Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018

Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018 Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018 Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018 Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018 Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018 Tài liệu hay Acca f6 taxation UK FA 2016 bpp study text applicable upto march 2018

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BPP Learning Media is an ACCA Approved Content Provider This means we work

closely with ACCA to ensure this Study Text contains the information you need to pass

your exam

In this Study Text, which has been reviewed by the ACCA examining team, we:

 Highlight the most important elements in the syllabus and the key skills you need

 Signpost how each chapter links to the syllabus and the study guide

 Provide lots of exam focus points demonstrating what is expected of you in the exam

 Emphasise key points in regular fast forward summaries

 Test your knowledge in quick quizzes

 Examine your understanding in our practice question bank

 Reference all the important topics in our full index

BPP's Practice & Revision Kit also supports this paper

FOR EXAMS IN JUNE 2017, SEPTEMBER 2017,

DECEMBER 2017 AND MARCH 2018

To Access More Free Study Material Visit : accastudymaterial.com

http://accastudymaterial.com

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First edition 2007 Tenth edition October 2016 ISBN 9781 5097 0787 4 (Previous 9781 4727 4423 4) eISBN 9781 5097 0794 2 British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Published by BPP Learning Media Ltd BPP House, Aldine Place 142–144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia

Printed in the United Kingdom by Ricoh UK Limited

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All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd

We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated

2016

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Part A UK tax system

Part B Income tax and national insurance contributions

Part C Chargeable gains for individuals

Part D Tax administration for individuals

Part E Inheritance tax

Part F Corporation tax

19 Computing taxable total profits and the corporation tax liability 287

Part G Value added tax

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Introduction v

Helping you to pass

BPP Learning Media – ACCA Approved Content Provider

As ACCA's Approved Content Provider, BPP Learning Media gives you the opportunity to use study

materials reviewed by the ACCA examination team By incorporating the examination team's comments

and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study

Text provides excellent, ACCA-approved support for your studies

The PER alert!

Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three

year practical experience requirement (PER) To help you to recognise areas of the syllabus that you

might be able to apply in the workplace to achieve different performance objectives, we have introduced

the 'PER alert' feature You will find this feature throughout the Study Text to remind you that what you

are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement

Your achievement of the PER should be recorded in your online My Experiencerecord

Tackling studying

Studying can be a daunting prospect, particularly when you have lots of other commitments The different

features of the Study Text, the purposes of which are explained fully on the Chapter features page, will

help you whilst studying and improve your chances of exam success

Developing exam awareness

Our Study Text are completely focused on helping you pass your exam

Our advice on Studying F6 outlines the content of the paper and the necessary skills you are expected to

be able to demonstrate and any brought forward knowledge you are expected to have

Exam focus points are included within the chapters to highlight when and how specific topics were

examined, or how they might be examined in the future

Testing what you can do

Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can

recall what you have learnt

We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as

Quick Quizzes at the end of each chapter to test your knowledge of the chapter content

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vi Introduction

Chapter features Each chapter contains a number of helpful features to guide you through each topic

Topic list

Topic list Syllabus reference Tells you what you will be studying in this chapter and the

relevant section numbers, together with ACCA syllabus references

Introduction Puts the chapter content in the context of the syllabus as a whole.

Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined.

Summarises the content of main chapter headings, allowing you to preview and review each section easily

Key terms Definitions of important concepts that can often earn you easy marks in exams

Exam focus points Tell you when and how specific topics were examined, or how they may be examined in the future

Formula to learn Formulae that are not given in the exam but which have to be learnt

Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER)

providing an easy source of review

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Introduction vii

Studying F6

As the name suggests, this paper examines the basic principles of taxation This is a very important area

for certified accountants as many areas of practice involve a consideration of taxation issues It also

provides a foundation for P6: Advanced Taxation which will be chosen by those who work in a tax

environment

Members of the F6 examination team have written several technical articles including two on Inheritance

Tax, two on chargeable gains, one on groups, two on VAT, one on benefits, one on motor cars, one on

adjustment of profit and one on Finance Act 2016 All these articles are available on the ACCA website

Make sure you read them to gain further insight into what the F6 examination team is looking for

1 What F6 is about

You are introduced to the rationale behind – and the functions of – the tax system The syllabus then

considers the separate taxes that an accountant would need to have a detailed knowledge of, such as

income tax from self-employment, employment and investments, the corporation tax liability of

individual companies and groups of companies, the national insurance contribution liabilities of both

employed and self employed persons, the value added tax liability of businesses, the chargeable gains

arising on disposals of investments by both individuals and companies, and the inheritance tax liabilities

arising on chargeable lifetime transfers and on death

You will be expected to have a detailed knowledge of these taxes, but no previous knowledge is

assumed You should study the basics carefully and learn the pro forma computations It then becomes

straightforward to complete these by slotting in figures from your detailed workings

As well as being able to calculate tax liabilities, you may be required to explain the basis of the

calculations, apply tax planning techniques for individuals and companies and identify the compliance

issues for each major tax through a variety of business and personal scenarios and situations

2 What skills are required?

 Be able to integrate knowledge and understanding from across the syllabus to enable you to

complete detailed computations of tax liabilities

 Be able to explain the underlying principles of taxation by providing a simple summary of the rules

and how they apply to the particular situation

 Be able to apply tax planning techniques by identifying available options and testing them to see

which has the greater effect on tax liabilities

3 How to improve your chances of passing

 There is no choice in this paper, all questions have to be answered You must therefore study the

entire syllabus, there are no short-cuts

 The first section of the paper consists of 15 objective test questions, worth two marks each These

will inevitably cover a wide range of the syllabus

 The second section of the paper also consists of 15 objective test questions, worth two marks

each However, they are linked to a scenario You must make sure you understand the scenario

before attempting the questions

 Practising longer questions set in the third section of the paper under timed conditions is

essential BPP's Practice & Revision Kit contains 10 mark and 15 mark questions on all areas of

the syllabus

 Answer all parts of the question Even if you cannot do all of the calculation elements, you will still

be able to gain marks in the discussion parts

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viii Introduction

 Answer selectively – the examination team will expect you to consider carefully what is relevant

and significant enough to include in your answer Don't include unnecessary information

 Keep an eye out for articles as the examination team will use Student Accountant to communicate

with students

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Introduction ix

The exam paper

Computer-based exams

ACCA have commenced the launch of computer based exams (CBE's) for F5–F9 They have been piloting

computer-based exams in limited markets since September 2016 with the aim of rolling out into all

markets internationally over a five year period Paper-based examinations will be run in parallel while the

