Income Tax Basics UK Residency

1

UK Residency 1. Does the individual fall in either the automatic resident or automatic non-resident criteria?

Automatic Resident ▪ In UK for ≥ 183 days in a tax year ▪ Only home is in UK ▪ Carries out full time work in UK

Automatic Non-Resident ▪ In UK for < 16 days in a tax year ▪ In UK for < 46 days in a tax year and non-resident during past 3 tax years ▪ In UK < 91 days in a tax year and works full-time overseas

UK Residency 1. Does the individual fall in either the automatic resident or automatic non-resident criteria? 2. If not, refer to the Tax tables on residency. Check the ▪

Duration of the individual’s stay in UK,

▪

Previous residency status

▪

Number of ties he/she is required to possess, in order to be considered a UK resident

Residency

Days in UK

Previously Resident

Not Previously Resident

Less than 16

Automatically not resident

Automatically not resident

16 – 45

Resident if 4 UK ties or more

Automatically not resident

46 – 90

Resident if 3 UK ties or more

Resident if 4 UK ties

91 – 120

Resident if 2 UK ties or more

Resident if 3 UK ties or more

21 – 182

Resident if 1 UK tie or more

Resident if 2 UK ties or more

183 or more

Automatically resident

Automatically resident

Statutory Test Based on following UK ties: • Close family in UK – spouse, civil partner or minor children • House in UK made use of during the tax year • Doing substantive work in UK • In UK for > 90 days in either of the previous 2 tax years • Spending more time in UK than any other country

Thank you…

8

Income Tax Basics UK Residency - Examples

9

Example Joanne is self-employed as a painter. She has previously been resident in the UK, spending more than 250 days here each tax year.

On 6 April 2022, Joanne purchased a property in Spain, and during 2022-23 she mainly lived and worked there. However, she still has a house in the UK where her husband and family live. Joanne visits the UK on a regular basis, staying in the family home. During 2022-23, a total of 80 days were spent in the UK, of which 35 were for work.

Solution Automatic Resident

Automatic Non-Resident

▪ In UK for ≥ 183 days in a tax year

▪ In UK for < 16 days in a tax year

▪ Only home is in UK

▪ In UK for < 46 days in a tax year and non-

▪ Carries out full time work in UK

resident during past 3 tax years ▪ In UK < 91 days in a tax year and works fulltime overseas

Solution Days in UK

Previously Resident

Not Previously Resident

Less than 16

Automatically not resident

Automatically not resident

16 – 45

Resident if 4 UK ties or more

Automatically not resident

46 – 90

Resident if 3 UK ties or more

Resident if 4 UK ties

91 – 120

Resident if 2 UK ties or more

Resident if 3 UK ties or more

21 – 182

Resident if 1 UK tie or more

Resident if 2 UK ties or more

183 or more

Automatically resident

Automatically resident

• In UK for > 90 days in either of the previous 2 tax years • Close family in UK • Doing substantive work in UK

• House in UK made use of during the tax year

• Spending more time in UK than any other country

Exam Question Hana was UK resident in the tax year 2021-22. He worked full-time in Egypt throughout the tax year 2022-23. What is the maximum number of days which Hana can spend in the UK and be treated as automatically not resident in the UK for the tax year 2022-23? A. 15

B. 45 C. 90 D. 182

Solution Focus on requirement: What is the maximum number of days which Hana can spend in the UK and be treated as

automatically not resident in the UK for the tax year 2022-23?

