Income Tax

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The income tax year runs from the 6th April to the 5th April the following year.

The current income tax year runs from the 6th April 2020 and will end on the 5th April 2021. It is therefore known as the 2020/21 tax year.

Before the amount of income tax that an individual needs to pay the tax-man can be calculated, an amount known as TAXABLE INCOME needs to be calculated. This is the amount of an individual’s income that will be subjected to tax. A standard (known as a proforma) income tax computation is set out below and shows how TAXABLE INCOME is calculated. Note how the different types of income are divided into Non Savings Income, Savings and Dividends. The reason for this will become clearer as the INCOME TAX LIABILITY is calculated since, Non Savings Income, Savings and Dividends are taxed in different ways.

PROFORMA INCOME TAX COMPUTATION
NON SAVINGS INCOMESAVINGSDIVIDENDSTOTAL
££££
Trading Profitxx
Less 
Trading Loss Relief Brought Forward(x)(x)
xx
Employment Incomexx
Other Earned Income – Pensionsxx
Other Earned Income – Furnished Holiday Acc.xx
Property Incomexx
Bank & Building Society Interestxx
Other Interestxx
Dividends from UK companiesxx
Other Dividends
(Foreign Dividends Gross of Overseas Tax)
xx
TOTAL INCOME xxxx
Less
Qualifying Interest Paid (Gross)(x)(x)
Other Trading Loss Reliefs(x)(x)
NET INCOMExxxx
Less
Personal Allowance(x)(x)
TAXABLE INCOME XXXX

When calculating TAXABLE INCOME all income is included GROSS.

EXEMPT INCOME is excluded from the computation.


Once the amount of TAXABLE INCOME has been established, the INCOME TAX LIABILITY can be calculated by applying the relevant tax rate to each source of income in order. Firstly, Non Savings Income is taxed, then Savings Income and finally Dividends.

INCOME TAX RATES 2020/21 FOR ENGLAND, WALES & NORTHERN IRELAND:

INCOMEBANDNON SAVINGS INCOMESAVINGSDIVIDENDS
£1 – £37,500Basic Rate20%20%7.5%
£37,501 – £150,000Higher Rate40%40%32.5%
£150,001 +Additional Rate45%45%38.1%

The Basic Rate and Higher Rate Bands are extended by any GROSS PERSONAL PENSION CONTRIBUTIONS and any GROSS GIFT AID DONATIONS that are PAID during the tax year.


Paying Tax

Some tax due on income is deducted at source. For example, if you are employed then your employer deducts tax due on your Employment Income and pays it to HMRC directly though the PAYE (Pay As You Earn) scheme.

Any other tax that is owed to HMRC which is not deducted at source is payable through the self-assessment system.

Under self-assessment, the payment of tax is governed by the PAYMENT ON ACCOUNT (POA) rules.


Trading Losses

The main reliefs available for TRADING LOSSES for INDIVIDUALS are as follows:

  • LOSSES can be CARRIED FORWARD and set against FUTURE TRADING PROFITS OF THE SAME TRADE.
  • CURRENT AND / OR PRECEDING TAX YEAR TRADING LOSS RELIEF AGAINST TOTAL INCOME. Note: there is no need to UNLOCK the CARRY BACK by claiming in the current year as per CORPORATION TAX.
  • Following a CURRENT or CARRY BACK LOSS RELIEF CLAIM an individual can UNLOCK the ability to extend the loss claim against CHARGEABLE GAINS of that tax year. This loss relief of CAPITAL GAINS is deducted BEFORE AEA and CAPITAL LOSSES BROUGHT FORWARD.
  • OPENING YEAR TRADING LOSS RELIEF: Against TOTAL INCOME of the preceding 3 tax years, for the first four years of starting a trade. The loss relief operates on a FIFO basis.
  • TERMINAL LOSS RELIEF (CESSATION OF TRADE) against previous 3 years of TRADING PROFITS (NOT TOTAL INCOME). The Terminal Loss is set against the TRADING PROFIT (NOT TOTAL INCOME) for the TAX YEAR of CESSATION (if any profits) and then against the TRADING PROFITS of the PREVIOUS 3 TAX YEARS on a LIFO BASIS.

Badges of Trade

For individuals entering into transactions, it is not always clear whether the individual is:

  • carrying on a trade, and therefore assessed to INCOME TAX and NATIONAL INSURANCE CONTRIBUTIONS, or
  • making a CAPITAL DISPOSAL which may be subject to CAPITAL GAINS TAX.

HMRC uses the BADGES OF TRADE to determine which type of transaction has occurred and therefore how it should be treated for taxation purposes.


Overseas Income

UK INCOME is always TAXABLE on an ARISING BASIS, whatever the tax status of the individual. PERSONAL ALLOWANCES are available if UK RESIDENT or if EEA, Isle of Man or Channel Island citizen.

The basis of assessment for OVERSEAS INCOME depends on the RESIDENCE and DOMICILE status of the individual.