P6 Revision Notes (1)-Acowtancy PDF

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ATX Revision Notes Income tax

Income tax The information below is provided in the exam:!

•

Example of a higher rate payer! For the tax year 2018/19, Jina has a salary of £48,850 and savings income of £1,800 (Gross).!

Income tax on: #! Non savings income$ Employment income £48,850$ Personal allowance (£11,850)$ Taxable income £37,000! £34,500 at 20% = £6,900$ £2,50 (£37,000 - £34,500) at 40% = £1,000!

Savings income$ Savings income £1,800$ £500 at 0%$ £1,300 (£1,800 – £500) at 40% = £520$ #$ Tax liability #(6,900 + 1,000 + 520) = £8,420!

Note#if she was a basic rate taxpayer, then the savings nil rate band would have been £1,000 and if she was a additional rate taxpayer, then there would be no nil rate band available.!

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Dividend income This includes dividends received from UK companies.! The first £2,000 of dividend income benefits from a 0% rate.! This £2,000 nil rate band is available to all taxpayers, (the basic, higher or additional rate).!

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Example of dividend nil rate band! Mia has a salary of £56,850 and dividend income of £3,800.! Income tax on: #! Non savings income$ Employment income £56,850$ Personal allowance (£11,850)$ Taxable income £45,000! 34,500 at 20% = £6,900$ 10,500 (45,000 – 34,500) at 40% = £4,200! Dividend income$ Dividend income £3,800$ 2,000 at 0% =£Nil$ 1,800 (3,800 – 2,000) at 32.5% = £585$ #$ Tax liability (6,900 + 4,200 + 585) = £11,685!

Personal allowance The personal allowance is reduced to Nil if the adjusted net income is £123,700. (£123,700£100,000)/2 = £11,850.!

The information below is provided in the exam:!

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Transferable Personal Allowance 20% * (£1,190) = £238 is the maximum tax credit that can be given to the spouse who is paying tax.

Qualifying loans REMEMBER:! Interest Payable on the Loans below is deducted from Total Income.!

1. Loan to purchase plant and machinery (P&M) which is acquired for the use in the employment of the taxpayer! Illustration: A loan taken out to Purchase a computer to use for employment!

2. Loan to purchase P&M for the use in the business of a partnership, in which the taxpayer is a partner.! Illustration: A partner would have taken out a personal loan to purchase a computer for use in the partnership, here interest payable would be deducted from Total income for 3 tax years only!

3. Loan to purchase an interest in a partnership.! Illustration: Partner A puts in £20,000 into the partnership bank account to fund the business.! If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the £1,400 payable from his total income.!

4. Loan to buy shares in a close company! This is allowable as long as the taxpayer owns at least 5% of the ordinary share capital or works for the greater part of his time in the management of the company.

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TX Revision Notes Income tax from Employment Income

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Income tax from Employment Income Total employment income calculation:! Salary

x

Commission or Bonus

x

Benefits (See below)

x

Less allowable deductions ( See below)

(x)

= Total employment income

x

Less PA

(£11,850)

Taxable Income

x

Income tax (20%/40%/45%)

x

Allowable deductions: 1. Contributions to an occupational pension scheme.! Note that Payments to a personal pension scheme are NOT allowable deductions.! 2. Travel, subsistence and entertaining incurred wholly, exclusively and necessarily in the performance of duties of employment! 3. Subscription to a professional body (e.g.) ACCA! Note that payments for gym memberships are NOT allowable deductions.! 4. Deficit on a mileage allowance # 5. Donations to charity! Note that Donations to political parties are NOT allowable deductions.! 6. Capital allowances are available for plant and machinery provided by an employee for use in his duties!

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Benefits! Employees pay Income Tax (I.T) (Taxable Benefit x I.T rates 20%/40%/45%) , NO NIC! Employers pay NIC Class 1A (13.8%)! Examples of the benefits: • Use benefit! • Gift benefit! • Living accommodation benefit! • Motor cars benefit! • Beneficial Loan Benefit! Benefits are Time Apportioned - If a benefit is available for only few months in the tax year e.g. 8 months, so pay the I.T. on it for only e.g. 8 months (Benefit x I.T rate x 8/12 months)!

