Tax year 2019/20 John Trayner FCII FPFS

Tax year 2019/20 John Trayner FCII FPFS
AF1 Day 1 Tax year 2019/20 John Trayner FCII FPFS 23 May 2019 Audley Financial Training

Audley Financial Training
The first step in acquiring knowledge is finding out what you don’t know 23 May 2019 Audley Financial Training

Today we will do a lot of heavy lifting
Focus on identifying what you know and what you don’t know Post course work on your weak areas and test your understanding by using the workbook 23 May 2019 Audley Financial Training

Overall course objective
By the end of the course you will have: increased your chances of passing the exam by covering the technical points that are likely to be tested 23 May 2019 Audley Financial Training

Day 1 objectives By the end of this session, delegates will be able to: Calculate accurately a liability to income, capital gains and inheritance tax for individuals whose situation is typical of those tested in previous AF1 papers. Explain accurately the tax treatment of the main pooled investments, both on and off shore and apply these rules to practical situations faced by the average investor. Explain accurately the characteristics and restrictions on the main tax privileged investments using only the information provided in the exam tax tables. 23 May 2019 Audley Financial Training

Point of Departure I’m going to assume we all have the basic knowledge of the main taxes up to R02 & R03 level. We will focus on the more difficult parts of the syllabus 23 May 2019 Audley Financial Training

Income tax need to know Basic calculation Taxation of savings income including PSA and 0% band Taxation of dividend income Tax free income Treatment of pension and Gift Aid contributions Adjusted Net Income Marriage Allowance and Married Couples Allowance Paying income tax 23 May 2019 Audley Financial Training

A job offers a straight salary of £32,500
How much income tax will be payable? 23 May 2019 Audley Financial Training

Salary £32,500 Less PA £12,500 Taxable salary £20,000 @20% £4,000 23 May 2019 Audley Financial Training

Another job offers a straight salary of £60,000.
How much income tax will be payable? 23 May 2019 Audley Financial Training

Salary £60,000 Less PA £12,500 Taxable salary £47,500 Less HRT £37,500 @20% £7,500 £10,000 @40% £4,000 Total £11,500 23 May 2019 Audley Financial Training

Additional Rate Band above £150,000 Higher rate Band between £37,500 and £150,000 Basic Rate Band on the next £34,500 But can be increased! Personal Allowance between £0 and £12,500 23 May 2019 Audley Financial Training

Types of Income Chargeable gains from non qualifying life policies Dividend income Savings income Non savings income 23 May 2019 Audley Financial Training

Non-Savings income Salary/Wages Taxable Benefits in Kind Self-employed profits Pensions Rental profits First income to be taxed Rates 20%, 40%, 45% 23 May 2019 Audley Financial Training

Savings Income Interest from banks/building societies, Gilts, Corporate Bonds. Distributions from gilt/bond unit trusts/OEIC All paid gross Can use Personal Savings Allowance A zero % rate band £1,000 for non and basic rate tax payers, £500 for higher rate tax payers, zero for additional rate tax payers. But, what is a higher or additional rate tax payer? 23 May 2019 Audley Financial Training

This person has £600 bank interest
Salary £49,500 Less PA £12,500 Taxable salary £37,000 23 May 2019 Audley Financial Training

Salary £49,500 Less PA £12,500 Taxable salary £37,000 @20% £7,400 Savings income £500 0% £0 £100 @40% £40 Total £6,840 23 May 2019 Audley Financial Training

Effect of PSA Non-savings £49,000 Savings Income £2,000 Higher rate Threshold PSA (£500) Non savings income 20% 40% 23 May 2019 Audley Financial Training

The 0% Savings Rate Non savings more than £17,500 No 0% rate available Non savings below £17,500, 0% rate available on £5,000 Non savings above £12,500 but below £17,500 some 0% rate available Plus £1,000 PSA is also available 23 May 2019 Audley Financial Training

The 0% savings rate Kay has a pension of £13,500 and savings income of £8,000 After her PA £1,000 of her pension (non-savings) is taxed at 20% She has £4,000 of the starting rate band £4,000 of her savings income is taxed at 0% £1,000 falls under the PSA which is taxed at 0% £3,000 is taxed at 20% 23 May 2019 Audley Financial Training

Dividend taxation Dividends from shares and distributions from equity unit trusts, OEIC Dividend Allowance, £2,000, 0% band, not a tax free allowance Ordinary rate 7.5% Upper rate 32.5% Additional rate 38.1% 23 May 2019 Audley Financial Training

