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Introduction

Taxation, the encroachment of mandatory charges by government agencies on entities or organizations (Freedman, 2015). In nearly every nation in the world, tax is levied predominantly to increase government reserves and support government spending, even though tax revenue is utilized many other purposes as well. The report consists of two parts, in part 1 the taxable income of Fiona is calculated as per taxation rules and legislation. Whereas, part 2 is about tax reducers in which certain type of investments and payments are recognised in taxation to reduce taxable income.

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PART 1

Fiona is domiciled and an individual in the UK form 6th April 2018 and getting enhanced salary with accommodation facility by her employer form 6th May 2017. All the utility bills subject to property would be payable to Fiona. She is also getting a car facility. There is a music system also being used by her for private use the cost of music system is £5000. A personal allowance of £11,850 also provided to Fiona and she contributes 5% of her monthly gross salary into Rambo’s HMRC occupational pension scheme. She made some contributions in charitable trusts to RSPCA. The aggregate value of these donations is mainly 3% of her gross salary. There are following aspects needs to consider before computation of taxable income of Fiona;

Computation of taxable income of Fiona 2018/2019

         

£

£

 

Salary

 

 

 

78060.3

 

 

Occupation Pension Scheme

 

5%of Salary

 

3903.015

74157.285

 

Bonus

 

12-05-18

 

 

15000

 

Benefits in Kind

 

 

 

 

 

1

Accommodation benefit

 

 

 

 

 

 

Annual Value

 

11600

 

11600

 

 

Additional Charge

 

(275000-75000)*2.5%

 

5000

16600

2

Furniture Benefit

 

45000

*20%

 

9000

3

Car Benefit

Price

£24760

*27%

 

6685.2

 

 

 

95g

20.00%

 

 

 

 

 

(133-95)/5

7.00%

 

 

 

 

 

 

 

 

 

4

Car Fuel Benefit

 

23400

*27%

 

6318

5

Loaned Benefit (Music System)

 

£5000

*20%

1000

 

 

Additional Charge

 

3000-2000 = 1000

 

 

 

 

 

 

(5000-2000)/12*9-1000 = 1250

 

1250

2250

 

Total Employment Income

 

 

 

 

130010.485

Computation of tax payable by Fiona 2018/2019

 

Total

NSI

SI

DIV

Employment Income

130010.49

130010.49

 

 

Bank Interest Received

3122.41

 

3122.41

 

Dividend Income

7806.03

 

 

7806.03

 

 

 

 

 

Total Income

140938.93

130010.49

3122.41

7806.03

Net Income

140938.93

130010.49

3122.41

7806.03

PA

0

£        -

 

 

Taxable Income

140938.93

130010.49

3122.41

7806.03

 

 

 

 

Income Tax

BRB NSI

 

37428.28

20.00%

7485.66

HRB NSI

(130010.49-37427.28) =

92583.21

40.00%

37033.28

PSA

 

500

0.00%

0.00

HRB SI

(3122.41-500) =

2622.41

40.00%

1048.96

Div Allowance

 

2000

0.00%

0.00

HRB Div

(7806.03-2000) =

5806.03

32.50%

1886.96

 

Total Income

140939.93

 

 

Income Tax Liability

 

 

47454.86

MCA

 

 

-869.50

Tax Liability

 

 

46585.36

NIC Primary Class 1

 

 

Annual Salary

Monthly

 

 

 

78060.3

£6505.03

 

702*0%

0

 

 

 

(3863-702)*12%

379.32

 

 

 

(6505.03-3863)*2%

52.8406

 

 

NIC Payable

 

432.1606

 

 

Salary

100.00%

78060.3

Interest

4.00%

3122.412

Pension

5.00%

3903.015

Donation

3.00%

2341.809

 

 

2927.28

 

 

 

Dividend

10.00%

7806.03

 

 

 

BRB

34500+2927.28 =

37427.28

HRB

150000+2927.28 =

152927.28

ANI

140938.93 – 2927.28 =

138011.65

PA (Personal Allowance)

 

0

PSA (Personal Saving Allowance)

 

500

MCA

8695*10%

869.5

Following considerations were made while calculating the taxable income and tax payable of Fiona:

Accommodation facility

In which an employee receives housing facility from his or her employer (from another individual in which the clause is based on employment), the worker shall be liable to tax the importance of both the housing facility provided (Onu and Oats, 2016). This also applies when accommodation is given for members of his or her family or household due to the employment of a person.

Salary computation

The date of birth to use for salary is 03/06/1978, hence salary will be 780603 / 10 = £78,060.

Car facility provided by employer

In respect of car facility, the provision states that the if the CO2 emission level of car is more than 75g per kilometres than it will be recognised as taxable car facility and valid tax will be charged for employee (HMRC expenses and benefits, 2019). The calculation will be based upon total price of car facility. Price of the car is £25,000. Approved figure of CO2 emissions is 173g/km Round down 173 to 170 Look up appropriate percentage is 29%. No adjustments are required 12.29 so this is the appropriate percentage and it is calculated as follows: £25,000 x 29% = £7,250.

Deductions regarding HMRC contributions

Comprehensive exemptions are contained in Part 7A ITEPA 2003 rules. These discourage the law from capturing those agreements, even if an appropriate third person is engaged. The exemptions are usually aimed at agreements that are not schemes for tax avoidance. Exemptions are subordinate to terms and cover things like staff share or cash incentive schemes, employee vehicle ownership schemes, those pension schemes, and employee benefit box transactions.

Personal allowance

There will no exemption provide to Fiona on receiving personal allowance of £11850, however the contribution made in HMRC registered occupational pension scheme will be allowed as 100% deduction form taxable income (Steinsland, Østli and Fridstrøm, 2016).