CBEs are phased in and BPP materials have been designed to support you, whichever exam option you

choose

Exam duration

The Skills module examinations F5–F9 contain a mix of objective and longer type questions with a

duration of three hours for 100 marks For paper-based exams there is an extra 15 minutes to reflect the

manual effort required

As ACCA increase their offering of F5–F9 session CBEs, they will be introducing seeded content to

guarantee all exams are equivalent and fair When the seeded content is introduced, students will be given

more time to complete the exams – increasing to 3 hours and 20 minutes to take into account the

inclusion of additional seeded content

For more information on these changes and when they will be implemented, please visit the ACCA website

http://www.accaglobal.com/uk/en/student/changes-to-exams/f5-f9-session-cbe.html

Format of the exam

The exam format is the same irrespective of the mode of delivery and will comprise three exam sections:

Section Style of question type Description Proportion of exam, %

B Objective test (OT) case 3 questions  10 marks

Each question will contain 5 subparts each worth 2 marks

Section A and B questions will be selected from the entire syllabus The paper version of these objective

test questions contains multiple choice only and the computer-based versions will contain a variety The

responses to each question or subpart in the case of OT cases are marked automatically as either correct

or incorrect by computer

The 10 mark Section C questions can come from any part of the syllabus The 15 mark Section C

questions will mainly focus on the following syllabus areas but a minority of marks can be drawn from any

other area of the syllabus:

 Income tax (syllabus area B)

 Corporation tax (syllabus area E)

The responses to these questions are human marked

Syllabus and Study Guide

The complete F6 syllabus and study guide can be found by visiting the exam resource finder on the ACCA

website: http://www.accaglobal.com/uk/en/student/exam-support-resources.html

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x Introduction

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UK tax system

P A R T A

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1 The overall function and purpose of taxation in a

modern economy A1(a)

2 Different types of taxes A1(b), (c)

3 Principal sources of revenue law and practice A2(a)-(c), (e), (f)

4 Tax avoidance and tax evasion A2(d), (g)

Introduction to

the UK tax system

Introduction

We start our study of tax with an introduction to the UK tax system

First, we consider briefly the purpose of raising taxes, focussing on economic,

social and environmental factors We next consider the specific UK taxes, both

revenue and capital, and also direct and indirect

We see how the collection of tax is administered in the UK, and where the UK

tax system interacts with overseas tax jurisdictions

Finally, we highlight the difference between tax avoidance and tax evasion and

explain the need for a professional and ethical approach in dealing with tax In

particular, we look at the situation where a client has failed to disclose

information to the tax authorities

When you have finished this chapter you should be able to discuss the broad

features of the tax system In the following chapters we will consider specific

UK taxes, starting with income tax

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4 1: Introduction to the UK tax system  Part A UK tax system

Study guide

Intellectual level

A1 The overall function and purpose of taxation in a modern economy

(a) Describe the purpose (economic, social etc) of taxation in a modern

economy

1

(b) Explain the difference between direct and indirect taxation 2 (c) Identify the different types of capital and revenue tax 1

A2 Principal sources of revenue law and practice

(a) Describe the overall structure of the UK tax system 1

(c) Describe the organisation of HM Revenue & Customs (HMRC) and its terms

of reference

1

(d) Explain the difference between tax avoidance and tax evasion, and the

purposes of the General Anti-Abuse Rule (GAAR)

1

(e) Appreciate the interaction of the UK tax system with that of other tax

jurisdictions

2

(g) Explain the need for an ethical and professional approach 2 Exam guide

You may be asked a question on a specific topic from this part of the syllabus in either Section A or Section B An example would be to identify sources of revenue law You are unlikely to be asked a whole Section C question on this part of the syllabus You may, however, be asked to comment on one aspect, such as the difference between tax avoidance and tax evasion or how to act if a client has failed to disclose information to the tax authorities, as part of a question

1 The overall function and purpose of taxation in a modern economy

Economic, social and environmental factors may affect the government's tax policies

1.1 Economic factors

In terms of economic analysis, government taxation represents a withdrawal from the UK economy

while its expenditure acts as an injection into it So the government's net position in terms of taxation and expenditure, together with its public sector borrowing policies, has an effect on the level of economic activity within the UK

The government favours longer-term planning, and regularly sets out proposed plans for expenditure

These show the proportion of the economy's overall resources which will be allocated by the government and how much will be left for the private sector

This can have an effect on demand for particular types of goods, eg health and education on the one hand, which are predominately the result of public spending, and consumer goods on the other, which results from private spending Changing demand levels will have an impact on employment levels within the different sectors, as well as on the profitability of different private sector suppliers

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Part A UK tax system  1: Introduction to the UK tax system 5

Within that overall proportion left in the private sector, the government uses tax policies to encourage

and discourage certain types of activity

It encourages:

(a) Saving on the part of the individual, by offering tax incentives such as tax-free Individual Savings

Accounts (ISAs) and tax relief on pension contributions (b) Donations to charities through the Gift Aid scheme

(c) Entrepreneurs who build their own business, through reliefs from capital gains tax

(d) Investment in plant and machinery through capital allowances

(e) Marriage and civil partnerships through the transferable personal allowance (marriage allowance)

Civil partners are members of a same sex couple which has registered as a civil partnership under the Civil Partnerships Act 2004 Same sex couples can also marry in England, Wales and Scotland (but not Northern Ireland)

It discourages:

(a) Smoking and alcoholic drinks, through the duties placed on each type of product

(b) Motoring, through fuel duties

Governments can and do argue that these latter taxes and duties to some extent mirror the extra costs to

the country as a whole of such behaviours, such as the cost of coping with smoking related illnesses

However, the Government needs to raise money for spending in areas where there are no consumers on

whom the necessary taxes can be levied, such as defence, law and order, overseas aid and the cost of

running the government and Parliament

1.2 Social factors

Social justice lies at the heart of politics, since what some think of as just is regarded by others as

completely unjust Attitudes to the redistribution of wealth are a clear example

In a free market some individuals generate greater amounts of income and capital than others and once

wealth has been acquired, it tends to grow through the reinvestment of investment income received This

can lead to the rich getting richer and the poor poorer, with economic power becoming concentrated in

relatively few hands

Some electors make the value judgement that these trends should be countered by taxation policies

which redistribute income and wealth away from the rich towards the poor This is one of the key

arguments in favour of some sort of capital gains tax and inheritance tax, taxes which, relative to the

revenue raised, cost a great deal to collect

Different taxes have different social effects:

