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Lecture Notes Week 1 2022

The document discusses various taxes in the UK including income tax, national insurance, VAT, capital gains tax, and corporation tax. It explains the purposes of taxation including influencing economic factors and redistributing wealth. The document also covers topics such as direct and indirect taxes, tax avoidance versus tax evasion, income tax calculations, and various tax reliefs.

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Anton Bessonov
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66 views26 pages

Lecture Notes Week 1 2022

The document discusses various taxes in the UK including income tax, national insurance, VAT, capital gains tax, and corporation tax. It explains the purposes of taxation including influencing economic factors and redistributing wealth. The document also covers topics such as direct and indirect taxes, tax avoidance versus tax evasion, income tax calculations, and various tax reliefs.

Uploaded by

Anton Bessonov
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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BUS 250

TAXATION
What taxes are there in the UK
• Income Tax
• National Insurance
• VAT
• Capital Gains Tax
• Inheritance Tax
• Corporation Tax
UK Tax system
Why do we need taxation?
Economic
• Used to influence inflation, employment and stabilise the economy
• Also used to direct the economic behaviour of businesses and individuals
Eg Encourage us to save (ISAs), give money to charity (gift aid), invest in
businesses (Entrepreneurs relief)
Discourage us to smoke or drink (imposing taxes), pollute the environment
eg fuel taxes
Social Justice
Redistribution of wealth
UK Tax System
Direct v Indirect Taxes
• Direct taxes are paid by those who generate the funds eg Income tax
or capital gains tax
• Indirect taxes are paid by an intermediary eg VAT, I suffer VAT on
purchases but it is paid by or collected from the shop

Progressive v regressive taxes


• A progressive tax increases with income eg Income tax
• A regressive tax decreases with income eg National Insurance
UK Tax system
• Governed by HMRC, her Majesty's Revenue and Customs
• Under self assessment it is the responsibility of the taxpayer to ensure the
correct amount of income is reported and the correct amount of tax is
paid
• Tax law comes from 2 sources
1) Tax legislation, updated each year in the Finance Act (we are examined
on the Finance Act 2020
2) Case law, court judgements become binding

Tax law is supported by statements of practice, extra statutory concessions,


guidance manuals, HRMC website & leaflets
Tax avoidance v tax evasion
Tax evasion
Illegally paying less tax than is due to deliberately misleading HMRC
Eg failing to declare taxable income or submitting false information
such as claiming expenses that have not been incurred

Tax evasion is punishable by fine or even imprisonment

As tax evasion is a crime, failure to report it is also an offence under


money laundering rules
Tax avoidance v tax evasion
Tax avoidance
Any legal way of reducing tax eg utilising tax efficient schemes eg help to buy
ISAs

This does not necessarily mean tax avoidance will be allowed or accepted by
HMRC or is fair

Amazon had sales income of €44bn in Europe in 2020 but paid no


corporation tax, diverting profits to its tax haven in Luxembourg
Margaret Hodge, a Labour MP, said: “It seems that Amazon’s relentless
campaign of appalling tax avoidance continues.”
Errors
As a tax advisor a duty is owed to both a client and HMRC

If errors are found


• Client should be advised to report them to HMRC
• If they refuse the consequences should be put in writing to the client
• The advisor should cease to act for the client, advise HMRC they have
ceased to act (without saying why) and consider money laundering
responsibilities
Income Tax Computation
• Income tax is payable on taxable income for a fiscal year
• Fiscal year 20/21 = 6/4/20 – 5/4/21
• Married couples must do separate computations splitting joint income
50:50 or electing to use actual ownership percentages

Exempt Income
• Income from Individual savings accounts (ISAs)
• Interest from NS&I certificates
• Winnings
Always taxed on gross income
Income Tax Computation
Total Non Savings Savings Dividends
Trading Income X X
Employment Income X X
Property income X X
Interest X X
Dividends X X
Total Income X X X X
Personal Allowance (X) (X) 1st (X) 2nd (X) 3rd
Taxable Income X X X X
Personal Allowance
• Individuals are not taxed on the 1st £12,500 of income, this is covered by
the personal allowance
• It should be used against non savings income 1st, then savings income and
finally against dividend income
• The personal allowance starts to get withdrawn is an individual has
income of greater than £100,000
• The reduction is calculated as follows:
(income – 100,000) x 50%
• For every £1 of income above £100,000 an individual looses 50p of
personal allowance.
• If income is greater than £125,000 the personal allowance is zero
Personal Allowance
Mr A received income in 20/21:
Trading income = 90,000, building society Interest = 12,000, dividends =
6,000, Interest from NS&I certificates = 500
Calculate Mr A’s taxable income

