Personal taxation

1. TAX TABLES ( PDF)

When you need to refer to the tax tables (PDF) , see here to open for a specific area we will refer you to that section within the course. Note that the tax tables contain additional information that is of general interest and not just information specific to this course.

2. TAX CALCULATION WORKBOOK (PDF)

As you work your way through the chapters we will refer you t...

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CPD credit

You will be credited with the CPD times listed within the revision test sections. This will be added to your CPD certificate when you complete each assessment. Your CPD certificate can be viewed and printed from the CPD certificate link on the left hand menu at any time.

By studying each chapter and then taking the end of chapter assessment this will create an entry on your CPD certificate containing:

Your personal details

Course name

Chapter name

Assessment results for each chapter

Estimated CPD time for each chapter.

After taking a chapter assessment if you go to the CPD certificate link you can produce a CPD certificate. By selecting the date filter you can choose which items to include on your certificate. You can also download this to excel which will allow you to edit the certificate as required.

The estimated CPD times allocated the first time you take the end of chapter assessments are:

R03

Hours

Chapter 1

2.5

Chapter 2

3.5

Chapter 3

2.6

Chapter 4

2.5

Chapter 5

3.4

Chapter 6

3

Chapter 7

1.2

Chapter 8

1.9

Chapter 9

4.4

Chapter 10

9.8

Chapter 11

7.6

Chapter 12

7.6

Total

50

T...

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Statement of Professional Standing (SPS)

All advisers giving independent or restricted advice must hold a Statement of Professional Standing (SPS). This details evidence they subscribe to a code of ethics, are qualified and have kept their knowledge up to date.

Bodies accredited by the FCA will be responsible for issuing individuals with an SPS and for ensuring that advisers hold an appropriate QCF Level 4 qualification.

If an SPS is removed from an adviser, the FCA could levy a fine on them, suspend them or even decide to remove their approved person status, although it could also agree to an action plan to be undertaken before reinstatement.

FCA monitoring

Firms are obliged to inform the FCA if any of their advisers fall below its competence or ethical standards.

The FCA collects information about individual advisers, such as the qualifications they hold and which accredited body they use. The FCA uses this database to help identify the highest risk individuals.

Where we have created an audiovisual presentation you can view it in a new window by clicking on the image that appears at the top of the section. As detailed in the contents and information page before purchasing  this module there are a selection of animated audiovisual presentations (total of 1 hour of viewing time) in the first 3 chapters only. These presentations are costly to create and maintain so are limited to cover some of the sections the first 3 chapters only to help get your studies off to a flying start.

The impact of taxation can have a significant impact on the return an individual receives from their savings and investments as well as the amount of money they have available to spend from their earnings.

For tax purposes, the UK comprises England, Scotland, Wales and Northern Ireland. It does not include the Channel Islands or the Isle of Man, as each have their own taxation systems.

The Scottish and Welsh Governm...

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The tax year runs from 6 April to the following 5 April. Most direct taxes are calculated on a tax year basis, so the amount of tax paid will be determined by the total events and transactions that occur during the tax year. Indirect taxes will usually arise on a single transaction. Inheritance tax is cumulative, in the sense that it depends upon a number of events covering periods up to 14 years.

The main personal taxes are:

Income tax – payable on income

National Insurance contributions (NICs) – payable on earnings

Capital gains tax – payable on capital gains

Inheritance tax – payable on estates on death and certain lifetime gifts

Test your knowledge: Explain the difference between a direct tax and an indirect tax.

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The amount of Income Tax and NICs that an individual will be liable for on their earned income depends on whether they are employed or self-employed.

Sometimes it is unclear whether an individual is an employee or self-employed. HMRC will consider a number of factors to decide whether they are undertaking a contract of service (employment) or a contract for services (self-employment). Bearing in mind the differences in the way employees and the self-employed are assessed for tax and NICs (employees and their employers generally pay more), HMRC will attempt to categorise any doubtful cases as employment.

The following table demonstrates the type of factors HMRC take into account and what these indicate:

Factor

Indicates empl...