(a) Direct taxes based on income and profits (income tax), gains (capital gains tax) or wealth

(inheritance tax) tax only those who have these resources

(b) Indirect taxes paid by the consumer (VAT) discourage spending and encourage saving Lower or

nil rates of tax can be levied on essentials, such as food

(c) Progressive taxes such as income tax, where the proportion of the income or gains paid over in

tax increases as income/gains rise, target those who can afford to pay Personal allowances and

the rates of taxation can be adjusted so as to ensure that those on very low incomes pay little or no tax

(d) Taxes on capital or wealth ensure that people cannot avoid taxation by having an income of zero

and just living off the sale of capital assets

Almost everyone would argue that taxation should be equitable or 'fair', but there are many different

views as to what is equitable

An efficient tax is one where the costs of collection are low relative to the tax paid over to the government

The government publishes figures for the administrative costs incurred by government departments in

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operating the taxation systems, but there are also compliance costs to be taken into account Compliance costs are those incurred by the taxpayer, whether they be the individual preparing tax returns under the self assessment system or the employer operating the PAYE system to collect income tax or the business collecting value added tax Some of the more equitable taxes may be less efficient to collect

1.3 Environmental factors

The taxation system accommodates environmental concerns to a certain extent, especially concerns

about renewable and non-renewable sources of energy and global warming

Examples of tax changes which have been introduced for environmental reasons are:

(a) The climate change levy, raised on businesses in proportion to their consumption of energy Its

claimed purpose is to encourage reduced consumption

(b) The landfill tax levied on the operators of landfill sites on each tonne of rubbish/waste processed

at the site Its claimed purpose is to encourage recycling by taxing waste which has to be stored

(c) The changes to rules on the lease or purchase of cars, and taxation of cars and private fuel provided for employees to be dependent on CO2 emissions Its claimed purpose is to encourage the manufacture and purchase of low CO2 emission cars to reduce emissions into the atmosphere caused by driving

Only the last of these will be directly felt by individuals, even if the other taxes are passed on by being factored into a business's overheads

2 Different types of taxes Central government raises revenue through a wide range of taxes Tax law is made by statute

2.1 Taxes in the UK

Central government raises revenue through a wide range of taxes Tax law is made by statute

The main taxes, their incidence and their sources, are set out in the table below

Corporation tax Companies CAA 2001 as above, Corporation Tax Act 2009 (CTA

2009), Corporation Tax Act 2010 (CTA 2010)

Capital gains tax Individuals

Partnerships Companies (which pay

tax on capital gains in the form of corporation tax)

Taxation of Chargeable Gains Act 1992 (TCGA 1992)

Inheritance tax Individuals

Trustees

Inheritance Tax Act 1984 (IHTA 1984)

Value added tax Businesses, both

incorporated and unincorporated

Value Added Tax Act 1994 (VATA 1994)

You will also meet National Insurance National insurance is payable by employers, employees and the self employed

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Further details of all these taxes are found later in this Study Text

The other taxes referred to in the previous section, such as landfill tax, are not examinable at F6

Finance Acts are passed each year, incorporating proposals set out in the Budget They make changes

which apply mainly to the tax year ahead This Study Text includes the provisions of the Finance Act

2016 This is the Finance Act examinable in the sessions in June 2017, September 2017, December

2017 and March 2018

2.2 Revenue and capital taxes

Revenue taxes are those charged on income In this Study Text we cover:

(a) Income tax

(b) Corporation tax (on income profits)

(c) National insurance Capital taxes are those charged on capital gains or on wealth In this Study Text we cover:

(a) Capital gains tax

(b) Corporation tax (on capital gains)

(c) Inheritance tax

2.3 Direct and indirect taxes

Direct taxes are those charged on income, gains and wealth Income tax, national insurance, corporation tax, capital gains tax and inheritance tax are direct taxes Direct taxes are collected directly

from the taxpayer

Indirect taxes are those paid by the consumer to the supplier who then passes the tax to the

Government Value added tax is an indirect tax

3 Principal sources of revenue law and practice Tax is administered by HM Revenue and Customs (HMRC)

3.1 The overall structure of the UK tax system

3.1.1 Her Majesty's Treasury

Her Majesty's Treasury formally imposes and collects taxation The management of the Treasury is the

responsibility of the Chancellor of the Exchequer

3.1.2 Her Majesty's Revenue and Customs (HMRC)

The administrative function for the collection of tax is undertaken by Her Majesty's Revenue and Customs (HMRC)

The HMRC staff are referred to in the tax legislation as 'Officers of Revenue and Customs' They are

responsible for supervising the self-assessment system and raising queries about tax liabilities

3.1.3 Crown Prosecution Service (CPS) The Crown Prosecution Service (CPS) provides legal advice and institutes and conducts criminal

prosecutions in England and Wales where there has been an investigation by HMRC

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3.1.4 Tax Tribunal

Tax appeals are heard by the Tax Tribunal which is made up of two tiers:

(a) First Tier Tribunal

(b) Upper Tribunal

The First Tier Tribunal deals with most cases other than complex cases The Upper Tribunal deals with complex cases which either involve an important issue of tax law or a large financial sum The Upper

Tribunal also hears appeals against decisions of the First Tier Tribunal We look at the appeals system in

more detail later in this Study Text

3.2 Different sources of revenue law

The sources of revenue law are Acts of Parliament, Statutory Instruments and case law

As stated above, taxes are imposed by statute This comprises not only Acts of Parliament but also

regulations laid down by Statutory Instruments Statute is interpreted and amplified by case law

HMRC also issue:

(a) Statements of practice, setting out how they intend to apply the law

(b) Extra-statutory concessions, setting out circumstances in which they will not apply the strict letter

of the law where it would be unfair (c) A wide range of explanatory leaflets

(d) Revenue and Customs Brief This is gives HMRC's view on specific points

(e) The Internal Guidance, a series of manuals used by HMRC staff

(f) Agent Update, for tax practitioners

A great deal of information and HMRC publications can be found on the HM Revenue and Customs pages

of the UK Government website (www.gov.uk)

