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TAXATION OF INDIVIDUALS

1. The principles of income tax

Introduction
Individuals, whether employed, self-employed or simply in receipt of investment
income, are assessed to income tax on their income arising in a tax year.
Basis of assessment
Income tax is payable by a UK resident individual for a tax year. The year from 6
April 2014 to 5 April 2015, is referred to as the tax year 2014/15.
Assessable persons
Each individual is required to pay income tax on his/her taxable income for each tax
year. This means that:
All individuals, including children, are chargeable to income tax
Both spouses within a married couple are treated as separate individuals for
the purposes of income tax

Husband and wife


There are special rules governing the allocation of income between spouses where
assets are jointly owned:
Generally, income generated from assets owned jointly will be split 50:50
between spouses regardless of the actual ownership
Where jointly owned assets are held other than in a 50:50, an election can be
made to HRMC for the income to be taxed on the individual spouses
according to their actual percentage ownership
Residence
All persons resident in UK are assessed to UK tax on their worldwide income
Subject to not meeting any of the automatic non-resident tests, the following people
will automatically be treated as resident in the UK:
A person who is in the UK for 183 days or more during a tax year
A person whose only home is in the UK
A person who carries out full time work in the UK
The following people will automatically be treated as not resident in the UK:
A person who is in the UK for less than 16 days during a tax year
A person who is in the UK for less than 46 days during a tax year, and who
has not been resident during the 3 previous tax years
A person who works full-time overseas, subject to them not being in the UK
for more than 90 days during a tax year.
Where a persons residence status cannot be determined according to any of the
automatic tests, then his/her status will be based on how many ties they have with
the UK and how many days they stay in the UK during a tax year. There are 5 UK
ties as follows:
Having a close family (a spouse/civil partner or minor child) in the UK
Having a house in the UK which is made use of during the tax year
Doing substantive work in the UK

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TAXATION OF INDIVIDUALS

Being in the UK for more than 90 days during either of the 2 previous tax
years
Spending more time in the UK than in any other country in the tax year
How the UK ties test is applied depends on whether a person has been resident in
the UK for any of the previous three tax years. A person who has been
resident during any of the previous 3 tax years will typically be someone
that is leaving the UK, and for them all 5 UK ties are relevant.
A person who has not been resident during any of the previous 3 tax years
will typically be someone that is arriving in the UK, and for them the final
country tie is ignored.
A persons residence status is found by comparing the number of days they are in
the UK during a tax year against how many UK ties they have:
Days in UK

Less than 16
16 to 45
46 to 90
91 to 120
121 to 182
183 or more

Previously resident
during 3
previous tax years
Automatically not
resident
Resident if 4 UK ties (or
more)
Resident if 3 UK ties (or
more)
Resident if 2 UK ties (or
more)
Resident if 1 UK ties (or
more)
Automatically resident

Not previously
resident during 3
previous tax years
Automatically not
resident
Automatically not
resident
Resident if 4 UK ties
Resident if 3 UK ties (or
more)
Resident if 2 UK ties (or
more)
Automatically resident

The table will be given in the tax rates and allowances section of the examination
paper.
Example 1
James is in the UK for 40 days during the tax year 2014-15. He has not previously
been resident in the UK.
Kate is in the UK for 60 days during the tax year 2014-15. Her only home is in
the UK.
Maggie has always been resident in the UK, being in the UK for more than 300 days
each tax year. On 6 April 2014 Maggie purchased an overseas apartment where she
lived for most of the tax year 2014-15. She also has a house in the UK where her
husband and children live. During the tax year 2014-15 Maggie visited the UK for a
total of 80 days, staying in her UK house.
Nigel has not previously been receiving in the UK, being in the UK for less than 20
days each tax year. On 6 April 2014 he purchased a house in the UK, and during the