Solution Apply them to Hana’s specific scenario ▪ In UK for < 16 days in a tax year ▪ Could be although very few days ▪ In UK for < 46 days in a tax year and non-resident during past 3 tax years ▪ Cannot apply as Hana was UK resident in the previous tax year ▪ In UK < 91 days in a tax year and works full-time overseas ▪ Hana does work full-time in Egypt, so he can get away with spending < 91 days in the UK

Exam Question Hana was UK resident in the tax year 2021-22. He worked full-time in Egypt throughout the tax year 2022-23. What is the maximum number of days which Hana can spend in the UK and be treated as automatically not resident in the UK for the tax year 2022-23? A. 15

B. 45 C. 90 D. 182

Thank you…

17

Income Tax Basics Types of Income

18

Income Taxable

Exempt

▪ Trading profit

▪ Interest received from National Saving &

▪ Rental income

Investment Certificate

▪ Employment income

▪ Interest from Individual Savings Account (ISA)

▪ Interest income

▪ Competition prizes, national lottery, premium

▪ Dividend income ▪ Pension received

bond prizes and betting winnings

▪ Interest received on overpaid taxes

Individual Savings Account ▪ For the current tax year, the limit of investment is £20,000 in total. ▪ Can be a mixture of cash or stock ISAs ▪ Cash ISA interest income is exempt ▪ Stocks ISA dividend income is exempt

Thank you…

21

Income Tax Basics Taxable Income Calculation

22

Determining Tax Liability and Payable - Steps 1. Collate income from all sources in a tax year. 2. Establish whether taxable or exempt 3. Segregate income into Non Savings Income (NSI), Savings Income (SI) and Dividend Income (DI)

4. Deduct interest paid on qualifying loan – IF ANY 5. Deduct personal allowance

Taxable Income Computation Format Name of individual Income tax computation: 2022/23 Employment income Trading income Property Income Other Investment income Interest income received gross Interest income net (? x 100/80) Dividends received from UK companies Other dividend income (? x 100/91.25) Total income Less : Qualifying interest Less: Loss Reliefs Net income Less : Personal allowance Taxable income

Non Saving Income £

Savings Income £

Dividend Income £

Total Income £

Taxable Income Computation Format Name of individual Income tax computation: 2022/23 Employment income Trading income Property Income Other Investment income Interest income received gross Interest income net (? x 100/80) Dividends received from UK companies Other dividend income (? x 100/91.25) Total income Less : Qualifying interest Less: Loss Reliefs Net income Less : Personal allowance Taxable income

Non Saving Income £ x x x x

Savings Income £

Dividend Income £

Total Income £ x x x x

Taxable Income Computation Format Name of individual Income tax computation: 2022/23 Employment income Trading income Property Income Other Investment income Interest income received gross Interest income net (? x 100/80) Dividends received from UK companies Other dividend income (? x 100/91.25) Total income Less : Qualifying interest Less: Loss Reliefs Net income Less : Personal allowance Taxable income

Non Saving Income £ x x x x

Savings Income £

x x

Dividend Income £

Total Income £ x x x x x x

Interest Received Gross ▪ Bank and building society interest ▪ Interest on Government Issued Long Term Securities (GILTS) ▪ Interest from National Savings and Investment account (NS&I) ▪ Interest from quoted corporate bonds of UK resident companies ▪ Foreign interest received gross of any overseas tax deducted

Interest Received Net ▪ Interest from unquoted corporate bonds of UK resident companies ▪ Interest from an Interest in Possession (IIP) trust Treatment ▪ These amounts are deemed to have been received net of 20% tax so the cash amounts

are grossed up ▪ Amount x 100/80

Taxable Income Computation Format Name of individual Income tax computation: 2022/23 Employment income Trading income Property Income Other Investment income Interest income received gross Interest income net (? x 100/80) Dividends received from UK companies Other dividend income (? x 100/91.25) Total income Less : Qualifying interest Less: Loss Reliefs Net income Less : Personal allowance Taxable income

Non Saving Income £ x x x x

Savings Income £

Dividend Income £

x x x x

Total Income £ x x x x x x x x

Other Dividend Income ▪ Dividends from an IIP trust (Cash amount x 100/91.25)

Thank you…

31

Income Tax Basics Qualifying Interest

32

Taxable Income Computation Format Name of individual Income tax computation: 2022/23 Employment income Trading income Property income Bank interest UK dividends received Total income Less : Qualifying interest Net income

Non Saving Income

Savings Income

Dividend Income

Total Income

£ x x x

£

£

£ x x x x x x (x) xx

x

x (x)1 xx

x (x)2 xx

x x (x)3 xx

Qualifying Interest ▪ Reasonable amount of interest paid on a loan taken by an individual for a qualifying purpose.