PART 2

Tax Reducers

There is type of tax reliefs provided to tax payers if he/she have contributed in specific Tax deductions is designed to reduce a person's or commercial individual's taxable income (Basu, 2016). Tax breaks is sometimes aimed at offering assistance for a given event or purpose. Few of Tax reducers are defined as follows:

Married Couple’s allowance (MCA)

The marital benefit (MA) requires the allocation of £1,060 of tax free allowance among partners / registered spouses to only certain couples / civil spouses. The £8,355 married couples allowance (MCA) is valid whereas before Apr 6, 1935, one partner / civil spouse was born. Tax Relief is provided at 10% as a tax reducer. The estimated MCA is £3,220, offering a standard tax reducer of £322 at 10 percent. Pay attention to "surplus limits" where expanded financial allowances are decreased to £10,600.

Enterprise investment scheme – investments (EIS)

This is one of the type of tax reducer in which an investor gains tax disruptions by subscribing to securities in an EIS business–therefore, a corporation which meets the Enterprise Investment Scheme's requirements (Iacobucci, 2019). According to ITA 2007, s.157 Ultimately, a taxpayer provides the corporation with a nominal sum as well as the business returns the tax payers stock. Remember that perhaps the shareholder has to contribute to a stock. It means the company is selling the investor new stock. HMRC provides tax breaks on monthly fee to promote members of the community to spend in these ESI-type companies. The relief is provided through a tax stabilizer.

Seed enterprise investment scheme (SEIS) investments

It allows an investor to get tax benefit subject to contributing in SEIS companies’ shares. This tax reducer is accessible for contributing in start-up entities or seed companies and small enterprises. As per ITA 2007, s.257AB, SEIS compensation is measured for the lesser amount or £100,000 for both the collected sum. Compensation is offered at a rate of 50% so that the maximum tax relief in 2015/16 is £50,000 for a SEIS membership. However, the relaxation for that year could not surpass the taxable income of the person.   

Venture capital trusts investment

ITA 2007, s.261, covers the rules related to tax relief subject to investment in venture capital trust. This tax reducer is similar like investment made in social entity, EIS and SEIS schemes. The taxpayer who fulfil the criteria of Venture Capital Trust would be entitled to avail the tax relief under VCT. As per ITA 2007, s.263, The tax relief is 30%, or £200,000, of both the lesser amount signed up for VCT securities. Consequently, the maximum tax relaxation acquired in 2015/16 on even a VCT subscription was £60,000, i.e. £200,000 at 30%. Again, this tax reducer can reduce tax liability to null, but it cannot produce a repayment on its own.

Maintenance payments

Maintenance expenses are contributions to the current or separate partner / civil spouse provided by an individual for the maintenance of such a current partner / civil spouse or for the care of a family child (Devereux, Maffini and Xing, 2018). In order to gain any tax breaks for maintenance disbursements, these pay-outs should be rendered in accordance with a court order or a Child Support Agency(CSA) evaluation. ITA 2007, s.453 Maintenance deductions are often grossly paid-i.e. levy is not denied by the payroll tax at point of origin. The payer of a care or maintenance fee may receive federal relief unless the payer or the receiver was born before 6 April, 1935 which means this relief is for old aged taxpayers only.

The maintenance working person will receive tax exemption on the lesser amount of both the maintenance expenses due to be charged for £3,220 (i.e. married couple benefit minimal level is the same amount defined above). A tax reducer of 10% will provide relief to the taxpayer. This is going to be 10% of the lower amount charged or £3,220. It means that the tax cutter's maximum amount for the 2015/16 investment relief is £322.

Loans used to purchase a life annuity

Tax payer is eligible for get relief in respect of interest paid on loan used to purchase a life annuity. By March 9, 1999, the loan was taken out.  Minimum 90% of the loan must be utilised to acquire a life annuity that resulted in the destruction of the lender or the debtor's beneficiary or one or more other annuity (Freedman, 2016). Interest shall be paid by the lender or by some of the annuity holders. The lender or any other annuitant had exceeded 65 years of age the loan was created. The loan was secured on land belonging by the lender or for one of the annuity holder. throughout the United Kingdom or even the Republic of Ireland and used as the sole or principal property of annuitants immediately preceding 9 March 1999. The taxable relief is entitled up to £30,000 of the loan.

Conclusion

The above report extract the concept of taxation fundamentals subject to assess the taxability of taxpayer. First part conclude the exemptions and benefits provided to employee form the employer and second part clearly extract the information related to tax reducers. The concept of tax reducers in terms of reducing taxable income defined in effective manner.

References

  • Freedman, J., 2015. Managing tax complexity: the institutional framework for tax policy-making and oversight.
  • Onu, D. and Oats, L., 2016. “Paying tax is part of life”: Social norms and social influence in tax communications. Journal of Economic Behavior & Organization. 124. pp.29-42.
  • Steinsland, C., Østli, V. and Fridstrøm, L., 2016. Equity effects of automobile taxation. TØI Report. 1463.
  • Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
  • Iacobucci, G., 2019. Workforce crisis:“punitive” cuts to pension tax relief must be reversed, say consultants. BMJ: British Medical Journal (Online). 364.
  • Freedman, J., 2016. General Anti-Avoidance Rules (GAARs)–A Key Element of Tax Systems in the Post-BEPS Tax World? The UK GAAR.
  • Devereux, M. P., Maffini, G. and Xing, J., 2018. Corporate tax incentives and capital structure: New evidence from UK firm-level tax returns. Journal of Banking & Finance. 88. pp.250-266.

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