2011
Revenue Law Tax Revision
Law & Statues ......................................................................................................................................... 3
Calculating Income Tax ........................................................................................................................... 4
Savings and Dividend income ............................................................................................................. 4
Savings Interest received ................................................................................................................ 4
Dividend Interest received .............................................................................................................. 5
Grossing up ......................................................................................................................................... 5
Savings ........................................................................................................................................ 5
Dividends..................................................................................................................................... 5
Allowances .......................................................................................................................................... 5
Personal ...................................................................................................................................... 5
Blind Persons............................................................................................................................... 5
Allowable Relief’s ................................................................................................................................ 5
Calculating the total tax return ........................................................................................................... 6
Steps ............................................................................................................................................ 6
Step1 ........................................................................................................................................... 6
Example tax return.............................................................................................................................. 6
Capital Gains Tax ..................................................................................................................................... 7
The charge to tax ............................................................................................................................ 7
Chargeable assets ........................................................................................................................... 7
Non-chargeable assets .................................................................................................................... 8
Who pays CGT? ............................................................................................................................... 8
Steps for calculation of CGT ................................................................................................................ 8
Disposals ................................................................................................................................................. 9
The gift of a chargeable asset ............................................................................................................. 9
The death of the taxpayer....................................................................................................................... 9
Relief’s ..................................................................................................................................................... 9
Exempt ................................................................................................................................................ 9
Hold-over relief ................................................................................................................................... 9
Roll-over Relief .................................................................................................................................. 10
Roll-over relief on incorporation of a business ................................................................................. 10
Relief for re-investment in' certain unquoted shares ....................................................................... 10
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Law & Statues
Income Tax law
Income Tax (Trading and Other Income) Act (ITTOIA 2005) Part 2 Chapter 2
Capital Gain tax
Taxation of Chargeable Gain ACT 1992
Capital Allowances Act 2001
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Calculating Income Tax
At this moment the bands for taxation are listed in the table below. These bands will
determine if people are taxed at the basic, higher or additional rates.
Non-savings – This is income can be derived from Income tax is charged on the profits of a
trade, profession or vocation1
Income
£0 - £37,400
£37,401 - £150,000
£150,001 -
Percentage Tax
20%
40%
50%
Band
Basic Rate
Higher Rate
Additional Rate
Savings and Dividend income
The next this we will look at is savings and dividends. This is income and is taxed in a very similar way
to the salary above. There is an order this is done in:
Income (except savings and dividends) → Interest on savings → Dividends
Dividends
Interest on savings
Income (except savings
and dividends)
Savings Interest received
The table below is similar to the tax table with an additional row.
Income
Percentage Tax
Band
£0 - £2,440
10%
Starting Rate
£2,440- £37,400
20%
Basic Rate
£37,401 - £150,000
40%
Higher Rate
£150,001 50%
Additional Rate
If the person earns less than £2,440 in income from anywhere then they are taxed at 10%. Once the
threshold is breached the person will be taxed at the basic rate.
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Income Tax (Trading and Other Income) Act (ITTOIA 2005) Part 2 Chapter 2
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Dividend Interest received
The table below is similar to the tax table with an additional row.
Income
Percentage Tax
Band
£0 - £37,400
10%
Basic Rate
£37,401 - £150,000
32.5%
Higher Rate
£150,001 42.5%
Additional Rate
Grossing up
Savings – Savings are taxed at source at a rate of 20%. Therefore the interest normally quoted is
the Net figure (after deductions). To enable tax to be calculated accurately we require the Gross
amount. This is calculated as follows:
Interest x 100 ÷ 80
or
Interest ÷ 4 then x 5
Dividends – Dividends received from companies carry a tax credt of 10%. The Grossing up formula
for this is:
Interest x 100 ÷ 90
or
Interest ÷ 9 then x 10
Allowances
Personal – The current personal tax allowance per person is £6,475. However this is for people
earning less than £100,000.
After £100,000 is reached the tax allowance reduces at the rate of £1 for ever £2 above £100,000.
£6,475 – (net income - £100,000) = Adjusted level.
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Once a person reaches or surpasses £112,950 they will effectively not get an allowance.
Blind Persons – A blind person receives an allowance of £1,890
Allowable Relief’s
Interest payments on qualifying loans are an example of an allowed relief.A person take a loan out
to by a partnership. There income £30,000 the loan is £20,000. The interest on the loan is 6% per
annum (year).
6% of 20,000 = £1,200. This is the cost of the loan or interest.
