Phuong - Taxation in the UK - Chapter 9 - The personal tax computation

• 1.Unit 12: TaxationChapter 9The personal tax computation Nguyen Hoang My Phuong [email protected] Chau Hung College / BTEC - Edexcel http://chauhung.edu.vn

2. Chapter 9The personal tax computation Scope ofVarious types Charges onincome taxof income income Personal tax Allowances computation Families Gift Aid 3. The scope of income tax: chargeable persons, chargeable income The key elements of a personal income tax computation total income (savings/non-savings/dividend), net income, taxable income, computations of income tax liability The key stages in the transition from computation of incomeObjectives tax liability to income tax payable The different categories of charges Personal allowances and the circumstances in which they can be claimed How to prepare income tax computation 4. Scope of income tax - 1Chargeable income Receipts which might be expected to recur(weekly wages or profits from running a business) tax year / fiscal year / year of assessment: from 6 April to the following 5 Aprilthe tax year 2009/10from 6 April 2009 to 5 April 2010 5. Key elements of a personal income tax computation Income tax is deductible interest charged on taxable incomeNon-savings income personal allowancetrade lossesSavings incomeTotal income Net incomeTaxable income less lessDividend incomeThe amount charged on theThe balance of the liabilityindividuals incomestill to be settled in cashTax on non-savings income less lessTax on savings incometotal Tax liabilityTax payableTax on dividend incometax reducer tax sufferedInvestment under EIS PAYE tax on salary Tax on building society interestEIS (Enterprise InvestmentScheme) is designed to help smallerhigher-risk trading companies to Tax credit on dividend incomeraise finance by offering a range oftax reliefs to investors who purchasenew shares in those companies 6. Scope of income tax 3Tax rates40%40%40% 40%32.5%(higher (higher (higher (higher(higher rate) rate) rate) rate)rate) 37,400 20% 20%(basic 20% rate)(basic(basic 20% rate) rate)(basic rate)10% 2,44020%10% 10% (basic(savings rate) income20% starting (basic0 rate) rate) Non-savings SavingsDividend incomeincome income (gross) (gross) 7. Various types of income 1Classification of income Income from employment, pensions & some social security benefits Profits of trades, professions & vocationsMain types Income from property businessof income Savings & investment income, including interest & dividends Miscellaneous income 8. Various types of income 2 Savings income - 1Savings incomeBanks Financial institution owned by its members as a mutual organisation.Building societies Offering banking & related financial services, esp. mortgage lending InterestGiltsInterest paid on government securities Medium- to long-term debt instrumentsDebentures used by large companies to borrow moneyAccrued incomescheme 9. Various types of income 2 Savings income - 2Interest on National Savings & Investments accounts (NS&I)(e.g. Investment account, Easy Access Savings account) Savings incomeInterest paid by listed UK companies on debentures & loan stock received grossGilt interest Savings income Bank & building society interest (not NS&I account interest) received net of20% tax (incomeInterest paid by unlisted UK companies on debentures & loantaxed at source) stockNS&I: Deducted income taxed at source can be repaid a government department Grossed up by multiplying by 100/80 Banks & building If a recipient is not liable to taxoffering savings & investmentsocieties: private can cover the tax sufferedto the general public. organsations can certify in advance that he is a non-taxpayer one of the largest savings and received the interest grossorganisations in the UK. 10. Various types of income 3Dividend income Stock dividend Offering shares instead of a cash dividend Cash alternative, if the amount of the stock dividend equals the market value of the shares 15% Amount of stock dividendMarket value of shares, if the amount of the stock dividend differs from thecash alternative by more than 15% no cash alternativeThe tax credit on dividend income can be deducted in computing tax payable but cannot be repaidGrossed up by multiplying by 100/90 (tax credit of 10%) 11. Scholarships (exempt as income of the scholar) Betting & gaming winnings, including premium bond prizes Interest or terminal bonus on National Savings Certificates Many social security benefits (but the jobseekers allowance, the pension and certain incapacity benefits are taxable) GiftsExempt Damages and payments for personal injury (applying for both lump sumincome and periodical payments) Payments under insurance policies, so long as the person benefiting paid premiums and did not get tax relief for them Receipts on a retirement due to special events, or otherwise the ordinary ill health grounds (only applying to pensions paid under non- approved pension schemes) Interest on amounts repaid to borrowers under the income contingent student loans scheme Income on investment made though individual savings accounts (ISAs) 12. Activity 1 in class1. Joe is aged 55. In 2009/10, he earns a salary of 7,500 from a part-time job and receives bank interest of 4,000. Calculate Joes tax liability for 2009/10.2. An individual has taxable income (all non-savings income) of 50,000 for 2009/10. What is the income liability? 13. Activity 2 in classAn individual has the following income in 2009/10Building society interest received 6,400Dividends received7,875Premium bond prize5,000His personal allowance is 6,475. What is histaxable income? 14. Charges on incomeCharge on income A payment by the taxpayer which income tax law allows as a deduction Paid net (20%) Patent royaltiesCategories ofcharges on income Eligible interest Paid gross Copyright royalties 15. ExampleThree taxpayers have the following Trade profits: A: 8,000 B: 3,000 C: 46,195Taxpayer A and B pay a non-trade royalty of 200(net). Taxpayer C pays a non-trade royalty of1,280 (net).Calculate the tax payable for each. 16. Allowances deducted from net incomeNon-savings incomeSavings income Dividend incomeAllowances is deducted1 2 3fromPersonalIndividualsNote allowancesAll persons (including children)6,475People aged 65-74 years old Net income > 22,900 (income9,490(at any time in the tax year) limit for age-related allowance)then>=75 years oldPAA = PA - (net income 9,64022,900)/2(at any time in the tax year)(until PAA comes down to 6,475) Blind persons allowance1,890 (BPA)Also given for the year before registration, if the taxpayerhad obtained the proof of blindness needed for registrationbefore the end of that earlier year. 17. Activity 3 at homeSusan has an annual salary of 37,000. She has aloan of 7,000 at 10% interest to buy shares in heremployee-controlled company, and another loan of5,000 at 12$ interest to buy double glazing for herhouse. She receives building society interest of2,000 a year.What is her taxable income for 2009/10? 18. Gift aidOne-off and regular charitable gifts of money qualify for tax relief under the giftDefinitionaid scheme provided the donor the charity a gift aid declarationIn writingDeclaration Electronically via InternetOrally over the phoneMust not to repayable Gifts Must not confer any more than a minimal benefit on the donorGifts Treated as though it is paid net of basic rate tax (20%) 19. Activity 4James earns a salary of 58,000 but has no otherincome. In 2009/10 he paid 8,000 (net) under thegift aid scheme.Compute Jamess income tax liability for 2009/10 20. FamiliesSpousesTaxed as separateIncome - peopleageGiven same-sex couples rightsCivil partnersand responsibilities identical tocivil marriage.Equal shares of theincome Jointly own income- Income / generating propertyCapital gainMaking a joint declarationOn or after the datespecifying the proportion of the declaration 21. Families - 2Income Parents Minor childrenCapital gain not