Taxation( Finance Act 2015)

Brunel Business School

MG 3027
Taxation
Majid Aminzare
( MSc , BSc , MICB, ACCA(P.Q ))
Surgery Hours:
Friday 16:00 – 18:00

Week 2
INTRODUCTION TO INCOME TAX

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 INTRODUCTION TO INCOME TAX

Purpose:
•To explain the main features of an income tax
computation
•Recognise the different types of taxable
income for an individual
•Calculate the income tax liability arising on
different types of income
•Distinguish between income tax liability and
income tax payable 2
 INTRODUCTION TO INCOME TAX

Sources of Income Tax Law:

Income tax legislation can be found mainly

in the :
 Income Tax (Earning and Pensions ) Act
2003
 Income Tax (Trading and Other Income )
Act 2005
 Income Tax Act 2007 , as amended by
subsequent Finance Acts.
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 INTRODUCTION TO INCOME TAX
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 , including
both income arising in the UK and income
arising overseas.

 UK residents who are not UK-domiciled ( i.e.

whose permanent home is not the UK) may
claim that their overseas income should be
subject to UK income tax only to the extent
that the income is remitted to the UK.
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 INTRODUCTION TO INCOME TAX
Taxable persons :

 Individuals who are not UK residents are liable

to pay income tax on their UK income only .

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 INTRODUCTION TO INCOME TAX

Classification of Income :
Statute Type of Income
Income Tax (Earning and Pension Act Employment Income
2003 Pensions
( ITEPA 2003) Social Security
Income

Income Tax ( Trading and Other Trading Income

Income ) Act 2005 (ITTOIA 2005) Property Income
Interest
Dividends
Miscellaneous Income

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 INTRODUCTION TO INCOME TAX
Exempt income :
Certain types of income are specifically exempt from
income tax and should be completely ignored
when preparing an income tax computation .
(a) Exempt savings and investment income :
 Income from Individual Savings Account
(ISA)
 Income from National Savings Certificates

 Interest arising from a certified SAYE(Save

As You Earn ) arrangement
 Income from investments held in a Child
Trust Fund account.
 Dividends received on shares held in a
Venture Capital Trust 7
 INTRODUCTION TO INCOME TAX
Exempt income :
(b) Exempt Employment income :
 Certain minor benefits provided by
employers for their employees
 The first £30,000 of compensation
received for loss of employment
 Certain lump sums payable under
registered pension schemes ( e.g. a lump
sum payable at the commencement of a
pension )
 The operational allowance paid to UK
armed forces serving in specified
locations 8
 INTRODUCTION TO INCOME TAX
Exempt income :
(b) Exempt Employment income :
 As from 1 October 2014,bonus payments
of up to £3,600 per annum received by
employees of companies controlled by
an employee ownership trust.

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 INTRODUCTION TO INCOME TAX
Exempt income :
(c) Other exempt Income :
 Winnings from betting, competition
prizes and premium bond prizes .
 Certain social security benefits (e.g. child
benefit* and housing benefit )
 Income from scholarships

 Damages or compensation received for

personal or professional injury.
 Certain payments made to individuals
who adopt children or care for children
placed with them under a special
guardianship order or residence order 10
 INTRODUCTION TO INCOME TAX
Exempt income :
(c) Other exempt Income :
 Receipts (not exceeding specified limits)
from foster care and other qualifying care.
 Maintenance payments .

 Wound and disability pensions

(d) Exempt Property Income :

 Income of up to £4,250 per annum received
under the ‘’rent-a-room’’ scheme.

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 Structure of an Income tax
Computation £
 Business profits 42,800
 Income from property 8,999
 Building society interest taxed at source 700
 Total Income 52,499
 Less: Tax reliefs 1,200
 Net Income 51,299
 Less: personal allowance 10,600
 Taxable income 40,699

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 Structure of an Income tax
Computation
 Income Tax
31,785 @ 20% 6,357.00
8,914 @ 40% 3,565.60
40,699 9,922.60
Less : Tax reductions 0.00
Tax borne 9,922.60
Add : Tax withheld on payments 240.00
Tax liability for the year 10,162.60
Less : Tax paid by deduction at source 140.00
Tax payable 10,022.60

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 INTRODUCTION TO INCOME TAX

Rates of income tax for 2015-2016

An individual’s taxable income is taxed according
to the rates of income tax in force for the year
in question. For tax year 2015-2016 the main
rates of income tax are as follows:
First £ 31,785 of taxable income 20%(the ‘’basic
rate’’)
Next £ 118,215 taxable income(up to £150,000) 40%(the ‘’higher
rate’’)

Remaining taxable income after the first £150,000 45%(the

‘’additional rate”)

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 INTRODUCTION TO INCOME TAX

 Rates of income tax for 2015-2016

 The first £31,785 of taxable income is

referred to as the “basic rate band “.
 The figure of £ 150,000 is known as the
“higher rate limit” .
 Saving income and dividend income are
treated specially