▪ Excessive amounts of interest paid i.e. interest paid over and above the commercial rate is not normally allowed

▪ HMRC have set a cap on reliefs, which applies on qualifying interest as well. Cap is greater of: £50,000 or 25% of the Adjusted Total Income for the tax year

Qualifying interest cannot create a negative figure.

Qualifying Purpose ▪ Loan taken to purchase plant or machinery for use in employment ▪ Loan taken to buy plant or machinery for use in partnership or to make capital investment

in a partnership ▪ Loan taken to buy shares in a close trading company i.e. a company in which the

individual possesses atleast 5% ordinary share capital or owns < 5% but has worked as part of the management of the organisation

▪ Loan taken to purchase shares in an employee controlled company

Thank you…

36

Income Tax Basics Personal Allowance

37

Personal Allowance ❑ The personal allowance for the current tax year is £12,570

Taxable Income Computation Format Name of individual Income tax computation: 06/04/XX – 05/04/XX Employment income Trading income Rental income Bank interest UK dividends received Total income Less : Qualifying interest Net income Less : Personal allowance Taxable income

Non Saving Income

Savings Income

Dividend Income

Total Income

£ x x x

£

£

£ x x x x x x (x) xx (12,570) xx

x x (x)1 xx (12,570) xx

x (x)2 xx xx

x x (x)3 xx xx

Taxable Income Computation Format Name of individual Income tax computation: 06/04/XX – 05/04/XX Employment income Trading income Rental income Bank interest UK dividends received Total income Less : Qualifying interest Net income Less : Personal allowance Taxable income

Non Saving Income

Savings Income

Dividend Income

Total Income

£ x x x

£

£

£ x x x x x x (x) xx (x) xx

x x (x)1 xx (x)1 xx

x (x)2 xx (x)2 xx

x x (x)3 xx (x)3 xx

Personal Allowance ❑ Personal Allowance Restrictions: Adjusted net income (ANI)

Personal Allowance

Adjusted net income ≤ £100,000

No restriction

Adjusted net income > £100,000

Reduce personal allowance by £1 for every increase of £2 above £100,000

Adjusted Net Income Net Income (picked up from the Income Tax pro-forma) less Gross Personal Pension Contribution (if any in the tax year) less Gross Gift Aid Donation (if any in the tax year)

Example For the current tax year May has a trading profit of £159,000. During the year May made gross personal pension contributions of £40,000 and a gross gift aid donation of £12,000. Her taxable income will be:

NSI/ Total £

Trading Profits

159,000

Total/ Net Income

159,000

Personal Allowance*

(9,070)

Taxable Income

149,930

May’s Adjusted Net Income = 159,000 – 40,000 – 12,000 = 107,000 *Reduced Personal Allowance = 12,570 – [(107,000 – 100,000)/2] = 9,070

Personal Allowance ❑ Personal Allowance can be reduced to zero but cannot create a negative figure ❑ Personal Allowance Restrictions: Adjusted net income (ANI)

Personal Allowance

Adjusted net income ≤ £100,000

No restriction

Adjusted net income > £100,000

Reduce personal allowance by £1 for every increase of £2 above £100,000

Adjusted net income > £125,140

NO PERSONAL ALLOWANCE

Example

For the current tax year May has a trading profit of £159,000. During the year May made a gross gift aid donation of £12,000. Her taxable income will be: NSI/ Total £ Trading Profits