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TAXATION OF INDIVIDUALS
tax year 2014-15 stayed in the UK for a total of 160 days. Nigel also has an
overseas house which was where he stayed for the remainder of the year 2014-15.
Answer
James
For 2014-15, James will automatically be treated as not resident in the UK. He has
not been residing during the 3 previous tax years, and has spent less than 46 days
in the UK.
Kate
For 2014-15 Kate will automatically be treated as resident in the UK. She has spent
too long in the UK to be automatically treated as non-resident, and her only home is
in the UK
Maggie
Maggie has been resident in the UK during the 3 previous tax years, and was in the
UK between 46 and 90 days. She is therefore resident in the UK for 2014-15 as a
result of the 3 UK ties:
Close family in the UK
A house in the UK which is made use of
In the UK for more than 90 days during the previous 2 tax years
Nigel
Nigel has not been resident in the UK during the 3 previous tax years, and was in
the UK between 121 and 182 days. He is therefore not resident in the UK for 201415 as the only UK tie is the house in the UK which is made use of.
Homework
Exam Question:
Nigel has not previously been resident in the UK, being in the UK for less than 20
days each tax year. For the tax year 201415, he has three ties with the UK. What is
the maximum number of days which Nigel could spend in the UK during the tax year
201415 without being treated as resident in the UK for that year?
A 90 days
B 182 days
C 45 days
D 120 days
2 TAXABLE INCOME
Basic Proforma:
All income is included gross in the computation
Any exempt income identified can be excluded
Income tax computation for the year 2014-15
Earned Income
Trading Income

F6 Taxation (UK) Tutor: Mr Gonpot Toshandranath (Tel: 57686027)

TAXATION OF INDIVIDUALS
Employment Income
Property Income
Investment income
Building society interest(x100/80)
Bank interest(x100/80)
UK dividends(x100/90)
Total income
Less:Reliefs
Net Income
Less:Personal allowance(PA)
Taxable Income

x
x
x
x
x
x
(x)
x
(x)
x

Classification of income
It is important to classify each source of income correctly as the tax rules are
different for each source.
Earned Income
Earned income can be generated in the following ways:
Profit of a trade, profession or vocation of a self-employed
Earnings derived from an office or employment are assessed as
employment income
Property and investment income
Sources of property and investment income include:
Property income-rental income, but also includes items such as the income
element of a premium on granting a short lease
Savings income-bank interest and building society interest. This can be
received either net (of 20% income tax) or gross. In both cases, it is the
gross amount that is included in the tax computation. Credit is given
for the tax paid at source in the calculation of income tax payable. Note:
Interest from government stocks (gilts) is received gross but no tax
credit is deducted
Dividend Income is received net of a 10% tax credit. The grossed up amount
is included in the income tax computation
Exempt income
Income from certain National Savings products
Gaming, lottery and premium bonds winnings
Income received from individual Savings Account (ISA)
Some social security benefits
Reliefs
Reliefs are deductible from an individuals total income. They include certain
payments that an individual makes and certain losses that may be incurred by an
individual

3. Income tax liability


Rates of income tax

F6 Taxation (UK) Tutor: Mr Gonpot Toshandranath (Tel: 57686027)

TAXATION OF INDIVIDUALS
The rates of income tax for 2014/15 are as follows:
A basic rate of 20% applies to the 31,865 of taxable income
A higher rate of 40% applies where taxable income is between 31,866 to
150,000
An additional rate of 45% applies where taxable income exceeds 150,000
They apply to all income except dividend income. For e.g employment income,
trading income, property income and savings income
Special rates of tax apply to dividend income.
The income tax rates for all sources of income for 2014/15 provided in the exam are
summarized below:
Level of taxable income
Dividend rates
Basic rate (1 to 31,865)
Higher rate (31,866 to 150,000)
Additional rate (150,001 and above)

Normal rates
20%
40%
45%

10%
32.5%
37.5%

A summary of the order in which income tax is applied to the different sources of
income is as follows:
1. Other income
2. Savings income
3. Dividend income
Note: Special rates may apply to savings income if it falls within the first 2,880
of taxable income.
The special rates for savings and dividend income are considered in more detail
later.
Personal allowances
Every tax payer is entitled to a basic (standard) personal allowances (PA). The PA is
an amount of tax-free income that every taxpayer is entitled to each tax year. The
standard PA in 2014/15 is 10,000 and this is given to people born on or after 6
April 1948.
Example 1
Tina, born on 29 May 1973, has assessable trading income of 40,765 and
employment income of 4,000 for 2014/15. She does not have any savings income
or dividend income.
Calculate Tinas income tax liability for 2014/15.
Example 2
For the tax year 2014-15, Smith, 23 January 1983, has a trading profit of 107,000.
He does not have any savings income or dividend income.
Calculate Smiths income tax liability for 2014/15.
Example 3