Mileage allowance This arises when an employee uses their own car on employer’s business.!

The information below is provided in the exam:!

• Anything below the allowance will be deductible! • You have to pay I.T and NIC Class 1 (Employee + Employer) on Anything above the allowance! • This is because, this is cash received by the employee, not a benefit. &

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Use benefit! If an employer lends an asset (e.g. a Computer, Motorcycle, Furniture) to an employee, and the employee uses this asset privately.! Proforma Assessable benefit:

20% * market value * x/12

X

Less:

Rent paid to employer to use asset'

(X)

Use benefit'

X

Gift benefit After an employer has given the employee an asset to use privately, the employer may then decide to give this asset to the employee as a gift.! The employee will need to pay income tax (I.T.) on the money value of gift benefit.!

The money value will be the higher of 2 figures:! Figure 1:! For example, if the computer cost the employee £750 2 years ago when he purchased it, and the use benefit that the employee paid income tax on for each year was £150, then the gift benefit will be:! Original market value £750! Year 1 (£150)! Year 2 (£150)! Gift benefit £450 !

Figure 2:! For example, after 2 years, if the computer had a market value of £500, the benefit would be:! Market value at date of gift £500! Gift benefit £500 I.T. will be paid on this figure.!

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Living accommodation benefit! If an employer provides an employee with a home to live in, without the home being necessary for the employee to do his or her job, the employee will have to pay income tax on a living accommodation benefit.

•

If the employer owns the home, then the home’s Annual Value will be used.!

•

If the employer is renting the home, then the higher of the Annual Value and Rent Paid by the employer will be used.!

•

The amount paid by the employee to the employer will be deducted to give the living accommodation benefit.!

Annual value x I.T. rate (20%/40%/45%) = I.T. on the Living accommodation benefit Rent Paid x I.T. rate (20%/40%/45%) = I.T. on the Living accommodation benefit

Additional benefit! There is an additional benefit that can arise if the employer owns the home and it cost the employer more than £75,000 when he purchased it.! The Additional benefit is ADDED to the Living accommodation benefit (above).

How to calculate the money value of the additional benefit? Did the employer buy the home more than 6 years before he gave it to the employee to use?! 1. No#

(Cost''- £75,000) * Official rate of interest (2.5% for 18/19) = Additional benefit! Note# The'Cost!will include the actual cost of the home plus any amount spent on extending/ enhancing the home.! 2. Yes (Market value - £75,000) * Official rate of interest = Additional benefit!

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Motor cars If an employer gives an employee a motor car to use for business and private purposes! •

(List price - capital contribution) * % = Car benefit!

•

The list price can be reduced by a maximum of £5,000 - even if the employee has contributed more than this, it will only be reduced by £5,000.

•

Deduct the employee’s Contribution towards the running costs from the benefit!

•

If there is no private use of the car there is no taxable benefit!

The information below is provided in the exam:

> 95g/km

Add an additional 1% for every complete 5g/km above 95 g/km

Maximum percentage

37%

The percentage rates are increased by 4% for diesel cars.! Illustration: Lina was provided with a diesel powered company car. The CO2 emissions are 122g/km. ! The motor car was only available for 8 months of 2018/19.! The CO2 emissions are above 95g/km, so the relevant percentage is 29% (20% + 4%(diesel car) + 5% (1% for every complete 5g/km above 95g/km ie 120-95 = 25 / 5 = 5%).! The CO2 emissions figure of 122 is rounded down to 120 so that it is divisible by five.! The motor car was only available for 8 months, so the benefit is £2,610 (13,500 × 29% × 8/12).!

Fuel provided for private use! The information below is provided in the exam:!

Multiply £23,400 by the percentage used for calculating the car benefit.!

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Beneficial Loan Benefit! This benefit arises when an employer gives an employee a loan at an interest rate that is cheaper than the official interest rate (2.5% for 18/19).! Carefully note – if the loan is £10,000 or less, no beneficial loan benefit will arise at all.! If the loan is above £10,000 – then the full benefit will arise! £ Money value of the loan benefit

X

Less: Interest actually paid by employee

(X)

Beneficial loan benefit

X

The information below is provided in the exam:!