159,000

Total/ Net Income

159,000

Personal Allowance

0 159,000

Taxable Income May’s Adjusted Net Income = 159,000 – 12,000 = 147,000

*Reduced Personal Allowance = 0 because ANI is > £125,140

Thank you…

46

Income Tax Basics Income Tax Liability Calculation

47

Taxable Income Computation Format Name of individual Income tax computation: 06/04/XX – 05/04/XX Employment income Trading income Rental income Bank interest UK dividends received Total income Less : Qualifying interest Net income Less : Personal allowance Taxable income

Non Saving Income

Savings Income

Dividend Income

Total Income

£ x x x

£

£

£ x x x x x x (x) xx (12,570) xx

x x (x)1 xx (12,570) xx

x (x)2 xx xx

x x (x)3 xx xx

Applying Tax Rates on Taxable Income

Income tax band Basic rate band: Higher rate band:

Additional rate band:

Band limit

Non saving

income

Saving income

Dividend

income

£1 - £37,700

20%

20%

8.75%

£37,701 – £ 150,000

40%

40%

33.75%

£150,000 & above

45%

45%

39.35%

Example A has taxable NSI (i.e. amount after Personal allowance) of £160,000 Income tax band

Band limit

Capacity

NSI rate

Basic rate band:

£1 - £37,700

37,700

20%

Higher rate band:

£37,701 – £ 150,000

112,300

40%

Additional rate band:

£150,000 & above

Unlimited

45%

▪ 37,700 out of 160,000 use up the basic rate band. ▪ Leftover amount is 160,000 – 37,700 = 122,300 ▪ 112,300 out of 122,300 use up the higher rate band. ▪ Leftover amount is 10,000 that falls in the additional higher rate band

Example Taxable amount

£

37,700 x 20%

7,540

112,300 x 40%

44,920

10,000 x 45%

4,500

Tax Liability

56,960

Thank you…

52

Income Tax Basics Nil Rate Band

53

Tax Bands: Savings Income ▪ If the first £5,000 of an individual’s taxable income is SI, then a “0” rate applies to it. ▪ If first £5,000 is used up by NSI, then the starting rate of 0% for Savings Income is wasted.

Income tax band Basic rate band: Higher rate band: Additional rate band:

Band limit £1 - £5,000 £5,001 - £37,700

NSI 20%

SI 0% 20%

£37,701 – £ 150,000

40%

40%

£150,000 & above

45%

45%

Nil Rate Bands: Savings Income ▪ Basic Rate Taxpayer: NRB on the first £1,000 of Savings income No tax will be applicable on the first £1,000 of SI ▪ Higher Rate Taxpayer: NRB on the first £500 of Savings income No tax will be applicable on the first £500 of SI ▪ Additional Higher Rate Taxpayer: No NRB applicable on Savings income ▪ The Nil Rate Band is in addition to the starting tax rate of 0% on the first £5,000 of SI ▪ The amount covered by the NRB does count towards the utilization of the tax band

Example B has taxable NSI (i.e. amount after Personal allowance) of £1,800 and taxable SI of £7,100 Tax bands utilization

▪ The 1,800 taxable NSI will use the basic rate band first and be taxed at 20%

Example Taxable amount NSI

Tax Liability

£ 1,800 x 20%

360

Example B has taxable NSI (i.e. amount after Personal allowance) of £1,800 and taxable SI of £7,100 Tax bands utilization

▪ NSI amount < 5,000 ▪ Leftover amount of the starting band for SI is 5,000 – 1,800 = 3,200

▪ 3,200 of SI will fall in the starting rate band (only available for SI) and be taxed at 0%

Example Taxable amount

£

NSI

1,800 x 20%

SI

(5,000 – 1,800) 3,200 x 0%

Tax Liability

360 0

Example B has taxable NSI (i.e. amount after Personal allowance) of £1,800 and taxable SI of £7,100 Tax bands utilization