Although the HMRC publications do not generally have the force of law, some of the VAT notices do where power has been delegated under regulations This applies, for example, to certain administrative aspects

of the cash accounting scheme

3.3 The interaction of the UK tax system with that of other tax jurisdictions

3.3.1 The European Union

UK membership of the European Union has a significant effect on UK taxes, in particular value added tax (VAT) This will continue until the UK leaves the European Union

Membership of the European Union has a significant effect on UK taxes although there is no general requirement imposed on the EU member states to move to a common system of taxation nor to harmonise their individual tax systems The states may, however, agree jointly to enact specific laws, known as 'Directives', which provide for a common code of taxation within particular areas of their

taxation systems

The most important example to date is Value Added Tax (VAT), where the UK is obliged to pass its laws in

conformity with the rules laid down in the European legislation The VAT Directives still allow for a certain amount of flexibility between member states, eg in setting rates of taxation There are only limited examples of Directives in the area of Direct Taxes, generally concerned with cross-border dividend and interest payments and corporate reorganisations

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However, under the EU treaties, member states are also obliged to permit freedom of movement of workers, freedom of movement of capital and freedom to establish business operations within the EU

These treaty provisions have 'direct effect', ie a taxpayer is entitled to claim that a UK tax provision is

ineffective because it breaches one or more of the freedoms guaranteed under European Law

The European Court of Justice has repeatedly held that taxation provisions which discriminate against non-residents (ie treat a non-resident less favourably than a resident in a similar situation) are contrary to European Law, unless there is a very strong public interest justification

There are provisions regarding the exchange of information between European Union Revenue

authorities

The long term implications of the UK referendum in June 2016 to leave the European Union are not fully

known However, until the UK has gone through the process of ceasing its membership, European Union rules will continue to apply to the UK

3.3.2 Other countries

In general, the rules of tax jurisdictions of other countries do not have a direct interaction with UK tax

However, the UK has entered into double tax agreement with various countries, as discussed below

3.4 Double taxation agreements

Double taxation agreements are designed to protect against the risk of double taxation where the same income or gains are taxable in two countries

Double Taxation agreements between two countries are primarily designed to protect against the risk

of double taxation where the same income or gains are taxable in two countries

For example, an individual may have a source of income which is taxed in the country in which the income arose but is also taxed in the individual's country of residence The agreement could provide

that the income is only to be taxed in one country or that credit is to be given for tax arising in one country against the tax charge in the other country

Double taxation agreements may also include non-discrimination provisions which prevent a foreign

national from being treated more harshly than a national of a country

Double taxation agreements also usually include rules for the exchange of information between the

different Revenue authorities

4 Tax avoidance and tax evasion One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to advise clients responsibly about the differences between tax planning, tax avoidance and tax evasion You can apply the knowledge you obtain from this section of the Study Text to help to demonstrate this competence

Tax avoidance is the legal minimisation of tax liabilities; tax evasion is illegal

4.1 Tax evasion

Tax evasion consists of seeking to pay too little tax by deliberately misleading HMRC by either:

(a) Suppressing information to which they are entitled (eg failing to notify HMRC that you are liable

to tax, understating income or gains or omitting to disclose a relevant fact, eg that business expenditure had a dual motive), or

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(b) Providing them with deliberately false information (eg deducting expenses which have not been

incurred or claiming capital allowances on plant that has not been purchased)

Tax evasion is illegal Minor cases of tax evasion have generally been settled out of court on the payment

of penalties However, there is now a statutory offence of evading income tax, which enables such

matters as deliberate failure to operate PAYE to be dealt with in magistrates' courts

Serious cases of tax evasion, particularly those involving fraud, will continue to be the subject of criminal prosecutions which may lead to fines and/or imprisonment on conviction

4.2 Tax avoidance

Tax avoidance is more difficult to define

In a very broad sense, it could include any legal method of reducing your tax burden, eg taking

advantage of tax shelter opportunities explicitly offered by tax legislation such as ISAs However, the term

is more commonly used in a more narrow sense, to denote complex arrangements designed to produce unintended tax advantages for the taxpayer

The effectiveness of tax avoidance schemes has often been examined in the courts Traditionally the tax rules were applied to the legal form of transactions, although this principle was qualified in later cases It was held that the Courts could disregard transactions which were preordained and solely designed to avoid tax

Traditionally, the response of HMRC has been to seek to mend the loopholes in the law as they come to

their attention In general, there is a presumption that the effect of such changes should not be backdated

There are disclosure obligations on promoters of certain tax avoidance schemes, and on taxpayers, to

provide details to HMRC of any such schemes used by the taxpayer This enables HMRC to introduce anti avoidance measures at the earliest opportunity

4.3 The distinction between avoidance and evasion

The distinction between tax evasion and tax avoidance should generally be clear cut, since tax

avoidance is an entirely legal activity and does not entail misleading HMRC However, some tax avoidance arrangements may be subject to the General Anti-Abuse Rule discussed below

Care should also be taken in giving advice in some circumstances For example, a taxpayer who does

not return income or gains because he wrongly believes that he has successfully avoided having to pay tax

on them may, as a result, be accused of tax evasion

4.4 General anti-abuse rule (GAAR)

There is a general anti-abuse rule (GAAR) which enables HMRC to counteract tax advantages arising from abusive tax arrangements

Tax avoidance is usually targeted with legislation which applies in specific circumstances. The GAAR provides additional means for HMRC to 'counteract' tax advantages arising from abusive 'tax arrangements', ie arrangements that involve obtaining a tax advantage as (one of) their main purpose(s)

Arrangements are abusive if they cannot be regarded as a reasonable course of action, for example,

where they lead to unintended results involving one or more contrived or abnormal steps and exploit any shortcomings in the tax provisions

Examples of abusive arrangements include those that result in:

(a) Significantly less income, profits or gains (b) Significantly greater deductions or losses, or (c) A claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid

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A 'tax advantage' includes:

(a) Relief or increased relief from tax (b) Repayment or increased repayment of tax (c) Avoidance or reduction of a charge to tax (d) Avoidance of a possible assessment to tax (e) Deferral of a payment of tax or advancement of a repayment of tax (f) Avoidance of an obligation to deduct or account for tax

HMRC may counteract tax advantages arising by, for example, increasing the taxpayer's tax liability

HMRC must follow certain procedural requirements and, if it makes any adjustments, these must be on a 'just and reasonable' basis