Exempt Benefits ! •

Employees pay NO I.T and NO NIC!

•

Employers pay NO NIC!

Examples: •

One mobile telephone!

•

Parking space at or near an employee’s work!

•

Spent time overseas on business - Payments for private incidental expenses (e.g. telephone calls) are exempt up to £10 per night when spent outside the UK!

•

Note that the equivalent UK allowance is only £5 per night

•

The use of a company gym!

•

The provision of meals in a staff canteen!

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Payments for home working are exempt up to £4 per week!

•

The provision of a place in a workplace nursery !

•

A non-cash long-service award (e.g. a watch) - if it is for a period of service of at least 20 years, and the cost of the award does not exceed £50 per year of service!

•

The payment of medical costs of up to £500 - e.g. an employee had been away from work for 2 months due to an injury, and the recommended medical treatment was to assist her return to work

•

Relocation cost of moving house - £8,000 is exempt!

Taxable Benefits ! •

Employees pay I.T. (Taxable Benefit x I.T rates 20%/40%/45%) and NO NIC !

•

Employers pay Class 1A NIC!

Examples: •

Use of the second mobile telephone!

•

If a company provides an employee with a leased motorcycle for travelling from home to work !

Cash Reimbursement! •

Employees pay I.T. (Cash Received x I.T rates 20%/40%/45%) and Class 1 Employee NIC !

•

Employers pay Class 1 Employer NIC!

Examples: •

If a Company reimburse an employee for the cost of driving his own car for business purposes!

•

The Cash compensation in respect of sale of the house in short notice at low price

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ATX Revision Notes National insurance contributions (NICs)

National insurance contributions (NICs) The information below is provided in the exam:!

Bonus or Dividends or Benefits? Employees: Bonus - pay I.T. and NIC Class 1 Employee! Dividends - pay I.T. and NO NIC! Benefits - pay I.T, NO NCI!

Employers: Bonus - Class 1 Employer! Dividends - Nothing! Benefits - pay NIC Class 1A

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ATX Revision Notes Property Income

Income tax on property business profits You pay Income tax on:! 1. Rent received/receivable (when you let something out - Rental income)! 2. Premium received on the grant of a short lease!

2 ways to calculate Property business profits:! 1. Cash basis (if Property income < £150,000)! All cash received/paid in the tax year!

1. Accrual basis (if Property income > £150,000)! All income + expense relating to the tax year (doesn’t matter whether the cash was received /paid or not in this tax year)!

Proforma:! Rent received/receivable in the tax year"

"x

Plus: Income element of a short lease (See below)

"x

Less: Allowable expenses

(x)

Property business profit/loss

x/(x)

Allowable expenses:! To be allowable, an expense must have been incurred wholly and exclusively in connection with the business, for example:! 1. Insurance! 2. Agent’s fees! 3. Other management expenses! e.g. cleaning expenses! 4. Repairs - however capital expenditure to improve the property are not allowed.!

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e.g. Building a garage is not allowable! 5. Decorating! 6. Impairment losses! e.g. A tenant left owing 1 month’s rent which you were unable to recover.! 7. Advertising costs! 8. Cost of replacing windows, doors and boilers 9. Interest on a loan to purchase a non-non-residential property 10. Finance cost to purchase/repair a residential property (50% restriction) 11. AMAP - If a car is used and motor expenses are incurred because of the property, then if the cash basis is used, the motor expenses are not allowable, the AMAP will be used.

Property finance cost restriction For loans taken to purchase or repair residential properties, there is a finance cost restriction.!

1.

Deduct (50%*finance cost) as an allowable expense!

2.

Get a tax credit of (50% x 20% x finance cost) - this is deducted from Tax liability

This table is provided in the exam:

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Premiums granted for short leases (less than 50 years) Landlords pay tax on the Income Element:!

Capital element:!

•

Premium received * ((number of years of lease - 1) * 2%)! Income element:!

•

Income Element = Premium received - Capital element!