Dividend allowance Savings and non-savings income £49,000 Dividend Income £10,000 Higher rate Threshold 0% Non savings income & savings income 32.5% 23 May 2019 Audley Financial Training

£44,850 salary, £4,000 dividend Salary £49,000 Less PA £12,500 Taxable salary £36,500 23 May 2019 Audley Financial Training

£44,850 salary, £4,000 dividend Salary £49,000 Less PA £12,500 Taxable salary £36,500 @20% £7,300 Dividend £2,000 @0% @32.5% £650 £7,950 23 May 2019 Audley Financial Training

Dividend allowance Savings and non-savings income £38,000 Dividend Income £10,000 Higher rate Threshold 0% Non savings income & savings income 7.5% 23 May 2019 Audley Financial Training

Dividend and Personal Allowance
Julie is a director and pays herself £9,000 in salary and takes £35,000 in dividends Her salary is all within the PA and she still has £3,500 left. DA sits on top of her PA so £3,500 of the dividends are taxed at 0% This leaves £31,500 of her dividends to be taxed and will all be in the basic rate band £2,000, the DA, is taxed at 0% £29,500 will be taxed at 7.5% 23 May 2019 Audley Financial Training

Tax free income ISA income National Savings Certificates Rent a room relief £1,000 small trading exemption £1,000 property exemption 23 May 2019 Audley Financial Training

Trading Exemption You must register as self-employed if income is more than £1,000 Alternatively you can apply for the trading exemption. This allows up to £1,000 to be exempt from income tax 23 May 2019 Audley Financial Training

Pat makes cakes for her friends and colleagues.
Her income is £800 so this is exempt from tax Her business expands and her income increases to £1,400 She now has two options: She can offset the £1,000 trading exemption and pay tax on £400 Or she can offset the costs of business. If these were £400 she would pay tax on £1,000 D 23 May 2019 Audley Financial Training

Not for the employed! Jean is in full employment and works part time as a pool attendant at the weekend. She earns £900 a year The trading exemption cannot be used as this is employment income 23 May 2019 Audley Financial Training

Income Tax: Pension Contributions & Gift Aid
23 May 2019 Audley Financial Training

How will they get tax relief on these contributions?
Bill pays 5% of his basic salary of £60,000 into his employer’s pension scheme Ben also has a salary of £60,000 and he pays 5% of his salary into his SIPP. How will they get tax relief on these contributions? 23 May 2019 Audley Financial Training

Net Pay v Relief at Source
With net pay, gross contributions are deducted from gross pay and tax is calculated on net pay. With Relief at Source contributions are always paid net of basic rate tax regardless of individual’s tax or employment status To make a £1,000 gross contribution you would pay £800 and the provider would reclaim £200 from HMRC 23 May 2019 Audley Financial Training

Net Pay example Sue earns £36,000 a year (£3,000 a month) She pays 5% into her employer’s occupational scheme Each month she has £150 deducted from her gross pay and only pays tax on £2,850 23 May 2019 Audley Financial Training

Relief at Source example
Jack is a member of his employer’s Group Personal Pension. He also earns £36,000 a year and pays 5% of his salary into this His gross pay is £3,000 and he will be taxed on this He pays £120 net after tax has been deducted. This is then grossed up to £150 which is paid into his pension Both Sue and Jack end up with the same net pay 23 May 2019 Audley Financial Training

Higher rate tax: Net Pay example
Sue earns £60,000 a year (£5,000 a month) She pays 5% into her employer’s occupational scheme Each month she has £250 deducted from her gross pay and only pays tax on £4,750 This means she gets 40% relief straight away 23 May 2019 Audley Financial Training

Higher rate: Relief at Source
Jack is a member of his employer’s Group Personal Pension. He also earns £60,000 a year and pays 5% of his salary into this His gross monthly pay is £5,000 and he will be taxed on this He pays £200 net after tax has been deducted. This is then grossed up to £250 which is paid into his pension He gets higher rate relief by adding the gross annual contribution (£3,000) to the higher rate threshold to give £37,500 23 May 2019 Audley Financial Training

Gift Aid £1,250 £1,000 £250 £38,500 23 May 2019 Audley Financial Training

Try this one Jane has a salary of £52,000 and also a company car with a P11D benefit of £5,000. She receives £600 from a deposit account and £7,000 from dividends. She pays £400 a month into her Personal pension and £1,000 into registered charity claiming gift aid. Calculate her income tax liability for 19/20 23 May 2019 Audley Financial Training