F6 Taxation (UK) Tutor: Mr Gonpot Toshandranath (Tel: 57686027)

TAXATION OF INDIVIDUALS
For the tax year 2014-15, Ingrid, born on 3 August 1965, has a trading profit of
184,000. She does not have any savings income or dividend income.
Calculate Ingrids income tax liability for 2014/15.
Personal allowances for the tax year 2014-15 are as follows:
Personal allowance
Born on or after 6 April 1948
Born between 6 April 1938
and 5 April 1948
Born before 6 April 1938
Income limit
Personal allowance
Personal allowance
(born before 6 April 1948)

10,000
10,500
10,660
100,000
27,000

The standard PA of 10,000 is gradually reduced to nil where a persons adjusted


net income (ANI) exceeds 100,000. Adjusted net income is net income ( total
income less deductions for loss reliefs and interest payments) less gross personal
pension contributions and groos gift aid donations.
The PA is reduced by 1 for every 2 that a persons adjusted net income exceeds
100,000. Therefore, a person with adjusted net income of 120,000 or more is not
entitled to any PA (120,000-100,000=20,000/2= 10,000)
Age allowance (born before 6 April 1948)
Where the taxpayers net income exceeds 27,000 for 2014/15, age
allowance is reduced by 1 for every 2 up to a minimum of the standard
personal allowance of 10,000
There will be a further reduction if adjusted net income exceeds 100,000.
This means that regardless of a persons age, no personal allowance will be
available where their adjusted net income is 120,000 or more.
Example 4
Calculate the age allowance in the following situations:
1. For the tax year 2014-15, D, born on 12 March 1947, has pensions of 27,250
2. For the tax year 2014-15, N, born on 14 July 1932, has pensions of 30,900
3. For the tax year 2014-15, P, born on 14 May 1945, has a trading profit of
90,000 and pensions of 18,000.
4 Income tax payable
Certain forms of income, such as:
Savings
Dividends
Most employment income
are received after income tax has been deducted at source.
All income are included in the income tax computation gross. To avoid double
payment of income tax, credit is given as the final element of the income tax
computation, in order to arrive at the tax payable figure.

F6 Taxation (UK) Tutor: Mr Gonpot Toshandranath (Tel: 57686027)

TAXATION OF INDIVIDUALS
The final stage of the income tax computation is to calculate the tax payable, as
follows:
Income tax liability
x
Less: tax credits on dividends
: tax deducted from savings income
: PAYE on employment income
Income tax payable

(x)
(x)
(x)
x

The income tax payable is the amount due by the taxpayer. It will be collected via
the self-assessment system ( to be explained later).
In the event that the amount of tax paid during the year is greater than the amount
actually due, a refund will be given via the self-assessment system.
5 Reliefs against total income
Tax relief is given for certain losses incurred eg trading losses and certain payments
made by an individual. Relief is given by deducting the losses/payments from total
income.
Losses are covered in later chapter.
The only payments deductible from total income which are examinable are certain
qualifying interest payments. In order to maximize the use of reliefs qualifying
interest payments should be deducted from total income in priority to losses
incurred.
Interest payments
Relief is given for interest paid on loans incurred to finance expenditure for a
qualifying purpose. There are a number of qualifying purposes to which the loan
must be applied. The only ones relevant in F6 are:
Employees-the purchase of plant and machinery by an employed person for
use in his employment
Partners-the purchase of a share in a partnership, or the contribution to a
partnership of capital or a loan. The borrower must be a partner in the
partnership. A loan taken out by a partner for the purchase of plant or
machinery for use in the partnership, also qualifies
Relief is given by deducting the amount of interest paid in a tax year from the total
income.
Example 2
Andy, born on 3 September 1970, has assessable trading income of 43,535 and
employment income of 9,000 (gross), for 2014/15. He does not have any savings
income or dividend income. He made interest payments of

Type equation here . b

F6 Taxation (UK) Tutor: Mr Gonpot Toshandranath (Tel: 57686027)