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 INTRODUCTION TO INCOME TAX

 Example 1
Calculate the 2015-2016 income tax liability
of a taxpayer with taxable income (i.e.
income remaining after deducting any
available allowance of:
(a)£ 11,250

(b)£ 31,785

(c)£ 43,121

(d)£ 231,400

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 INTRODUCTION TO INCOME TAX
 Solution
(a) £11,250< £ 31,785 (basic rate band)
£ 11,250 @20% = £ 2,250.00 (income tax liability )

(b) £ 31,785= £ 31,785 (basic rate band)

£ 31,785@20%= £ 6,357.00 (income tax liability )

(c) £ 43,121> £ 31,785 so £ 31,785 @20% = £

6,357.00 (1)
£ 43,121- £ 31,785=11,336 @ 40% = £ 4,534.40 (2)
(1)+(2)= £ 6,357.00+ £ 4,534.40= £ 10,891.40 (Total
income tax)

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 INTRODUCTION TO INCOME TAX
 Solution
(d) £231,400> £ 31,785 (basic rate band ) and
£ 231,400> £ 150,000 (higher rate limit )
First £ 31,785 @ 20%= £ 6,357 (1)
Next £ 118,215 @ 40% = £ 47,286 (2)
£ 150,000

Last £ 231,400- £ 150,000= £ 81,400 @ 45%= £

36,630 (3)

(1)+(2)+(3)= £ 6,357+ £ 47,286+ £ 36,630= £ 90,273

(income tax liability) 18
 INTRODUCTION TO INCOME TAX

Taxable £ Taxable income

income@20% 118,215@40% @45%

£ 0.00 £ 31,785 £150,000

Taxable
Income

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 INTRODUCTION TO INCOME TAX

Income Taxed at source :

Certain types of income are taxed at source ,
which means that income tax is deducted
from the income before the taxpayer
receives it .
Wages and salaries and most form of bank
and building society interest are examples
of income taxed at source .
Income which has been taxed at source
must still be included in the taxpayer’s
income tax computation for two reasons:

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 INTRODUCTION TO INCOME TAX
The main types of income received net of basic rate tax
are:

a) Bank and building society interest(apart from interest

on a National Savings Bank (NSB) investment account
or direct saver account, which is received gross).

b) Debenture and other loan interest paid by UK

companies

c) The income element of a purchased life annuity(as

long as the annuity has not been purchased with
assets held under a registered pension scheme)

d) Patent royalties
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 INTRODUCTION TO INCOME TAX
(a) It is important to derive correct figures
for the taxpayer’s “Total income” and
‘’Net income”.

(b) The amount of income tax which has

already been deducted might not be
the correct amount .the only way to
check is to aggregate the income
concerned with all of the taxpayer’s
other income in a single computation .

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 INTRODUCTION TO INCOME TAX
 Example 2
John put £10,000 to his saving account which
pay 4% interest per annum . In 2015-2016 he
received £320 net from his saving account as
interest .compute the equivalent gross
income and the amount of tax deducted
Solution
£10,000 @ 4%= £ 400 gross interest per annum
£ 400@20%= £ 80 tax deducted by bank
£ 400- £ 80= £ 320 net interest income
received after 20% tax at source .
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 INTRODUCTION TO INCOME TAX

Grossing up :
If income is received net of basic rate (20%) income tax
, the gross amount of that income can be ascertained
by multiplying the net amount received by 100/80.
this calculation is known as “grossing up” and the
100/80 fraction referred to as “grossing up
fraction” .
In previous example : £
80% of interest income 320
100% x
80%(x)=£320 *(100%) x=£320/0.80 x=£400

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 INTRODUCTION TO INCOME TAX
Saving income :
 The tax liability for saving income is calculated
differently from the tax liability on non-saving
income .
 Saving income which falls into the first £5,000 (for
2015-2016) of the basic rate band is taxed at the
starting rate for savings of 0%,so that such income is
in effect tax-free.
 If a taxpayer has both saving and non –saving income,
it is necessary to split taxable income between these
two categories before the tax liability can be
calculated .
 The basic rate band is made available to non-saving
income in priority to savings income .

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 INTRODUCTION TO INCOME TAX

 Example 3
In 2015-2016 , Robert has business profits
of £38,805 ( non-saving income ) and net
bank interest of £ 360 . He claims the
personal allowance of £ 10,600 . Calculate
the income tax payable for the year ?

