income.

  10. Income tax payable • Some savings income and divided income is received after income tax has been deducted at source. • Therefore to determine taxable income the income is grossed up • To avoid double taxation, a credit is given to arrive at the tax liability. • In summary IT is calculated on grossed income after deducting reliefs and PA

  11. Example 3 Amanda has assessable trading income of £41,535 and employment income of £9.000 gross. Amanda has no other income. Amanda was taxed at source on employment income of £590 (PAYE). Calculate Amanda’s IT for 2010/11 • Example 4 Jane has £28,000 salary and £20,000 trading income. PAYE of £4,390 paid at source. Calculate Jane’s IT for 2010/11

  12. Reliefs • Trading losses; will be considered later • Interest payment • Relief is given for finance expenditure for a qualifying purpose. • Employees: relief is give if the buy plant for use in there employment • Partners: relief is given for share purchase in a partnership, or contribution to a partnership of capital or a loan. also for a loan to buy plant or machines for use in a partnership.

  13. Charitable Giving The tax relief is given to the following • Gift Aid scheme • Relief is given at the donors highest rate • No limits • One off or serial donations • Payments must be less of basic tax rate, which gives relief at time of payment Basic rate: pay 80%, therefore immediate tax relief Higher rate payers; firstly relief as above than the gross amount of the donation is added to the basic rate in the IT liability calculation. The effect is the it will be taxed at 20%, than 40% giving the additional 20%

  14. Personal Allowance (PA) • PA • Every tax payer is entitled to PA of £6,475. • PA can not be deducted from CG nor can it be transferred to another taxpayer. • An restrictions apply to PA where individuals only live for part of the year. • Age related PA (Age Allowance) • Applies to any one who is 65 in the tax years of assessment. • Up t 64 years £6,475 65-74 years £9,490 75 years and over £9,640 • Income limit for age related allowance is £22,900 • Income limit for standard PA is £100,000

  15. Example 4 Calculate the age related PA for the follow • Dennis is 71 and net income of £23,750 • Nora is 90 and net income of £25,400 • Peter is 80 and net income of £30,900.

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