▪ SI amount not covered is 7,100 – 3,200 = 3,900 ▪ Of this 1,000 is covered by Nil Rate Band and is taxed at 0%

▪ SI amount not covered = 3,900 – 1,000 = 2,900 ▪ Basic rate band utilization = 37,700 – 1,800 (NSI) – 3,200 (SI starting rate) – 1,000 (SI NRB) = 31,700 ▪ 2,900 falls in the basic band and is taxed at 20%

Example Taxable amount

£

NSI

1,800 x 20%

SI

(5,000 – 1,800) 3,200 x 0%

0

NRB 1,000 x 0%

0

(7,100 – 3,200 – 1,000) 2,900 x 20%

Tax Liability

360

580

940

Nil Rate Bands: Dividend Income ▪ Basic/ Higher/ Additional Higher Rate Taxpayer: NRB on first £2000 of dividend income No tax payable on the first £2000 of DI

Example C has taxable NSI of £18,000, taxable SI of £14,000 and taxable DI of £10,000 Tax bands utilization

▪ The 18,000 taxable NSI will use the basic rate band first and be taxed at 20%

Example Taxable amount NSI

Tax Liability

£ 18,000 x 20%

3,600

Example C has taxable NSI of £18,000, taxable SI of £14,000 and taxable DI of £10,000 Tax bands utilization

▪ Leftover amount of the basic rate band will be 37,700 – 18,000 = 19,700 ▪ Since C is a higher rate taxpayer, 500 of SI will be taxed at 0% because of the NRB

▪ Leftover amount of the basic rate band will be 19,700 – 500 = 19,200 ▪ The balancing 13,500 (14,000 – 500) of SI will fall in the basic rate band and be taxed at 20%

Example Taxable amount

£

NSI

18,000 x 20%

SI

[37,700 – 18,000] = 19,700 NRB 500 x 0%

(14,000 – 500) 13,500 x 20%

Tax Liability

3,600

0

2,700

Example C has taxable NSI of £18,000, taxable SI of £14,000 and taxable DI of £10,000 Tax bands utilization

▪ Leftover amount of the basic rate band will be 19,700 – 500 (SI NRB) – 13,500 = 5,700 ▪ This can be utilized by DI

▪ But 2,000 of DI is covered by Nil Rate Band and is taxed at 0% ▪ Leftover amount of the basic rate band will be 5,700 – 2,000 (DI NRB) = 3,700 ▪ So, 3,700 of DI will be taxed at 8.75% ▪ DI = 10,000 – 2,000 – 3,700 = 4,300 taxed in the higher rate band at 33.75%

Example Taxable amount

£

NSI

18,000 x 20%

SI

[37,700 – 18,000] = 19,700 NRB 500 x 0%

(14,000 – 500) 13,500 x 20% DI

0

2,700

[19,700 – 14,000] = 5,700 NRB 2,000 x 0% (5,700 – 2,000) 3,700 x 8.75% (10,000 – 2,000 – 3,700) 4,300 x 33.75%

Tax Liability

3,600

0 323.75 1,451.25 8,075

Thank you…

69

Income Tax Basics Income Tax Payable Calculation

70

Tax Payable ▪ Tax Reliefs: HMRC approved reductions of the tax liability ▪ Example: Marriage allowance: Spouse or civil partner, transfers some of his/ her personal allowance ▪ Tax deducted at source: Tax already paid to HMRC on the earnings of the taxpayer ▪ Example: Pay As You Earn (PAYE) system: Employers deduct a tax amount from the employee’s salary each month and pass it on to HMRC

Format Tax liability

xxx

Less: Tax reliefs Marriage allowance

(xx)

Investment schemes relief

(xx)

Double taxation relief

(xx)

Less: Tax deducted at source PAYE Tax payable

(xx) xx

Thank you…

73

Income Tax Basics Income Tax Payable - Example

74

Example For the tax year 2022-23, Joe has a salary of £46,700, savings income of £2,000 and dividend income of £6,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted income tax of £6,826 under PAYE from his earnings.