Calculate Higher Rate Threshold
Gross pension £400 x 12 =£4,800/0.8 = £6,000 Gross Gift Aid £1,000/0.8 = £1,250 HRT is £44,750 23 May 2019 Audley Financial Training

Set out in three columns
Non Savings Savings Dividend Total £57,000 £600 £7,000 £60,600 £12,500 £45,500 £50,750 23 May 2019 Audley Financial Training

Tax Non Savings Income Non-savings £45,500 43,750 20% £8,750 1,250 40% 500 Savings Total 23 May 2019 Audley Financial Training

Tax Savings Income Non-savings £45,500 43,750 20% £8,750 1,250 40% 500 Savings 0% 100 40 Total 23 May 2019 Audley Financial Training

Tax Savings & Dividend Income
Non-savings £45,500 43,750 20% £8,750 1,400 40% 560 Savings 500 0% 100 40 Dividend 2,000 5,000 32.5% 1,625 Total £10,975 23 May 2019 Audley Financial Training

Taxation of Rental Profits
23 May 2019 Audley Financial Training

Taxation of Rental income
Rental profits aretaxed rather than gross income is taxed For 19/20 only 75% of mortgage interest can be offset against rental income Other expenses such as managing agent’s fees can still be offset 25% of interest can be offset overall tax liability as a tax reducer 23 May 2019 Audley Financial Training

How it works Phil has a pension of £27,000 and has a buy to let property bringing in rental income of £40,000, pays interest of £20,000 and other costs of £4,000. Prior to the changes his net rental income would have been £16,000 In 19/20 only £5,000 of interest can be offset Net rental profit is £31,000 23 May 2019 Audley Financial Training

Full calculation Pension £27,000 Net Rental income £31,000 £58,000 Less PA £12,500 £45,500 20% = £7,500 40% = £3,200 £10,700 Less 20% £1,000 Tax due £9,700 23 May 2019 Audley Financial Training

Adjusted net income 23 May 2019 Audley Financial Training

What is ANI and why is it important?
It’s net income but not as we know it! There are two situations when it is significant Reducing the Personal Allowance if ANI is more than £100,000 Calculating the amount of Child Benefit Tax charge 23 May 2019 Audley Financial Training

Calculating Adjusted Net Income
Starting point is the total of non-savings, savings, dividend income and chargeable gains under life policies. If payments were made to an occupational pension scheme under the net pay system these are deducted from non-savings. Gross payments to Personal Pensions and SIPP are deducted to get the ANI Grossed up Gift Aid contributions can also be deducted 23 May 2019 Audley Financial Training

ANI example Tasmin has a salary of £110,000 and pays 5% (£5,500) into her employer’s pension scheme She has savings income of £2,000 and dividend income of £10,000 She contributed £4,000 net to a SIPP and paid £400 to charities claiming Gift Aid Her total earnings are £104,500 + £2,000 + £10,000 = £116,500 From this we can deduct £5,000 and £500. Her ANI is £111,000 23 May 2019 Audley Financial Training

ANI Key points The ANI does not affect the higher or additional rate thresholds You don’t include ISA income or other tax free income such as rent a room. All savings income and dividend income must be included, you cannot deduct the PSA or Dividend Allowance If ANI is more than £100,000 individuals would still have a PSA of £500 provided they hadn’t gone into additional rate and would always have the full Dividend Allowance of £5,000 If the individual is self employed, trading losses can also be deducted. 23 May 2019 Audley Financial Training

Personal Allowance reduction
If the ANI is more than £100,000 the PA is reduced by £1 for every £2 of above £100,000. Mike’s ANI is £120,000 so is PA is reduced by £10,000 to £1,850. If ANI is more than £123,700 the individual will have no PA. This gives a marginal rate of 60% between £100,000 and £125,000 23 May 2019 Audley Financial Training

Child Benefit tax charge
Child Benefit is a tax free weekly payment to the parent of a child under 16. It is currently £20.70 a week for the first child and £13.70 for subsequent ones. It is lost if either parent has ANI above £60,000 If ANI is more than £50K child benefit is lost at the rate of 1% for every £100 above £50,000 This is collected as a child benefit charge 23 May 2019 Audley Financial Training