4.5 The need for an ethical and professional approach

If a client makes a material error or omission in a tax return, or fails to file a tax return, and does not correct the error, omission or failure when advised, the accountant should cease to act for the client, inform HMRC of this cessation and make a money laundering report

Under self assessment, all taxpayers (whether individuals or companies) are responsible for disclosing their taxable income and gains and the deductions and reliefs they are claiming against them

Many taxpayers arrange for their accountants to prepare and submit their tax returns. The taxpayer is still the person responsible for submitting the return and for paying whatever tax becomes due: the

accountant is only acting as the taxpayer's agent

The practising accountant often acts for taxpayers in their dealings with HMRC and situations can arise where the accountant has concerns as to whether the taxpayer is being honest in providing information to the accountant for onward transmission

How the accountant deals with such situations is a matter of professional judgement, but in deciding

what to do, the accountant will be expected to uphold the standards of the Association of Chartered Certified Accountants He must act honestly and objectively, with due care and diligence, and showing

the highest standards of integrity

If an accountant learns of a material error or omission in a client's tax return or of a failure to file a required tax return, the accountant has a responsibility to advise the client of the error, omission or failure and recommend that disclosure be made to HMRC

If the client, after having had a reasonable time to reflect, does not correct the error, omission or failure or authorise the accountant to do so on the client's behalf, the accountant should inform the client

in writing that it is not possible for the accountant to act for that client

The accountant should also notify HMRC that the accountant no longer acts for the client but should not provide details of the reason for ceasing to act

An accountant whose client refuses to make disclosure to HMRC, after having had notice of the error,

omission or failure and a reasonable time to reflect, must also report the client's refusal and the facts surrounding it to the Money Laundering Reporting Officer within the accountancy firm or to the appropriate authority (National Crime Agency) if the accountant is a sole practitioner

Accountants who suspect or are aware of tax evasion activities by a client may themselves commit an offence if they do not report their suspicions.The accountant must not disclose to the client, or any one else, that such a report has been made if the accountant knows or suspects that to do so would be likely

to prejudice any investigation which might be conducted following the report as this might constitute the criminal offence of 'tipping-off'

You may be asked to explain how you, as a trainee Chartered Certified Accountant, should deal with a situation where a client is evading tax, for example by not disclosing income or gains to HMRC

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Chapter Roundup

 Economic, social and environmental factors may affect the government's tax policies

 Central government raises revenue through a wide range of taxes Tax law is made by statute

 Tax is administered by HM Revenue and Customs (HMRC)

 The sources of revenue law are Acts of Parliament, Statutory Instruments and case law

 UK membership of the European Union has a significant effect on UK taxes, in particular value added tax

(VAT) This will continue until the UK leaves the European Union

 Double taxation agreements are designed to protect against the risk of double taxation where the same

income or gains are taxable in two countries

 Tax avoidance is the legal minimisation of tax liabilities; tax evasion is illegal

 There is a general anti-abuse rule (GAAR) which enables HMRC to counteract tax advantages arising from

abusive tax arrangements

 If a client makes a material error or omission in a tax return, or fails to file a tax return, and does not

correct the error, omission or failure when advised, the accountant should cease to act for the client, inform HMRC of this cessation and make a money laundering report

Quick Quiz

1 What is the difference between a direct and an indirect tax?

2 What is an Extra Statutory Concession?

3 How might a double taxation agreement benefit a UK taxpayer who has income arising in a country which

has such an agreement with the UK?

4 Tax avoidance is legal True/False?

5 When may HMRC use the general anti-abuse rule (GAAR)?

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Answers to Quick Quiz

1 A direct tax is one charged on income or gains; an indirect tax is paid by a consumer to the supplier, who

then passes it to HMRC

2 An Extra Statutory Concession is a relaxation by HMRC of the strict rules where their imposition would be

unfair

3 The agreement could provide that the income is only to be taxed in one country or that credit is to be given

for tax arising in one country against the tax charge in the other country

4 True Tax avoidance is legal; tax evasion is illegal

5 The GAAR may be used by HMRC where a taxpayer has used abusive tax arrangements to obtain a tax

advantage

Now try the question below from the Practice Question Bank

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Income tax and national

insurance contributions

P A R T B

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1 Scope of income tax B1(a)

2 Computing taxable income B5(a)

3 Types of income B4(f), B5(a)

4 Tax exempt income B4(g), B7(c)

5 Deductible interest B5(e)

6 Personal allowance B5(b)

7 Computing income tax liability and income tax payable B4(f), B5(d)

8 Accrued income scheme B4(h)

9 Gift aid B5(f)

10 Child benefit income tax charge B5(g), B7(c)

11 Transferable personal allowance B5(c), B7(c)

12 Married couples and couples in a civil partnership B5(h), B7(b),(c)

Computing taxable

income and the income

tax liability

Introduction

In the previous chapter we considered the UK tax system generally Now we

look at income tax, which is the tax applied on the income individuals make

from their jobs, their businesses and their savings and investments We

consider the scope of income tax and see how to collect together all of an

individual's income in a personal tax computation, and we also see which

income can be excluded as being exempt from tax

Next, we look at the circumstances in which interest paid can be deducted in

the income tax computation

Each individual is entitled to a personal allowance and only if that is exceeded

will any tax be due We then learn how to work out the income tax liability on

taxable income and how much tax remains to be paid in cash

We consider how the accrued income scheme applies to interest on UK

Government securities (gilts) We see how donations to charity under the gift

aid scheme can save tax We also look at the income tax charge in relation to

child benefit We then consider the relief given by the transferable amount of

the personal allowance between spouses/civil partners Finally we consider how

married couples or civil partners are subject to income tax and how they can

minimise their tax liabilities

In the next chapter we look at employment income

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18 2: Computing taxable income and the income tax liability Part B Income tax and national insurance contributions

Study guide

Intellectual level

B1 The scope of income tax

(a) Explain how the residence of an individual is determined 1

B4 Property and investment income

(f) Compute the tax payable on savings and dividends income 2 (g) Recognise the treatment of individual savings accounts (ISAs) and other tax

spouses and civil partners

2

(e) Explain the treatment of interest paid for a qualifying purpose 2 (f) Understand the treatment of gift aid donations and charitable giving 1