Solution Joe – Income Tax Computation

Salary

NSI

SI

DI

Total

£

£

£

£

46,700

Savings income

46,700 2,000

Dividends income Total Income

46,700

2,000

2,000 6,000

6,000

6,000

54,700

Solution Joe – Income Tax Computation

Salary

NSI

SI

DI

Total

£

£

£

£

46,700

Savings income

46,700 2,000

Dividends income Total Income

Qualifying Interest

46,700

(300)

2,000

2,000 6,000

6,000

6,000

54,700

(300)

Solution Joe – Income Tax Computation

Salary

NSI

SI

DI

Total

£

£

£

£

46,700

Savings income

46,700 2,000

Dividends income Total Income

Qualifying Interest Personal Allowance Taxable Income

46,700

2,000

2,000 6,000

6,000

6,000

54,700

(300)

(300)

(12,570)

-

-

(12,570)

33,830

2,000

6,000

41,830

Applying Tax Rates on Taxable Income Income tax band

Band limit

Non saving income

Saving income

Divided income

Basic rate band:

£1 - £37,700

20%

20%*

8.75%

Higher rate band:

£37,701 – £ 150,000

40%

40%

33.75%

Additional rate band:

£150,000 & above

45%

45%

39.35%

*0% for the first £5,000 and 20% for £5,001 till £37,700 Savings Income Nil Rate Bands Basic Rate Tax Payer

Higher Rate Tax Payer Dividend Nil Rate Band

£1,000

£500 £2,000

Solution Tax Liability Calculation

Total

Basic Rate Band Availability

£ 37,700

NSI 33,830 x 20%

6,766

(33,830) 3,870

Solution Tax Liability Calculation

Total

Basic Rate Band Availability

£ 37,700

NSI 33,830 x 20%

6,766

SI

(33,830) 3,870

500 x 0 (SI Nil Rate Band)

0

(500)

[2,000 – 500] 1,500 x 20%

300

(1,500) 1,870

Solution Tax Liability Calculation

Total

Basic Rate Band Availability

£ 37,700

NSI 33,830 x 20%

6,766

SI

(33,830) 3,870

500 x 0 (SI Nil Rate Band)

0

(500)

[2,000 – 500] 1,500 x 20%

300

(1,500) 1,870

DI 2,000 x 0 (DI Nil Rate Band) [6,000 – 2,000] 4,000 x 33.75%

Tax Liability

0

(1,870)

1,350

Higher Rate Band Starts

8,416

Solution Income Tax Calculation

Total

£ NSI 33,830 x 20%

6,766

SI 500 x 0 (SI Nil Rate Band)

0

[2,000 – 500] 1,500 x 20%

300

DI 2,000 x 0 (DI Nil Rate Band) [6,000 – 2,000] 4,000 x 33.75%

0 1,350

Tax Liability

8,416

Less: PAYE

(6,826)

Tax Payable

1,590

Thank you…

84

Income Tax Basics Allocation of Personal Allowance

85

Personal Allowance Allocation ❑ Normally PA is allocated in the following sequence: ▪

NSI

▪

SI

▪

DI

❑ Tax law requires that this be net off in the most beneficial basis ❑ So in certain cases to ensure better tax saving, sequence can be changed

Example Alfred had the following gross income in the year 2022/23 NSI Trading profits Bank interest Dividend income

SI

DI

£6,000 £4,500 £20,000

Solution Normally NSI Trading profits

SI

£6,000

Bank interest

£4,500

Dividend income Less: PA

DI

£20,000 (6,000)

(4,500)

Bal(2,070)

▪ The starting rate of Savings Income of £5,000 is not being utilised ▪ The Nil Rate band of SI is being wasted ▪ The Nil Rate band of Dividend income will be available regardless