Income (90k+12k+6k) 108,000


PA 12,500 – [(108,000 – 100,000)x50%] (8,500)
Taxable Income 99,500
Tax Liability – How to tax taxable income
Non Savings Income
1 – 37,500 @20% X
37,501 – 150,000 @40% X
150,001+ @45% X
Savings Income (after £1,000 nil band for BRTP and £500 nil band for HRTP)
1 – 37,500 @20% X
37,501 – 150,000 @40% X
150,001+ @45% X
Dividend Income (after £2,000 nil band)
1 – 37,500 @7.5% X
37,501 – 150,000 @32.5% X
150,001+ @38.1% X
Income Tax Liability X
Tax Liability
Mr A earns employment income of 180,000 in 20/21, calculate his taxable
income

Income 180,000
PA (0)
Taxable Income 180,000
37,500 x 20% 7,500
(150,000 – 37,500) x 40%45,000
(180,000 – 150,000) x 45% 13,500
Income Tax Liability 66,000
Giving to Charity
Gift Aid Scheme
• Cash gifts can be made to charity net of an individuals marginal rate
of tax
• Gifts are made net of 20% income tax
• If you want a charity to receive £100, you would pay £80 and the
charity would claim the other £20 from HMRC
• If the individual is a higher or additional rate taxpayer further tax
relief is given by extending the higher rate band and the additional
rate band by the gross value of the gift (£X x 100/80)
Giving to Charity
Mr A has the a salary of £30,000 and receives rent of £25,000, he makes donations to
charity of £1,600 declaring them to be under the gift aid scheme, calculate Mr A’s
Income Tax liability

Total income (30k + 25k) 55,000


PA (12,500)
Taxable income 42,500
[37,500 + (1,600 x 100/80)]
39,500 x 20% 7,900
3,000 x 40% 1,200
42,500 9,100
Gifts to charity
Payroll Giving Scheme
• Cash is given to charity through the payroll
• Tax relief is given at the taxpayers marginal rate of tax by deducting it
from employment income
Child Benefit
• The government pays child benefit to parents
• If a couple have 2 children they would receive £1,846 per year tax free
• If either of the couple has income of more than £50,000 some or all
of the child benefit is clawed back
• For every £100 above £50,000, 1% of the child benefit received is
clawed back
• Once either of the couple receive £60,000 of income all the child
benefit is clawed back
Child benefit
Mr A and Mrs A have 2 children and receive £1,846 of child benefit in
2020/21
Mr A looks after the children and has no income, Mrs A works for a
fashion retailer and earns £56,000 a year. What is the child benefit
charge for Mrs A?

Child benefit received £1,846


Excess income over £50k = £6,000
Charge is 1% per £100 of £6,000 = 60%
Child benefit charge = 60% x £1820 = £1,108
Savings Income
• Individuals are taxed on the amount of interest they receive, after non
savings income, examples include:
- Bank Interest
- Building society interest
- Interest from gilt edged securities such as treasury or exchequer
stocks

• Note that interest from individual savings accounts (ISAs) and from
National Savings and Investment (NS&I) certificates are exempt
Savings Income
• A starting rate of 0% applies if interest falls in the 1st £5,000 of taxable income
Mr A has salary of £14,000, bank interest of £2,500 and interest on NS&I certificates of £500
for 20/21, calculate his income tax liability

Total NSI S
Net Income 16,500 14,000 2,500
PA (12,500) (12,500)
Taxable Income 4,000 1,500 2,500

NSI 1,500 x 20% = 300


S 2,500 x 0% = 0
Income tax liability = 300
Savings Income
• There is also a nil rate band for interest for basic rate and higher rate
taxpayers with savings income above the starting rate band
• Nil rate band = 1,000 for basic rate taxpayers
= 500 for higher rate taxpayers
Savings Income
Mr A receives a salary of £25,000, bank interest of £3,000 and lottery
winnings of £500 for 20/21, calculate his income tax liability
Total NSI S
Net Income 28,000 25,000 3,000
PA (12,500) (12,500)
Taxable income 15,500 12,500 3,000

NSI 12,500 x 20% 2,500


S 1,000 x 0% 0
2,000 x 20% 400
2,900
Dividend Income
• Taxed after non savings and savings income at the following rates
£1 - £37,500 = 7.5%
£37,501 - £150,000 = 32.5%
£150,001+ = 38.1%

• There is a nil rate band for all taxpayer of £2,000


Dividend Income
Mr A received employment income of 40,000, bank interest of 2,000 and dividends of 10,000 for
20/21, calculate his income tax liability.
Total NSI S D
Net Income 52,000 40,000 2,000 10,000
PA (12,500) (12,500)
Taxable Income 40,150 28,150 2,000 10,000

NSI 28,150 x 20% 5,630


S 1,000 x 0% 0
1,000 x 20% 200
D 2,000 x 0% 0
5,350 x 7.5%401 (basic rate band left 37.5k – 28.15k – 2k – 2k))
2,650 x 32.5 861
7092
ISAs
• The maximum amount an individual can invest in an ISA in 20/21 is
£20,000
• An individual can invest in the form of cash or shares
• An individual must be living in the UK and over 16
• All income is exempt from income tax
• Disposals of shares are exempt from capital gains tax

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