(h) Understand the treatment of property owned jointly by a married couple, or

by a couple in a civil partnership

1

B7 The use of exemptions and reliefs in deferring and minimising income

tax liabilities

(b) Understand how a married couple or a couple in a civil partnership can

minimise their tax liabilities

2

Exam guide Section A questions on the topics in this chapter may include identification of different types of income or calculation of the personal allowance They could also include a simple computation of income tax liability

on one type of income, or a computation of the child benefit income tax charge Section B questions on the topics in this chapter could focus on tax implications of various types of income and the treatment of married couples/civil partners

It is likely that you will have to prepare a full computation of income tax liability (and possibly income tax payable) in a Section C question, in a 15 mark question or a 10 mark question You should familiarise yourself with the layout of the computation, and the three types of income: non-savings, savings and dividends It is then a simple matter of slotting the final figures into the computation from supporting workings for the different types of income

Gift aid donations could feature in a question in any section You will come across the technique of increasing the basic rate and higher rate limits again when you deal with pensions later in this Study Text

Throughout this chapter, you should be aware of basic income tax planning such as investing in sources of exempt income We will also deal with some tax planning for spouses/civil partners in capital Section 12

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Part B Income tax and national insurance contributions  2: Computing taxable income and the income tax liability 19

1 Scope of income tax

1.1 Residence

1.1.1 Statutory residence test

An individual will automatically not be UK resident if he meets any of the automatic overseas tests An individual, who does not meet any of the automatic overseas tests, will automatically be UK resident if he meets any of the automatic UK tests An individual who has not met any of the automatic overseas tests nor any of the automatic UK tests will be UK resident if he meets the sufficient ties test

A taxpayer's residence has important consequences in establishing the tax treatment of his UK and overseas income and capital gains Statute sets out a test to determine whether or not an individual is

UK resident in a tax year

The operation of the test can be summarised as follows

Does the individual satisfyany of the automaticoverseas tests?

Does he satisfy the sufficient

ties test?

1.1.2 Automatic overseas tests

The automatic overseas tests must be considered first

The automatic overseas tests treat an individual as not resident in the UK in a tax year if that individual:

(a) Spends less than 16 days in the UK in that tax year and was resident in the UK for one or more

of the three previous tax years (typically someone who is leaving the UK); or

(b) Spends less than 46 days in the UK in that tax year and was not resident in the UK for any of the previous three tax years (typically someone who is arriving in the UK); or

(c) Works full-time overseas throughout that tax year and does not spend more than 90 days in the

UK during that tax year

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1.1.3 Automatic UK tests

If none of the automatic overseas tests are met, then the automatic UK tests are considered

The automatic UK tests treat an individual as UK resident in a tax year if that individual:

(a) Spends 183 days or more in the UK during that tax year; or

(b) Has a home in the UK and no home overseas; or

(c) Works full-time in the UK during that tax year

1.1.4 Sufficient UK ties tests

If the individual meets none of the automatic overseas tests and none of the automatic UK tests, the 'sufficient ties' test must be considered

The sufficient ties test compares the number of days spent in the UK and the number of connection factors or 'ties' to the UK

An individual who was not UK resident in any of the previous three tax years (typically someone who is

arriving in the UK) must determine whether any of the following ties apply:

(a) UK resident close family (eg spouse/civil partner, child under the age of 18)

(b) Available UK accommodation in which the individual spends at least one night during the tax year

(c) Substantive UK work (employment or self-employment)

(d) More than 90 days spent in the UK in either or both of the previous two tax years

An individual who was UK resident in any of the previous three tax years (typically someone who is

leaving the UK) must also determine whether any of the ties in (a) to (d) above apply plus whether an additional tie applies:

(e) Present in the UK at midnight for the same or more days in that tax year than in any other country

The following table shows how an individual's UK residence status is found by comparing the number of days in the UK during a tax year and the number of UK ties:

Less than 16 Automatically not UK resident Automatically not UK resident Between 16 and 45 Resident if 4 UK ties (or more) Automatically not UK resident Between 46 and 90 Resident if 3 UK ties (or more) Resident if 4 UK ties Between 91 and 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more) Between 121 and 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)

183 or more Automatically UK resident Automatically UK resident This table will be given in the tax rates and allowances section of the examination paper

1.1.5 Days spent in UK Generally, if a taxpayer is present in the UK at the end of a day (ie midnight), that day counts as a day spent by the taxpayer in the UK

The detailed rules in the statutory residence test are quite complex (and have been simplified here), especially those in regard to work and having a home in the UK or overseas These more complex aspects are not examinable in Paper F6 (UK)

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1.1.6 Examples (a) James spent 40 days in the UK during the tax year 2016/17 He had not previously been resident in the UK James did not work during 2016/17

James is arriving in the UK He satisfies one of the automatic overseas tests since he spent less than 46 days in the UK in 2016/17 and was not resident in the UK for any of the previous three tax years James is therefore not UK resident for the tax year 2016/17

(b) Caroline had not previously been resident in the UK before she arrived on 6 April 2016 She spent

60 days in the UK during the tax year 2016/17 She did not work during 2016/17 Her only home during 2016/17 is in the UK

Caroline is arriving in the UK She does not satisfy any of the automatic overseas tests since she spends 46 days or more in the UK and does not work overseas She satisfies one of the automatic

UK tests since her only home is in the UK Caroline is therefore UK resident for the tax year 2016/17

(c) Miranda had always been resident in the UK before the tax year 2016/17 and has previously spent more than 90 days in the UK in every tax year Miranda does not work during 2016/17 Miranda is married to Walter who is UK resident in 2016/17 They own a house in the UK which is available to them for the whole of 2016/17 On 6 April 2016, Miranda bought an overseas apartment where she spent 285 days during 2016/17 The remaining 80 days were spent in her UK house

Miranda is leaving the UK She does not satisfy any of the automatic overseas tests since she spends 16 days or more in the UK and does not work overseas She does not satisfy any of the automatic UK tests since she spends less than 183 days in the UK, has an overseas home and does not work in the UK The 'sufficient ties' test is therefore relevant Miranda has three UK ties:

(i) Close family resident in the UK (spouse) (ii) Available accommodation in the UK in which she spends at least one night in the tax year (iii) More than 90 days spent in the UK in both of the previous two tax years

Miranda spends between 46 and 90 days in the UK in 2016/17 These three ties are therefore sufficient to make her UK resident in 2016/17