Child Benefit tax charge
Tom and Sara are entitled to Child Benefit of £1, (1 child) Tom’s ANI is £54,000, £4,000 in excess so the charge is 40% or £430 By making a net contribution of £3,200 to a PP Tom’s ANI drops to £50,000 and doesn’t have to pay the £430 charge Higher rate tax relief could be claimed so effectively a £4,000 gross contribution would have cost £1,970 (£2,400 less £430) 23 May 2019 Audley Financial Training

Hatches & Matches Children’s income and Marriage 23 May 2019 Audley Financial Training

Children’s income >£100 income £12,500 £12,500 £12,500 £12,500 23 May 2019 Audley Financial Training

Income tax and marriage
Income tax is assessed on individuals rather than couples This can lead to some anomalies Heather is married and the sole earner with a salary of £60,000. She can offset her PA but she will be a higher rate tax payer. John and Mary each earn £30,000 Their total income is the same as Heather’s but both can use their PA and both will be in the basic rate band. They pay less tax than Heather 23 May 2019 Audley Financial Training

Marriage Allowance Example
£7,000 £40,000 Her PA increases to £13,750 She saves £250 in tax Transfers £1,250 of his PA 23 May 2019 Audley Financial Training

Marriage Allowance rules
Allows one person to transfer 10% of their PA up to £1,250 to a spouse/CP If unused PA was less than £1,250 then maximum transfer is restricted Kate has a pension income of £12,000 so can only transfer £500 Both must have been born after 5/4/1935 Recipient’s income between £12,500 and £50,000 (a basic rate tax payer) Can be claimed in the following tax year Can be backdated for four tax years 23 May 2019 Audley Financial Training

Married Couple’s Allowance
Applies if one of a married couple/CP was born before 6 April 1935 It is a tax reducer Maximum is 10% of £8,915= £891.50 Minimum is 10% of £3,450 = £345 Exact amount is determined whether ANI is more than £29,600 Whose ANI? For marriages made before 5/12/05 on the husband For marriages/CP made after that on highest earner 23 May 2019 Audley Financial Training

MCA example Dan and Doris are married Dan was born in 1932, Doris in 1938 Dan’s ANI is £20,000 so is entitled to the full MCA His tax liability is £1,500 but he can deduct £ (10% of £8,915) This reduces his tax liability to £608.50 23 May 2019 Audley Financial Training

Impact of ANI If ANI is more than £29,600 the MCA is reduced. As you must be over 83 to claim MCA, only Gift Aid contributions can be deducted. Marcia has an ANI of £37.600 This is £8,000 above the income limit so MCA is reduced by £4,000 £8,915 less £4,000 = £4,915 Marcia’s tax bill is reduced by £491.50 23 May 2019 Audley Financial Training

Minimum MCA If an individual qualifies for MCA they will always get at least £3,450 or a reduction of £345 Tony has a pension income of £59,600 £30,000 above income limit so £15,000 reduction which would give a minus figure but minimum of £3,260 will apply There will be a reduction of £326 in his tax bill 23 May 2019 Audley Financial Training

Date of marriage trap Phil and Jill qualify for MCA Phil’s ANI is £20,000, Jill’s is £40,000 If they married before 5/12/05 it is assessed on Phil so he would get full reduction of £891.50 If they married after 5/12/05 it is assessed on Jill so reduction is £345 23 May 2019 Audley Financial Training

Paying Income Tax 23 May 2019 Audley Financial Training

Paying Income Tax Income tax is a retrospective tax. No one knows what their income, and therefore their tax liability will be before the end of the year HMRC don’t want to wait for their money! Two methods of collection, Pay as You Earn and Self-Assessement 23 May 2019 Audley Financial Training

PAYE v Self-Assessment
PAYE is for employees, pensioners and directors Tax deducted from each “pay packet” by employer. Tax code should collect right amount of tax Final figure will be adjusted at end of tax year For the self-employed Make 2 payments on account on January 31 and July 31 Tax liability calculated. Balancing payment made on 31 January following end of tax year 23 May 2019 Audley Financial Training

The Payment Cycle All income must be declared and all tax due paid by the following 31st January Tax Year April 6 to April 5 For the final part of this module we are going to look at how income tax is collected. As we saw at the start of the module you are taxed on the income you receive in the tax year which runs from April 6 to April 5. The fundamental rule is that all tax must be paid by the following 31st January. If you are employed or in receipt of a pension you will pay through PAYE where your employer or scheme deducts tax each time you are paid If you are self employed you will pay through self assessment 23 May 2019 Audley Financial Training

