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Summary Business Law and Practice - Income tax and capital gains tax exam template
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Exam template - complete step 1-4 income tax and capital gains tax
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INCOME TAX TEMPLATEStep Notes
1 – calculate What is income?
total income income = element of recurrence ie salary/ partnership profit share received every
from all month, interest paid on bank/building society account every quarter
sources
Who pays income tax?
1- Individuals
2- Partnerships (partners are individually responsible for tax due on their share of
partnership profits)
3- Personal representatives (they pay the deceased’s outstanding income tax and
income tax chargeable during administration of estate)
4- Trustees (pay income tax on income produced by trust fund)
Exempt income
The following are free of income tax:
1- Certain state benefits
2- Interest on savings certificates
3- Scholarships
4- Interest on damages for personal injuries or death
5- Income from investments in an individual savings account (ISA)
6- Gross income up to £7,500 a year from letting a furnished room in the
taxpayer’s home
7- Annual payments under certain insurance policies Ie where insurance benefits
are provided in times of sickness
8- Premium bonds winnings
Three categories:
1- Non savings, non- dividend income (NSNDI) – comprising all sources of income
except income derived from savings and dividends
2- Savings income – interest from various sources ie building society accounts,
most National Savings accounts, unit or investment trusts and corporate or
government bonds and gilts
3- Dividend income
Location Source
ITTOIA 2005
Part 2 Trading income
- Profits of a trade
- Profession or vocation
Therefore charges
- Self-employed person
- Applies to sole traders
- Trading partnerships
- Sole practitioners
Professional partnerships
Part 3 Property income
- Rents
- Other receipts from land in the UK
Part 4 Savings and investment income
, - Interest
- Annuities
- Dividends
Part 5 Certain miscellaneous income
Annual income not otherwise charged
ITEPA 2003
Employment and pensions income Income arising out of employment and
including social security payments such
as sick pay and maternity payments
2 – deduct Total income – allowable reliefs = net income
any
allowable In certain cases, tax relief may be available for interest paid on money borrowed
reliefs to
give net Taxpayer obtains income tax relief for certain interest payments by deducting them
income from their total income as an allowable relief. Interest must be payable on a ‘qualifying
loan’
Qualifying loan = loan to buy a share in a partnership or contribute capital or make a
loan to a partnership
Cap of £50,000 of 25% of ‘adjusted total income’ on the amount of reliefs that can be
claimed under this provision
‘Adjusted total income’ = taxable income less allowable pension contributions
3- deduct Net income – personal allowance = taxable income
any personal
allowances Personal allowances
to give Tax-payer must claim their allowances each year in their tax return
taxable
income Personal allowance for 2022/23 is £12,570 (subject to limit of £100,000)
Applied in following order
1- NSNDI
2- Savings income
3- Dividend income
For most people, their 12,570 is used up by employment income
Any surplus unused cannot be carried forward (subject to marriage allowance)
Personal allowance is reduced where taxpayer’s income exceeds the income limit of
£100,000 PA is reduced by £1 for every £2 of income over the £100,000 limit.
Income over £125,000 = no personal allowance available
Calculation
, (net income−£ 100,000)
£ 12,570−
2
Marriage allowance
Where one spouse or partner does not have enough income to use their PA, they may
transfer £1,260 of their PA to their spouse of civil partner. The recipient must not be
higher or additional rate taxpayer
Blind person’s allowance
A taxpayer who is registered blind receives an allowance of £2,600
Property and trading allowances
Generally available = allowances for small amounts of property income and trading
income
Individuals in receipt of gross property income or gross trading income below £1,000 =
income not subject to income tax and taxpayers not required to submit a tax return or
declare it on their tax return (if they have other income)
When gross property or trading income exceeds £1,000 = taxpayer can choose to take
£1,000 allowance as a deduction against gross income instead of deducting actual
expenses to arrive at their taxable income figure
4 – calculate First separate out the savings and dividend income
tax
Taxable income - Savings and dividend income = non-savings, non-dividend income
(‘NSNDI’))
Personal savings allowance
PSA Can be set against income so that first £1,000 of savings income will be tax free
Tax rate Income band (taxable Allowance
income)
Basic rate taxpayer £0 - £37,700 £1,000 tax free
Higher rate taxpayer £37,701 - £150,000 £500 tax free
Additional rate taxpayer £150,001 No allowance
Taxing savings income
Starting rate for savings of 0% £0 - £5,000
Savings basic rate of 20% £5,001 - £37,700
Savings higher rate of 40% £37,701 - £150,000
Savings additional rate of 45% Over £150,000
Dividend allowance
Dividend allowance can be set against dividend income. First £2,000 of taxpayer’s
dividend income will be free from tax. ALL taxpayers (regardless of rate) are entitled to
£2,000 allowance. Taxpayers who receive less than £2,000 a year will pay no tax on
their dividends even if they are higher rate tax-payers
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