Solution NSI

Trading profits

SI

£6,000

Bank interest

£4,500

Dividend income Less: PA Taxable Income

DI

£20,000 (6,000)

-

(6,570)

0

4,500

13,430

▪ NSI used up first as it doesn’t have a NRB and is taxed at higher rates ▪ Since Savings Income can be covered by the NRB and starting rate band of tax, we will allocate the PA to

▪ Dividend income which also has £2,000 of NRB, leading to a tax liability of £11,430 x 8.75% = £1,000

Thank you…

90

Income Tax Basics Gift Aid Donation and Personal Pension Contributions

91

Gift Aid Donation ▪ Charitable donation ▪ To encourage the donation, HMRC set up gift aid scheme

▪ Available for taxpayers only ▪ Contribution of taxpayer is considered to be 80% of the total donation ▪ Balancing 20% is donated by the HMRC ▪ Individual taxpayer gets tax relief for the gross amount

Personal Pension Scheme ▪ To encourage savings for retirement, HMRC offers tax relief on any personal pension contribution made

▪ Available for taxpayers only ▪ Contribution of taxpayer is considered to be 80% of the total donation

▪ Balancing 20% is contributed by the HMRC ▪ Individual taxpayer gets tax relief for the gross amount

Tax Implications: GAD or PPC ▪ The gross amount is used to determine the Adjusted Net Income amount, which may affect the Personal Allowance

▪ The upper limit of the basic rate band is extended by the gross amount of the Gift Aid payment or/ and personal pension contribution.

▪ This results in a lower rate of tax being applied on the taxable income.

Example

For the current tax year, May has a trading profit of £159,000. During the year, May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is: NSI/ Total £ Trading Profits

159,000

Total/ Net Income

159,000

Personal Allowance*

(9,070)

Taxable Income

149,930

May’s Adjusted Net Income = 159,000 – (32,000 x 100/80) – (9,600 x 100/80) = 159,000 – 40,000 – 12,000 = 107,000

*Reduced Personal Allowance = 12,570 – [(107,000 – 100,000)/2] = 9,070

New Tax Bands

Income tax band

Band limit

Basic rate band

£1 - £37,700

Higher rate band

£37,701 – £ 150,000

Additional rate band > £150,000

New Band Limits

NSI

SI

DI

£1 – (£37,700 + 52,000)

20%

20%

8.75%

£37,701 – (£150,000 + 52,000)

40%

40%

33.75%

> £?

45%

45%

39.35%

New Tax Bands

Income tax band Basic rate band

Band limit

New Band Limits

NSI

SI

DI

£1 - £37,700

£1 – £89,700

20%

20%

8.75%

40%

40%

33.75%

45%

45%

39.35%

(£37,700 + 52,000) Higher rate band

£37,701 – £ 150,000

£89,701 – £202,000 (£150,000 + 52,000)

Additional rate band

> £150,000

> £202,001

Total £ Income Tax: 37,700 x 20%

7,540

52,000 (Note 1) x 20%

10,400

[149,930 – 37,700 – 52,000] 60,230 x 40%

24,092

Tax Liability

42,032

Note 1: The basic and higher rate band for May will both be extended by £52,000

This is the sum of the gross gift aid donation £12,000 and gross personal pension contribution £40,000 amounts

Thank you…

99

Income Tax Basics Spouses or Civil Partners

100

Tax View ▪ Each will be required to pay tax on his/her individual share of income ▪ Each is entitled to their own individual personal allowance amount

Joint Income ▪ Income from joint sources is split equally between spouses or partners ▪ Unless ‘actual basis’ of split, opted for

Illustration A

B Actual ownership

70%

30% Joint Income: £20,000 Default split 50:50

£10,000

£10,000

Election for ‘Actual Basis’ Split 70:30 £14,000

£6,000

Joint Income ▪ Useful for tax planning – to save tax as a couple

Transferable Amount of Personal Allowance ▪ Also known as the marriage allowance or marriage tax allowance ▪ Election to transfer a fixed amount of personal allowance to a spouse or registered civil partner. ▪ Not possible if either spouse or civil partner is a higher or additional rate taxpayer. ▪ A transfer is beneficial where one spouse or civil partner is not making full use of their personal allowance.