Tenants (Traders) can deduct:! • Trading profit deduction Income element (calculated above) / number of years of lease! • Rent paid

Rent a room relief - is available if you let furnished rooms out in your main residence! The relief must be claimed 22 months after the end of the tax year! Choose the lower one of:

Method 1:! Gross rent

x

Less: Rent a room relief"

(£7,500)

Property income"

x

Method 2: Gross rent

x

Less: Allowable expenses

(x)

Property income"

x

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Furnished holiday lettings (FHL) 1. The accommodation must be available for letting for at least 210 days in the tax year.! 2. The accommodation must actually be let for 105 days in the tax year.! 3. The accommodation must be let on a commercial basis.! 4. There must be no more than 155 days of longer term occupation in the tax year. ! 5. Longer term occupation occurs where there is a continuous period of occupation by the same person for more than 31 days.

Relief for property losses Relief is only given against future Property Income FHL Loss can be used against FHL Profit only You can’t mix FHL with UFHL Profit or loss!

Property business losses cannot be carried back to previous accounting periods.!

ISA This information is given in the exam: !

Example:! Peter received dividends of £3,000, of which £500 were from shares (ISA). ! What amount of dividends will tax be paid on?

£3,000 - £500 = £2,500 Dividend income! However, there is a NRB available for a Dividend income of £2,000, so No I.T. will be paid.

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ATX Revision Notes Residency & Domicile

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UK Residency This table is provided in the exam:!

Ties! 1. Close family in the UK (Wife, child).! 2. House in UK which is used during the tax year. (at least 1 night during the tax year)! 3. In the UK for more time than any other country.! 4. In UK for more than 90 days in either of the previous 2 tax years.! 5. Doing substantive work in the UK. (40 days or more)!

UK Residency and Domicile ! • If an individual is UK resident and UK domiciled, he is subject to UK income tax on his worldwide income.! ! • If an individual is not UK resident, then he is only subject to UK income tax on his UK income.! ! • If an individual is UK resident but not UK domiciled, he is subject to UK income tax on his worldwide income BUT there are 2 options: Remittance or Arising basis!

Arising basis! • The whole Overseas income will be taxed in the UK! • Personal Allowance (PA) will be deducted!

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Remittance basis! • Only Income remitted back (sent back) to the UK will be taxed ! • NO PA will be deducted! • Pay the Remittance Basis Charge (RBC)!

RBC £0 if UK resident for =7 of previous 9 tax years! £60,000 if UK resident for >=12 of previous 14 tax years!

If unremitted overseas income (Income that stays abroad) is £2,000 - there are two options - Remittance or Arising basis (Explained above)

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ATX Revision Notes Pensions

Pensions! Exam STYLE 1) Check how much you are allowed to contribute to Pension Scheme You can contribute the amount which is within Relevant Earnings:! Relevant Earnings are the greater of! •

£3,600 !

and! 100% of: •

Trading income (e.g. profits from a business)!

•

Employment income (e.g. salary)!

•

Income from furnished holiday lettings (e.g.) rental income from a FHLA (Remember NOT Unfurnished properties)!

2) Check how much your Annual Net Income is •

if ANI (Annual Net Income) is more than £150,000 ! For example if the taxpayer has ANI of £160,000 - then he will be entitled to (£160,000 - £150,000 = £10,000/2 = £5,000, A.A. £40,000 - £5,000 = £35,000 - annual allowance available.! Therefore, a person with ANI of £210,000 or more, will only be entitled to an annual allowance of £10,000! A.N.I. = Total income - gross personal pension contributions - gross gift aid donations

3) Check how much Annual allowances are available (in the last 3 years)!

The information below is provided in the exam:!

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3) Is there any Annual Allowance Charge? If you want to contribute more than Annual Allowances are available, then you will have to pay I.T on the difference.!

Eg. You want to contribute £80,000 and your Annual Allowance is £50,000, you will have to pay I.T on £30,000!

4) Extend your bands Remember that you can Extend your bands by the contribution (£80,000) - so £34,500 + £80,000 = £114,500 band will be taxed by 20%!

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ATX Revision Notes Stamp Taxes "