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Where an individual is a salaried member of a Limited Liability Partnership (LLP), they are taxed as an employee unless:

More than 20% of their remuneration is based on the profitability of the LLP as a whole

They have a significant say in the running of the business as a whole

They have made a significant capital contribution to the LLP (considered to be an investment the equivalent of at least 25% of their expected income from the LLP in a particular tax year)

List three factors that would indicate an individual is working on an employed basis.

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Although many people pay all of their tax through the PAYE system, for others there are sources of income, such as that from the profits generated by a self-employed individual or partner in a partnership, as well as  savings and investment income and capital gains that must be declared and taxed via the “self-assessment” system.

Taxes paid via self-assessment are:

Income tax for all types of income

Class 2 NICs

Class 4 NICs

Capital gains tax

The high-income child benefit charge is also paid via self-assessment and it can also be used to collect student loan repayments, although for employees this is collected through PAYE.

Those individuals who are within the self-assessment system have to complete a tax return showing all of their income and capital gains. They must pay any tax due directly to HMRC on set dates and if these are not adhered to can incur penalties, interest and/or surcharges.

A single self-assessment tax return covers all sources of taxable income and capital gains for the relevant tax year. Taxpayers can request that HMRC calculate the tax or they can work it out themselves. If no return gets filed, HMRC can decide the tax due to the best of its ability and with the information it has available, serving an assessment on that basis. The deadlines for filing returns are as follows:

Method/circumstances

Deadline

Filing return online

31 January following the tax year to which it relates, or three months after the tax return is issued if that is later than 31 January.

Filing return on paper

31 October following the tax year...

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Unless amended by the taxpayer or HMRC, a self-assessment return stands as submitted.

HMRC only check self-assessment returns for obvious errors . Taxpayers can amend their returns at any time in the period ending 12 months after 31 January following the tax year.

HMRC has a right to enquire into the accuracy of any return or self-assessment . This could be carried out by random audit or targeted by suspicion. The enquiry could result in amendment of the return if it was found that the information originally provided was incorrect.

An HMRC enquiry would normally have to start within 12 months of the date HMRC receives the return. After this time, HMRC can only open an enquiry where it believes that there has been fraud or negligence.

Taxpayers have access to their own digital tax account which is regularly updated and shows all the information necessary for an individual to understand their tax affairs. Most taxpayers will not have to file annual tax returns and those with more complex affairs and businesses will be able to use the online system to manage their liabilities.  Most businesses, self-employed individuals and landlords will be required to update HMRC at least quarterly on their tax position through their online account.

By when must an individual file a tax return on paper?

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Employers have to deduct income tax and employees’ NICs under PAYE from all payments to employees and directors.

After deducting income tax and NICs, the employer must pay it to HMRC, usually on a monthly basis.

HMRC provides employers with a PAYE code for each employee. Using PAYE tax tables, the employer is able to deduct the right amount of tax and NICs from each employee’s pay.

The PAYE code is designed to deduct the right amount of tax from the employee’s pay so that the employee does not usually need to complete a tax return. The code includes:

A letter – which may precede or follow a number, indicating the type of personal allowance to which the employee is entitled during a tax year. In some cases, the code is a special one not related to the personal allowance

A number – which tells the employer the amount of tax-free income to which the employee is entitled during a tax year. With a K code, there is no tax-free income. Instead there is notional additional income

The PAYE code number is calculated by adding all the employee’s allowances and allowable expenses and then deducting the amount of any taxable benefits in kind. The figure that results from this is the level of the employee’s tax-free pay for the tax year. The last digit is then removed from this sum to produce the PAYE code number.

See our workbook example for an example of calculating the correct PAYE coding.

NOTE : We will refer you to our workbook for examples throughout this course which can be downloaded in the IMPORTANT READ FIRST section at the start of this chapter.

Real...