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 INTRODUCTION TO INCOME TAX
 Solution
Total Non-savings
Savings
£ £ £
Business profits 38,805 38,805
Bank Interest 450
450
£ 360*100/80
Total Income 39,255 38,805
450
Less: personal allowance10,600 10,600
Taxable income 28,655 28,205
450
Income tax due
Non saving income :Basic rate 28,205 @20% 5,641.00
saving income : Basic rate 450 @20% 90.00

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 INTRODUCTION TO INCOME TAX
 Solution
Tax borne 5,731.00
Less :Tax deducted at source 90.00
Tax payable 5,641.00

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 INTRODUCTION TO INCOME TAX

 Example 4
In 2015-2016 , Roberta has rental income of
£12,300 ( non-saving income ) and net
building society interest of
£ 400 and net bank interest of £ 2,480 . She
claims the personal allowance of £ 10,600 .
Calculate the income tax payable for the
year ?

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 INTRODUCTION TO INCOME TAX
 Solution
Total Non-savings Savings
£ £ £
Income from property 12,300 12,300
BSI £ 400 * 100/80 500 500
Bank Interest 3,100 3,100
£ 2,480 * 100/80
Total Income 15,900 12,300 3,600
Less: personal allowance 10,600 10,600
Taxable income 5,300 1,700 3,600
Income tax due
Non saving income :Basic rate 1,700@20% 340.00
Savings income :Starting rate 3,300 @0% 0.00
Saving Income : Basic Rate 300@20% 60

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 INTRODUCTION TO INCOME TAX
 Solution
Tax borne 400.00
Less :Tax deducted at source 720.00
Tax repayable (320.00)

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 INTRODUCTION TO INCOME TAX

 Dividends from UK companies

 UK dividends have an attached “tax credit “
which is equal to one-ninth of the amount of the
dividend received.
 UK dividends are not classed as savings income
or non-savings income .
 For 2015-2016 , dividends which fall into the
basic rate band are taxed at the 10% , and
dividends which fall into the higher rate band
are taxed at the 32.5%. Any dividends which lie
above the higher rate limit are taxed at the
37.5%.
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 INTRODUCTION TO INCOME TAX
 Dividends from UK companies
 Tax reliefs and the personal allowances should be
set against non-savings income in priority to
savings income and against savings income in
priority to dividends.
 Tax credits relating to dividends which are charged
to tax may be deducted from the taxpayer’s income
tax liability on those dividends. However it is not
possible to claim payment of any tax credits which
exceed this liability . Nor it is possible to deduct tax
credits from the income tax which is due on other
forms of income . Tax credits that relate to
dividends which are not charged to tax are lost .
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 INTRODUCTION TO INCOME TAX

 Example
In 2015-2016 , Charlie’s only income
consists of net bank interest of £ 5,156
and UK dividends of £ 4,140 . He claims
the personal allowance of £ 10,600 .
Calculate the income tax payable by
Charlie for the year?

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 INTRODUCTION TO INCOME TAX
 Solution
Total savings Dividends
£ £ £
Bank Interest 6,445 6,445
5,156@100/80
UK dividends
4,140 *100/90 4,600 4,600
Total Income 11,045 6,445 4,600
Less: personal allowance 10,600 6,445 4,155
Taxable income 445 - 445
Income tax due
Dividend Income :Ordinary rate 445 @10% 44.50
Tax borne 44.50
Less :Tax credits on dividends 44.50

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 INTRODUCTION TO INCOME TAX
 Solution
Tax payable 0.00
Less :Tax deducted at source 1,289.00
Tax repayable (1,289.00)

 The dividend all fall into the basic rate band and
are taxed at the rate of 10%.
 The tax due on these dividends is £ 44.50 .
 Tax credits relating to dividends which are
charged to tax are £ 44.50.
 Charlie can not claim payment of the remaining £
415.50 of tax credits (£ 460- £ 44.50= £ 415.50)
which relate to the dividends covered by the
personal allowances . 36
 Summary

BASIC INCOME
ALLOWANCE
Exempt TAX
S
COMPUTATION
Income

ASSESSABLE
INCOME

NON
SAVING
INCOME

SAVINGS
INCOME

DIVIDEND
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 Summary
 In general ,income tax is chargeable on all of the income of
the UK residents and on the UK income of non-resident.

 Income is classified into a number of categories, each of

which has its own rules for determining the amount of
assessable income in a tax year.

 Certain types of income are specifically exempt from

income tax.

 To calculate a taxpayer’s income tax liability it is necessary

to bring together all of the taxpayer’s income into a single
computation .The gross equivalent of income received net
of income tax must be included in the computation.

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 Summary
 In 2015/16 the main rates of income tax are the basic rate of
20%,the higher rate of 40% and the additional rate of 45% .
Savings income which occupies the first £5,000 of the basic
rate band is taxed at the starting rate for savings of 0%.
 UK dividends are accompanied by tax credits which
generally may be set against the tax liability on those
dividends.

 In 2015/16 ,dividends which fall into the basic rate band are
taxed at 10% and dividends which fall into the higher rate
band are taxed at 32.5% . Dividends which lie above the
higher rate limit are tax at 37.5%.

 If the tax credit attached to a UK dividend exceeds the tax

liability with regard to that dividend ,the excess tax credit
cannot be paid to the recipient under any circumstances.
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