(d) Norman has not been resident in, or visited, the UK in any tax year before 2016/17 On 6 April

2016, he bought a house in the UK and spent 160 days in the UK during the tax year 2016/17

Norman also has an overseas house in which he spent the remainder of the tax year 2016/17

Norman did not work in 2016/17 and his close family are not UK resident in 2016/17

Norman is arriving in the UK He does not satisfy any of the automatic overseas tests since he spends 46 days or more in the UK and does not work overseas He does not satisfy any of the automatic UK tests as he spent less than 183 days in the UK, has an overseas home and does not work in the UK The 'sufficient ties' test is therefore relevant Norman spends between 121 and 182 days in the UK during 2016/17 and so he would need two UK ties to be UK resident for that tax year Since Norman has only one tie with the UK in 2016/17 (available accommodation), he is therefore not UK resident for the tax year 2016/17

1.2 Tax consequences of residence

An individual who is UK resident is taxed on worldwide income

Generally, a UK resident is liable to UK income tax on his UK and overseas income whereas a non-UK resident is liable to UK income tax only on income arising in the UK We deal with the capital gains tax

consequences later in this Study Text

The taxation of the overseas income of a UK resident and the taxation of non-UK residents is outside the scope of the F6(UK) syllabus

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2 Computing taxable income

In a personal income tax computation, we bring together, for each tax year, income from all sources, splitting the sources into non-savings, savings and dividend income

An individual's income from all sources is brought together (aggregated) in a personal tax computation for each tax year

The tax year, or fiscal year, or year of assessment runs from 6 April to 5 April For example, the tax year

2016/17 runs from 6 April 2016 to 5 April 2017

In the computation, three columns are needed to distinguish between non-savings income, savings income and dividend income Here is an example All items are explained later in this Study Text

RICHARD: INCOME TAX COMPUTATION 2016/17

Non-savings Savings Dividend

income income income Total

£ £ £ £

Less tax suffered

Total income is all income subject to income tax Each of the amounts which make up total income is

called a component Net income is total income after deductible interest and trade losses Taxable income is net income less the personal allowance

Income tax is charged on taxable income Non-savings income is dealt with first, then savings income

and then dividend income We look at how to compute the income tax liability later in this chapter

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2.1 The complete proforma for computing taxable income

Here is a complete proforma computation of taxable income It is probably too much for you to absorb at this stage, but refer back to it as you come to the chapters dealing with the types of income shown You will also see how trading losses fit into the proforma later in this Study Text

Non-savings Savings Dividend income income income Total

3.1 Classification of income

All income received must be classified according to the nature of the income This is because different

computational rules apply to different types of income Income can then be further classified as savings, savings or dividend income The main types of income are:

non-(a) Income from employment (employment income, non-savings income)

(b) Pension income (non-savings income)

(c) Profits of trades, professions and vocations (trading income, non-savings income)

(d) Income from property letting (property business income, non-savings income)

(e) Interest income (savings income)

(f) Dividends (dividend income)

3.2 Non-savings income

The rules for computing employment income, trading income and property business income will be

covered in later chapters These types of income are savings income Pension income is also

non-savings income

3.3 Savings income

Savings income is interest Interest is paid on bank and building society accounts, most National Savings

& Investments (NS&I) products, on Government securities (gilts) such as Treasury Stock, and on company loan stock

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Certain types of savings income are paid after deduction of basic rate tax (paid net) but these are not examinable in F6 (UK) All savings income in F6(UK) is paid without deduction of basic rate tax (paid

gross) This includes interest paid on bank and building society accounts

3.4 Dividend income

Dividend income consists of dividends received as a result of ownership of shares Dividends are paid

without deduction of tax (paid gross)

4 Tax exempt income Income from certain investments, such as those held in Individual Savings Accounts (ISAs), is exempt from income tax

4.1 Types of tax exempt investments

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives You can apply the knowledge you obtain from this section of the Study Text to help to demonstrate this competence

Income from certain investments is exempt from income tax They are therefore useful for tax planning

to minimise tax from investments

In the examination you may be given details of exempt income in a Section C question You should state in your answer that the income is exempt to show that you have considered it and have not just overlooked

it, otherwise the relevant marks will not be awarded

4.2 Individual savings accounts

ISAs are tax efficient savings accounts There are two types of ISA

 Cash ISA (which only has a cash component)

 Stocks and shares ISA (which primarily has a stocks and shares component, although cash may be held in a stocks and shares ISA if the provider allows this)

The annual subscription limit for ISAs is £15,240 per tax year (2016/17) This can be invested in cash,

stocks and shares, or any combination of the two An individual can withdraw money from a cash ISA and replace it in the same tax year without the replaced cash counting towards the ISA subscription limit

The ISA limit will be given to you in the Tax Rates and Allowances in the examination paper

Dividend income and interest received from ISAs is exempt from income tax, whether it is paid out to

the investor or retained and reinvested within the ISA Similarly, capital gains made within a ISA are exempt from capital gains tax The introduction of the savings income nil rate band and the dividend nil

rate band (see later in this chapter) means that ISAs are not as advantageous as they were previously

However, additional rate taxpayers and individuals who have already used their savings income nil band will still benefit from using a cash ISA The main benefit of using a stocks and shares ISA is the capital gains tax exemption where an individual already uses the annual exempt amount (see later in this

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4.3 Savings certificates

Savings certificates are issued by National Savings and Investments (NS&I) They may be fixed rate certificates or index linked and are for fixed terms of between two and five years On maturity the profit is tax exempt This profit is often called interest

4.4 Premium bonds

Prizes received from premium bonds are exempt from tax

4.5 Child benefit

Child benefit is a benefit paid to people responsible for caring for at least one child It is usually paid to

the mother of the child

Child benefit is usually exempt from income tax However, an income tax charge applies if a taxpayer

receives child benefit (or their partner receives child benefit) and has adjusted net income over £50,000

in a tax year This charge is covered later in this chapter

5 Deductible interest Deductible interest is given tax relief by being deducted from total income to compute net income

An individual who pays interest on a loan in a tax year is entitled to relief in that tax year if the loan is for one of the following purposes:

(a) Loan to buy plant or machinery for partnership use Interest is allowed for three years from the

end of the tax year in which the loan was taken out If the plant or machinery is used partly for private use, the allowable interest is apportioned