TAX PLANNING

Transferable Amount of Personal Allowance ▪ The transferable amount is £1,260 for the current tax year. ▪ The transferor’s personal allowance is reduced by the amount £1,260. ▪ The recipient’s tax liability is reduced by the basic rate of tax applied on the transferred amount i.e. a reduction of £252 (1,260 at 20%). ▪ If the recipient’s tax liability is less than £252, the tax reduction is restricted as tax liability cannot be negative.

Example

Paul and Rai are a married couple. For the current tax year, Rai has a salary of £38,000 and Paul has a trading profit of £10,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Solution: Paul’s personal allowance is reduced to £11,310 (12,570 – 1,260) Because this is still higher than his trading profit of £10,000 he does not have any tax

liability.

Rai’s income tax liability is:

£ Employment Income

38,000

Total/ Net Income

38,000

Personal Allowance Taxable Income

(12,570) 25,430

Income Tax: 25,430 x 20%

5,086

Personal allowance tax reduction (1,260 at 20%)

(252)

Tax Liability

4,834

Transferable Amount of Personal Allowance ▪ If the election is made by the end of the same tax year, it remains applicable till withdrawn. ▪ Election can be made retrospectively but applies only to the year for which the election is being made. ▪ For 2021/22, the election can be made by 5 April 2026 (4 years from the end of the relevant tax year) but the election will only apply to the tax year 21/22.

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Income Tax Basics Child Care Benefit

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Child Care Benefit ▪ For individuals with children, the Government normally pays a tax free amount when claimed. ▪ Earnings threshold of individual claiming the child benefit or his/ her spouse or civil partner is

ANI of £50,000. Adjusted net income (ANI)

Tax treatment

ANI ≤ £50,000

Exempt

ANI between £50,001 - £60,000

Tax charge* = Childcare amount x ?% 1% of child care benefit for each £100 of income over £50,000 or [ANI – 50,000]/100

ANI > £60,000

Tax charge* = whole amount of child benefit

*The tax charge is directly added to the tax payable

Example Mavis has a trading profit of £56,000 and received child benefit of £1,752 during the year. Solution: Mavis’ adjusted net income of £56,000 is between £50,000 and £60,000. The child benefit income tax charge is therefore (56,000 – 50,000)/100) = 60% £1,752 x 60% = £1,051

Example Cecil has a salary of £64,000 and he received child benefit of £1,056 during the year. Solution: Cecil’s adjusted net income of £64,000 exceeds £60,000 The child benefit income tax charge will be the whole amount of child benefit received i.e. £1,056

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Income Tax Basics Taxation of Children

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Introduction ▪ If a child has income – tax will be payable on it ▪ A child is entitled to the standard personal allowance amount although his/ her tax returns, if required have to be completed by the parents/ guardian

Parental Disposition ▪ This is a capital deposit made by a parent from which the income is earned by the child ▪ If the child is unmarried, < 18 years old and the income from the deposit is > £100 per annum, it will be taxable on the parent ▪ If the income is < £100 per annum, then it is taxed on the child

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Income Tax Basics Income Tax Planning

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Tax Planning Pointers ▪ Maximum utilization of personal allowance and nil rate bands Increase NSI to fully utilize personal allowance if SI and DI are nil ▪ Withdraw dividends instead of profits from a shareholder managed business to avail the £2,000 dividend Nil Rate Band ▪ Married couples or civil partners can decide to go for an equal split of income or declare actual ratio of ownership based on what maximises tax saving ▪ Transfer personal allowance where it will be more beneficial

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