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The PAYE system covers many payments including:

Wages/salaries

Fees

Bonus and commission

Holiday pay

Pensions

Payments under profit sharing schemes

Most benefits and some expense allowances

SSP, SMP, SPP, ShPP and SAP

Some lump sum payments

Some assets that are easily marketable, or where arrangements exist to convert them to cash or payments through third parties designed to avoid PAYE

Date of payment

For most employees who are not directors, PAYE is operated when the employee is entitled to receive payment even if payment is made at a later date.

For directors, PAYE is generally operated on the earliest of:

The date payment is made

The date the director becomes entitled to be paid

The date the amount is credited in the company’s books, even if the director cannot draw it straight away

The date when the remuneration is fixed or agreed e.g. at the time of approval of the company’s annual accounts, at the annual general meeting, or at an extraordinary general meeting

Within what period from the end of the tax month must an employer pay HMRC all money owed for PAYE and NICs?

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Tax avoidance or mitigation is arranging taxpayers’ affairs legitimately so that they pay less tax than they otherwise might have paid. Where there are a number of ways of arranging a transaction, it is acceptable to select the method that results in the smallest amount of tax being paid.

However, the more complicated the tax avoidance regime and the more it circles the edge of legality, the more likely the government will introduce anti-avoidance legislation to attack the scheme, either through specific statutes, or via the Finance Acts.

Tax evasion

Tax evasion is failing to provide full and accurate information to the relevant tax authorities, and this is definitely illegal, as everyone has a duty to report all their taxable income and capital gains to HMRC. As this type of behaviour is frequently a criminal offence, apart from having to pay to HMRC any tax that has not been paid along with interest and penalty charges, there is also the possibility of a court case and a prison sentence.

Any professional financial adviser who has assisted in tax evasion activities could also face prosecution, as they are obliged to report any suspicions of criminal offences that may arise whilst carrying out their duties.

It is a commonly held (although wrong) belief that interest from offshore bank accounts does not have to be declared as it is not taxable. However, HMRC have been able, through the Courts, to establish details of interest paid to UK residents who hold accounts with the overseas branches of several banks.

HM Treasury has disclosure agreements with various countries and continues to seek more international agreements that enable HMRC to obtain information about accounts held overseas by UK residents.

HMRC has run various camp...

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Accelerated payment notices

HMRC can enforce immediate payment of any disputed tax, through the accelerated payment notices (APNs), from those using tax arrangements that the courts have found to fail.

An accelerated payment notice can be issued by HMRC when a taxpayer has:

Been involved in a tax avoidance scheme disclosed under the DOTAS legislation,

Been caught by the GAAR, or,

Received a follower notice

A follower notice is issued by HMRC to a taxpayer who has used a tax avoidance scheme that has been determined by another taxpayer’s litigation to be ineffective.  The notice requests the taxpayer to amend their tax return to remove the tax advantage. For those who fail to take corrective action, the payment is 30% of the disputed tax with a further 20% charged depending on the outcome of the investigation. There is no right of appeal against a notice. If the scheme used eventually is found to be effective the accelerated payments will be reimbursed.

Enablers of arrangements

Penalties will apply to enablers of defeated tax avoidance schemes, with an enabler defined as those who design, manage, market or facilitate tax avoidance. Arrangements are treated a defeated whether this is the result of a court case or a tribunal. The opinion of the GAAR advisory panel must be taken before a penalty can be applied and where applied it is up to the value of the fees paid to the enabler in respect of their actions in enabling a taxpayers’ arrangements.

In general terms, good tax planning involves the following four principles:

Make the maximum use of available tax allowances

Choose the most suitable investments for the investor’s own tax position

Consider investments that provide tax-free returns

Consider investments that qualify for tax relief on the initial amounts invested

Some general principles of legitimate tax planning include:

Use all ava...

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Never recommend schemes you yourself don’t understand

Keep planning flexible to accommodate a change in the law

Carry out regular audits for the client’s tax position

Don’t persuade a client to do something he or she would not otherwise want to do, just to gain a tax advantage

List the four main principles of tax planning.

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NOTE - These questions are designed for revision purposes only and are therefore not written ...

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