(b) Loan to buy plant or machinery for employment use Interest is allowed for three years from the

end of the tax year in which the loan was taken out If the plant or machinery is used partly for private use, the allowable interest is apportioned

(c) Loan to buy interest in employee-controlled company The company must be an unquoted trading

company resident in the UK with at least 50% of the voting shares held by employees

(d) Loan to invest in a partnership The investment may be a share in the partnership or a

contribution to the partnership of capital or a loan to the partnership The individual must be a partner (other than a limited partner) and relief ceases when he ceases to be a partner

(e) Loan to invest in a co-operative The investment may be shares or a loan The individual must

spend the greater part of his time working for the co-operative

Tax relief is given by deducting the interest from total income to calculate net income for the tax year

in which the interest is paid For F6(UK) purposes it is deducted from non-savings income first, then from savings income and lastly from dividend income

There are some situations where this order of set off will not be the most beneficial but such a scenario

will not be examined in F6(UK)

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In 2016/17, Frederick has taxable trading income of £45,000, savings income of £4,320 and dividend income of £6,000 Frederick pays interest of £1,370 in 2016/17 on a loan to invest in a partnership What

is Frederick's net income for 2016/17?

Answer

is reduced by £1 for every £2 that adjusted net income exceeds £100,000 and can be reduced to nil

Once income from all sources has been aggregated and any deductible interest deducted, the remainder is the taxpayer's net income An allowance, the personal allowance, is deducted from net income Like

deductible interest, for F6(UK) purposes it reduces non-savings income first, then savings income and lastly dividend income

There are some situations where this order of set off will not be the most beneficial but such a scenario

will not be examined in F6(UK)

All individuals (including children) are entitled to a personal allowance of £11,000

However, if the individual's adjusted net income exceeds £100,000, the personal allowance is reduced

by £1 for each £2 by which adjusted net income exceeds £100,000 until the personal allowance is nil (which is when adjusted net income is £122,000 or more)

Adjusted net income is net income less the gross amounts of personal pension contributions and gift aid

donations

We will look at personal pension contributions and gift aid donations later in this Study Text and revisit this topic again then At the moment, we will look at the situation where net income and adjusted net income are the same amounts

In 2016/17, Clare receives employment income of £95,000, bank interest of £8,000 and dividends of

£7,500 Calculate Clare's taxable income for 2016/17

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Answer

Non-savings Savings Dividend

income income income Total

Note Where there is no deductible interest, so that total income is the same as net income, it is

acceptable just to state the net income at this stage of the computation

Where an individual has an adjusted net income between £100,000 and £122,000, the effective rate of tax on the income between these two amounts will usually be 60% This is calculated as 40% (the

higher rate on income) plus 40% of half (ie 20%) of the excess adjusted net income over £100,000 used

to restrict the personal allowance The individual should consider making personal pension contributions and/or gift aid donations to reduce adjusted net income to below £100,000

7 Computing income tax liability and income tax payable

To work out the income tax liability on the taxable income, first compute the tax on non-savings income, then on savings income and, finally, on dividend income To work out tax payable, deduct tax paid under Pay As You Earn (PAYE) If tax deducted under PAYE exceeds the tax liability, the excess will be repayable

One of the competencies you require to fulfil Performance Objective 15 Tax computations and assessments of the PER is to prepare or contribute to the computation or assessment of tax computations for individuals You can apply the knowledge you obtain from this section of the Study Text to help to demonstrate this competence

The income tax liability is the amount of tax charged on the individual's taxable income Income tax payable is the balance of the income tax liability still to be settled in cash

7.1 Introduction

Income tax payable is computed on an individual's taxable income using the proforma in shown earlier

in this chapter The tax rates are applied to taxable income first to non-savings income, then to savings

income and finally to dividend income We will start by looking at taxpayers who only have non-savings

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Key terms

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income, then to taxpayers who have both non-savings and savings income and, finally, to taxpayers who have non-savings income, savings income, and dividend income

7.2 Computations with non-savings income only

Taxpayers with non-savings income only may pay income tax at basic rate, higher rate and additional rate

7.2.1 Basic rate on non-savings income The basic rate of tax on non-savings income is 20% for 2016/17 The basic rate limit for 2016/17 is

£32,000

7.2.2 Higher rate on non-savings income The higher rate of tax on non-savings income is 40% for 2016/17 The higher rate limit for 2016/17 is

£150,000

In 2016/17 Jem has trading income of £41,000 and property business income of £8,500 Calculate Jem's tax liability for 2016/17

Answer

Non-savings income

In 2016/17 Milo has employment income of £145,000 and property business income of £10,800

Calculate Milo's tax liability for 2016/17

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Answer

Non-savings income

£

Net income/taxable income (no PA available as net income exceeds £122,000) 155,800

7.3 Computations with non-savings income and savings income only

7.3.1 Savings income starting rate There is a tax rate of 0% for savings income up to £5,000 (the savings income starting rate limit) This

rate is called the savings income starting rate The savings income starting rate only applies where the savings income falls wholly or partly below the starting rate limit

Remember that income tax is charged first on non-savings income So, in most cases, an individual's

non-savings income will exceed the savings income starting rate limit and the savings income starting rate will not be available on savings income

7.3.2 Savings income basic, higher and additional rates The basic rate of tax for savings income is 20% for 2016/17 The higher rate of tax for savings income is 40% for 2016/17 The additional rate of tax for savings income is 45% for 2016/17

7.3.3 Savings nil rate band There is a tax rate of 0% for savings income within the savings income nil rate band The savings

income nil rate band for 2016/17 is £1,000 if the individual is a basic rate taxpayer and £500 if the

individual is a higher rate taxpayer There is no savings income nil rate band for additional rate taxpayers

The savings income nil rate band counts towards the basic rate limit of £32,000

The detailed rules for establishing whether an individual is a higher rate or additional rate taxpayer for the purpose of computing the availability of the savings income nil rate band are quite complicated and are not examinable in F6(UK) Therefore, in any question involving the savings income nil rate band, it will be

quite clear which tax rate is applicable

In 2016/17 Alicia has trading income of £13,600 and bank interest of £8,000 Calculate Alicia's tax liability for 2016/17

Exam focus

point

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In 2016/17 Joe has employment income of £39,800 and bank interest of £5,200 Calculate Joe's tax liability for 2016/17

In 2016/17 Maddie has trading income of £146,800 and building society interest of £6,700 Calculate Maddie's tax liability for 2016/17

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