Sending in a tax return If tax return is required, two options File paper return by October 31 after end of tax year File on line by January 31 On line, liability is calculated automatically With paper can calculate yourself or get HMRC to do it The vast majority of individuals will not need to send in a tax return. However a return is always going to be required by: The self employed Higher rate tax payers Anyone receiving untaxed income Company directors. This isn’t a full list but it will suffice at this stage If you do have complete a return this can be done in two ways File a paper return by 31st October after the end of the tax year Alternatively you can file on line and this can be done right up to the deadline of January 31. If you do it on line the system will calculate how much you owe With paper you have the option of doing the calculation yourself or asking HMRC to do it for you 23 May 2019 Audley Financial Training

HMRC Fines and sanctions
£100 fine if return for previous year not filed 31 January Daily fines of £10 are levied Maximum of £900 30 April £300 or 5% of tax due if greater 31 July There are automatic penalties if you miss the deadline. There is a £100 fine if you do not file by 31 January. This is charged even if you owe no money Three months later, on 30 April, HMRC will start to levy a daily fine of £100 until the return is filed. This is capped at £900. If no return has been filed three months later on 31 July an additional £300 fine is applied which could be increased to 5% of tax due if this is greater. Should it not be returned by the following 31 January a similar fine will be applied 23 May 2019 Audley Financial Training

Trading year – Tax year Trading year April 6 to April 5 Apr Trading year Apr 5 Apr Apr 5 A self employed individual can choose any trading year they choose. If you select April 6 to April 5 (or April 1 to March 31 then it’s simple. The trading year matches the tax year 23 May 2019 Audley Financial Training

Trading year – Tax year Trading year Jan 1 to Dec 31 1/1/ Trading year 31/12/17 Apr Apr Apr Apr However let’s say your trading year is January 1 to December 31 This means trading year Jan to December straddles two tax years, 11/12 & 12/13 The rule is that you look at which tax year the last day of the trading year falls into. In this case it is December This is in 2012/2013 Therefore trading year 2012 will be taxed in 12/13 23 May 2019 Audley Financial Training

Key dates First payment on account is made on the 31st January in the tax year that is being assessed It is 50% of previous tax year’s bill Same amount as second payment is made on the following 31st July. Balancing payment is made on the following 31st January It is the difference between what is owed and what has already been paid A final balancing payment will be made on the following 31 January and is the difference between her liability and what has already been paid 23 May 2019 Audley Financial Training

Paying tax for 17/18 By 31 July 2018 she must make the second payment on account for 17/18. This would be £10,000 Anna’s tax bill for 16/17 was £20,000. This was all completed on 31 January 2018 During November 2018 she completes her self-assessment form and her liability for 17/18 is £26,000 By 31 January 2018 she must make the first payment on account for 17/18. This would be £10,000 As she has already paid £20,000 on account she must make the balancing payment of £6,000 by 31 January 2019 plus the first payment on account of £13,000 for 18/19 23 May 2019 Audley Financial Training

Payments on account 31 January 2017 Joe makes first payment on account £30,000 for 16/17 6 April 2017 Tax year 2017/18 starts 31 July 2017 Joe makes second payment on account, £30,000 Before 31st January 2018 he must complete self assessment return for 16/17 Liability £70,000 31 January 2018 Final date to make balancing payment of £10,000 plus first payment on account of £35,000 for 17/18 6 April 2018. Tax Year 2018/17 starts 23 May 2019 Audley Financial Training

Tax planning strategies
Use tax free investments Use of PSA and Dividend Allowance Income splitting Pension payments Using 5% withdrawal from Income Bonds Grandparents funding children’s investments Avoiding income producing investments The most basic approach to reducing income tax is to use tax free investments, the most common one being an ISA A couple can also make use of income splitting. This can be used if one is paying tax at a lower rate that the other. Pension payments will also reduce your tax liability. A 5% withdrawal from an investment bond is not taxed immediately and the liability is deferred. Someone who is a higher rate tax payer approaching retirement could use this and then do a full encashment when they become a basic rate tax payer. If you want to invest for children it is better that grandparents or anyone other than the parents make the investment as the children can then use their personal allowance. Finally it can make sense to avoid income producing investments 23 May 2019 Audley Financial Training

Tax year 2019/20 John Trayner FCII FPFS

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Tax year 2019/20 John Trayner FCII FPFS

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