1. F6 Taxation (UK)

2. 2 Taxation (UK) Section A: The UK tax system Section B: Income tax liabilities Section C: Chargeable gains Section D: Corporation tax liabilities Section E: Inheritance tax Section F: National insurance contributions Section G: Value Added Tax Section H: The obligations of tax payers and/or their agents

3. 3 Section B: Income tax liabilities B2. Income from employment B3. Income from self – employment (Part 1) B3. Income from self – employment (Part 2) B5. The comprehensive computation of taxable income and income tax liability B2. Income from employment B3. Income from self – employment (Part 1) B3. Income from self – employment (Part 2) B5. The comprehensive computation of taxable income and income tax liability Designed to give you knowledge and application of:

4. 4  Prepare a basic income tax computation involving different types of income. [2]  Calculate the amount of personal allowance available generally, and for people aged 65 and above. [2]  Compute the amount of income tax payable. [2]  Explain the treatment of interest paid for a qualifying purpose. [2]  Explain the treatment of gift aid donations. [1]  Explain the treatment of property owned jointly by a married couple, or by a couple in a civil partnership. [1] B5: The comprehensive computation of taxable income and income tax liability Learning outcomes

5. 5 1.All adults and children are charged to income tax if they receive sufficient income to pay tax. 2. They are liable to income tax on their taxable income in a tax year. 3. A tax year runs from 6 April to the following 5 April. The exam will cover the period 6 April 2010 to 5 April 2011, written as 2010 - 11. 4. Taxable income is made up of:  income from all sources  payments that are tax deductible  personal allowances Some basic concepts

6. 6 Proforma for tax calculation TotalNon-savingsSavingsDividends Trading incomeXX--- Employment incomeXX--- Property incomeXX--- Bank interest (gross)XX--- Dividends (gross)X---X Total IncomeXXXX Less: Interest paid for a qualifying purpose (X) --- Net incomeXXXX Less: Personal allowance(X) --- Taxable incomeXXXX Income taxX Income tax liabilityX Less: Tax credits(X) Less: Tax deducted at source(X) Income tax payableX

7. 7 Received net of Building society interest20% tax Bank interest (except National Savings Bank interest)20% tax Debenture interest 20% tax Patent royalties20% tax UK dividends10% tax Employment incomeVarious rates (paid net under PAYE – Pay As You Earn scheme) Income taxed at source may have different rates of tax deducted:

8. 8 1.Scholarship income 2.Interest on National Saving Certificates. 3.Winnings from betting, national lottery and premium bond prizes. 4.Income of up to £4,250 per annum received under the “rent–a-room” scheme. 5.Statutory redundancy pay and the first £30,000 of compensation received for loss of employment. 6.Interest received from HMRC (repayment supplement). 7.Certain social security benefits like child benefit and housing benefit. Income exempt from tax

9. 9 Personal Allowance Personal allowance Above £112,950 or more : personal allowance is nil Upto £100,000 personal allowance is £6,475 Between £100,000 to £112,950 : personal allowance is reduced by 1/2 of excess

10. 10 The amount of income tax payable Personal Allowance Cannot be carried forward Always allowed in full Never time- apportioned Set-off against Non-savings income Tax payer aged 65 or above Savings income/dividen d income if not fully utilised Given personal age allowance 9,640 22,900 9,490 £ Personal allowance for people aged 75 and over Personal allowance for people aged 65-74 Personal age allowances for the tax year 2010 – 11 Income limit for age- related allowances Continued…

11. 11 Once the income has been categorised and the personal allowance deducted (from non-saving income, savings income and then dividends) the income tax liability can be calculated. From the tax year 2010-11, a new rate of 50% has been introduced as an additional rate where the taxable income of an individual exceeds £150,000. For the computation of income tax liability, it is necessary to arrange the taxable income in ‘slices’, with non-savings income at the bottom, followed by savings income and then dividend income. Example John, a taxpayer aged 40 has an adjusted net income of £108,250 for 2010-11. The maximum net income limit for 2010-11 is £100,000. John’s net income exceeds the limit by £8,250(£108,250 - £100,000). The standard personal allowance of £6,475 will be reduced by one half of the excess. Therefore, the personal allowance available to John is (£6,475 - ½ x £8,250) = £2,350. Continued…

12. 12 A starting rate of 10% is applicable for savings income that falls within the first £2,440 of taxable income. However, if the non-savings income, which is the bottom slice of income itself, exceeds £2,440. the starting rate of 10% for savings will not apply. Summary of tax rates Refer to Example (James) on page 191 Income Tax Band Non-savings income Savings income Dividend income Basic rate band: £1 to £37,400 20% 10% Higher rate band: £37,401 to £150,000 40% 32.5% Additional rate band: over £150,000 50% 42.5%

13. 13 TotalNon-savingsSavingsDividends ££££ Employment income22,500 Building society interest (£3,800 x 100/80)4,750 Dividend income (£18,900 x 100/90)21,000 Total / Net Income48,25022,5004,75021,000 Less PA(6,475) Taxable income41,77516,0254,75021,000 Income tax Non-savings: basic rate band (£16,025 x 20%)3,205 Savings: basic rate band (£ 4,750 x 20%)950 Dividends: basic rate band (£16,625 x 10%)1,663 £ 37,400 Dividends: higher rate band (£4,375 x 32.5%)1,422 Income tax liability7,240 Test Yourself on page 191 James’s income tax liability for 2010-11 is computed as follows: Continued…

14. 14 Steps for calculation of income tax liability Step 1 Ensure that all James’s income has been grossed up if any income tax has been deducted before James receives it: Salary: £22,500 (this is the gross amount). Building society interest: £3,800 x 100/80 = £4,750 (tax of 20% has been deducted). Dividend income: £18,900 x 100/90 = £21,000 (cash amount of dividends must be grossed up by 100/90). Step 2 Deduct personal allowance. This is always deducted from non-savings income first, leaving £16,025 (£22,500 - £6,475) of taxable non-savings income. Step 3 Compute the income tax liability for each category of income, starting with non-savings income, then savings and finally dividend income. Continued…

15. 15 Non-savings income The first £37,400 of non-savings income is taxed at the basic rate of 20%. £16,025 x 20% = £3,205 Savings income The savings income of £4,750 is taxed at 20% £4,750 x 20% = £950 (This is because the sum of non-savings income of £16,025 plus savings income of £4,750 i.e. £20,775 is still within the basic rate band of £37,400). Dividend income The dividend income falls partly in the basic rate band and partly in the higher rate band. The amount falling in the basic rate band is £16,625 (£37,400 - £20,775) and is taxed at 10%. £16,625 x 10% = £1,663. The amount falling in the higher rate band is £4,375 (£21,000 - £16,625) and is taxed at 32.5%. £4,375 x 32.5% = £1,422. The figure of £7,240 is the income tax liability. Tip: “Income tax liability" means the total tax due, “Income tax payable" means after offsetting any amounts deducted at source" Therefore, if asked for the income tax payable, then PAYE and tax suffered will be deducted from the income tax liability figure. Continued…

16. 16 RECAP  Prepare a basic income tax computation involving different types of income. [2]  Calculate the amount of personal allowance available generally, and for people aged 65 and above. [2]  Compute the amount of income tax payable. [2]  Explain the treatment of interest paid for a qualifying purpose. [2]  Explain the treatment of gift aid donations. [1]  Explain the treatment of property owned jointly by a married couple, or by a couple in a civil partnership. [1]

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