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Unit 2: The Personal Tax Computation

Scope of income tax: Taxable persons (Chargeable persons), chargeable income Key elements of personal income tax computations Different categories of charges Personal allowances Income tax computations

Taxable persons
Individuals who are resident in the UK for a tax year are generally charged to income tax on all of their income for that year, whether arising in the UK or overseas Individuals who are not UK residents are liable to pay income tax on their UK income only Income tax is payable by adults, children, trustees and personal representatives Companies pay corporation tax on their profits, not income tax

Exercise:
John is UK resident, ordinarily resident and domiciled. For 2009/10 he had taxable UK income of 10,000. In addition, John had the following overseas income: 1) Dividends of 880 from Pinot GmbH (resident in a non-qualifying territory), after deduction of withholding tax at 12%. 2) Interest of 360 on a German bank account after deduction of withholding tax at 10%.

If assets are owned jointly but in unequal proportions, then: (a) if the higher rate taxpayer owns more than 50% of the asset, no declaration of beneficial interest should be made so that the income is shared equally, or (b) if the higher rate taxpayer owns less than 50% of the asset, a declaration of beneficial interest should be made so that the other spouse or civil partner is taxed on their full amount of income.

Classification of income
Income is classified into categories such as: employment income, pensions and some social security benefits property income trading income/profit, professions and vocations Savings and investment, interest and /or dividends Miscellaneous income

Exercise
Jason, aged 35, earned a gross salary of 100,000 during 2010/11. He received a bonus of 16,000 on 31 March 2011. Jason paid 900 per month throughout 2010/11 into a personal pension scheme. Jason had no other income in 2010/11. You are required to calculate Jasons taxable income for 2010/11.

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Savings Income
Savings Income Received GROSS:
NS&I accounts Interest paid by listed UK companies on debentures and/or loan stock Gilt interest

Dividends on UK shares
Dividends are received net of a 10% tax credit. Stock dividends :
The cash alternative, if that equals the market value of the shares offered 15% The market value of the shares offered, if that differs from the cash alternative by more than 15%, or if there is no cash alternative

Savings income received net of 20% tax

Bank, building society interest Interest paid by unlisted UK companies on debentures and/ or loan stock

Exercise: Rebekah received 134,400 of UK bank interest (net) during 2010/11. She had no other income. You are required to calculate Rebekahs Income Tax liability for 2010/11.

Statute ITEPA 2003

Type of income Employment income Pension Social security income ITTOIA 2005 Trading income Property income Interest Dividends Miscellaneous income

Exempt income
income from Individual Savings Accounts (ISAs) income from National Savings Certificates certain minor benefits provided to employees certain lump sums from pension schemes "rent-a-room" income Premium Bond prizes and betting winnings some social security benefits Damages and payments for injuries Scholarships Payments under insurance policies to compensates for loss of income due to illness and / or injury Interest on repayment under the income contingent student loans scheme

Charges on Income
Charges on income are DEDUCTED in computing taxable income. Eligible interest ( paid gross) Patent royalties ( non-trading) (paid net) Copyright royalties ( non-trading) (paid gross)

Eligible Interest
Refer text p158. Some examples:
Purchase an interest in a partnership Purchase ordinary shares in a close company Invest in a cooperative Purchase shares in an employee controlled company Purchase plant and machinery Exercise: Glenda has total income of 6,350 in 200910. She makes a net deductible payment of 40 during the year and claims only the basic personal allowance. Show her income tax computation: with the deductible payment

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PA / PAA
Age <65 65 -74 75 and above PA/PAA 6475 9490 9640 Income limit 100K 22,900 22,900

BPA
A taxpayer who is registered with a local authority as a blind person. BPA=1,890

Gift Aid
One-off/ regular charitable gifts of money qualify for tax relief under the gift aid scheme. It is treated as though it is paid net of a basic rate of 20% tax.

PA/PAA will be reduced by half of excess from income limit , however, restricted to 6475.. In the case of taxpayers 65 years old with income > 100k, restriction to 6475 does not apply

Exercise
In 2009-10, Owen makes qualifying Gift Aid donations totalling 360. He claims only the basic personal allowance and he has no capital gains tax liability for the year. Show his income tax computation if his only income for the year consists of business profits of: (a) 22,800 (b) 6,590 (c) 46,090. Geoffrey is aged 48 and lives with his wife (aged 47) and their two children. Geoffrey's income for 2009-10 consists of a salary of 42,455 and UK dividends of 3,780. He makes a qualifying Gift Aid donation of 320 during the year. Show Geoffrey's 2009-10 income tax computation.

Minor Children
Under 18 years old. Income transferred by a parent to his minor child is treated as income of the parent for tax purposes. If the amount < 100, it will not be treated as parents income.

Typical income tax computation for tax year 2012-13

Business profits Income from property Savings income Total income Less: Tax reliefs Net income Less: Personal allowance xxx xxx xxx xxx xxx xxx xxx xxx
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Typical income tax computation for tax year 2012-13

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xxx xxx xxx xxx xxx xxx xxx xxx

Income tax due on taxable income: Basic rate tax (on first 34,370) Higher rate tax (on next 115,630) Additional rate tax (on remainder)

Taxable income

Less: Tax reducers Tax borne Less: Tax paid by deduction at source Tax payable

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Rates of Income Tax

The tax borne by the taxpayer is the amount of income tax suffered for the year. This may be different from the tax liability, which is the amount of tax which must be accounted for to HMRC and the tax payable which is the tax remaining to be paid after deducting any tax already paid for the year. Different rates of income tax apply to nonsavings income, savings income and dividends For tax year 2012-13, the rates of income tax which apply to non-savings income forming part of the taxpayer's taxable income are: Basic rate 20% Higher rate 40% Additional rate 50% Non-savings income consists mainly of employment income, business profits and property income

Income Tax rates and taxable bands

Rate

2011-12

2012-13

2013-14

Starting rate for savings: 10%*

0 - 2,560

0-2,710

0- 2,790

Basic rate: 20% Higher rate: 40% Additional rate: 50% Additional rate: 45% from 6 April 2013

0 - 35,000 35,001 150,000 Over 150,000 N/A

0-34,370

0-32,010

34,371-150,000 32,011- 150,000 Over 150,000 N/A N/A Over 150,000

Source: http://www.hmrc.gov.uk