Income - £30,000
Reliefs - £1,200
Net Income £28,800
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Calculating the total tax return
Steps
Step1 Calculate the total Income
Income from profits
Calculate the Gross Interest on savings
Calculate the Gross Dividends
Calculate the Total
Step 2 Deduct allowable reliefs
Interest on allowable loans
Subtract this from the total in step 1 to get the Net income.
Step 3 Deduct personal allowances
Personal allowance
Blind person’s allowance
Step 4 Calculate the tax at the applicable rates
Step 5 Add the amounts in step 4 to calculate the tax owed
Example tax return
Percy runs a fruit an vegetable store. He recently took out a loan to buy the business for £30,000.
The interest on this loan is 5%. Percy received interest of £3,000 from savings and a dividend of
£12,000. The income is £44,000. Calculate Percy’s tax bill for 2010/11.
Step 1 total Income
Profit
Interest on savings Net = 3000 Gross =3000 ÷4 x 5
Dividends Net = 12000 Gross = 12000 ÷9 x 10
Total Income
£44,000
£3,750
£13,333
£61,083
Step 2 Reliefs
Loan from the bank = 30,000 x .05 =
Net Income
61,083 – 1,500
£1,500
£59,583
Step 3 Allowances
Personal allowance
Taxable income 59,583 – 6,475
£6,475
£53,108
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Tax Credit = £750
Tax Credit = £1,333
Total Credit= £2.083
Step 4 tax applicable
Taxable income =
£53,108
Less the Gross savings\dividends
£17,083
Income
£36,025
As this falls below the basic level of tax (£37,400) it can be taxed at 20%
36,025 x 0.2 = £7,205
Savings
Total savings = £3,750
The amount left over in the basic tax band = 37,400-36,025 = £1,375. This amount can be taxed at
20% the basic rate.
Taxed at the basic rate
1,375 x 0.2 = £275
Taxed at the higher rate = 3,750-1,375 = 2,375
2,375 x 0.4 = £950
Dividends
We are currently on the higher tax band. We have a dividend of £13,333. This is well short of the
next tax band of £150,000. Therefore it will be calculated at the higher rate of 32.5%
13,333 x 0.325 = £4,333
Step 5 add it all together
Overall Income tax liability
Less the credits (calculated In step 1)
Income tax to pay
£12,763
-£2083
£10,680
What is an Income and what is Capital?


A Capital expense is normally a one off payment for an asset for example a computer or
furniture
Income is and expense or receipt which is reoccurring in nature such as rent, buying
stationary
Capital Gains Tax
The charge to tax
Capital gains tax (CGT) is charged on the chargeable gains made by a chargeable person on the
disposal of chargeable assets in a tax year (6 April to following 5 April).
Chargeable assets
All property is treated as an asset for CGT purposes, including:
 debts
 options
 incorporeal property and property created by the person disposing of it
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Stirling is excluded from the definition so disposals of cash do not attract CGT liability.
Non-chargeable assets
The main example is private motor vehicles. The legislation also provides that certain assets which
are not non-chargeable shall be wholly or partly exempt from CGT
Who pays CGT?
Chargeable persons Act:
 Individual
 partners (each partner is charged separately for his share of the partnership gains when
there is a disposal of a chargeable partnership asset);
 personal representatives (who pay CGT when there is a disposal of the deceased's
chargeable asset')
 trustees (who pay CGT when there is a disposal of a chargeable asset from the trust fund)
The tax is treated as the top layer of tax as follows:
Income (except savings and dividends) → Interest on savings → Dividends→ Capital Gain tax
Capital Gains Tax
Dividends
Interest on savings
Income (except savings
and dividends)
Steps for calculation of CGT
Step 1 – You must dispose of a chargeable asset
Step 2 – Calculation of the gain This is the consideration less the costs
Step 3 – Apply any reliefs
Step 4 – Calculate the aggregate gains and losses and deduct the exemption This is currently
£10,100 of net gains in the tax year.
Step 5 – Tax at the appropriate amount This will depend on the persons income and is treated as
the top slice of income
Income
£0 - £37,400
£37,401 - £150,000
Percentage Tax
18%
28%
Entrepreneurs
Percentage Tax
10%
Band
Basic Rate
Higher Rate
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Tax is payable on or before 31 January following the end of the tax year (or 30 day's) from the
making of an assessment if later.
When calculating gains you must consider the following:
Initial expenditure
a) How much was the asset brought for or if a gift what was the market value when acquired.
Taken from this are costs related to its purchase, legal fees, stamp duty, valuation, surveys.
b) Costs associated with making or building the asset.
Subsequent expenditure
a) Any costs to improve assets for example restoration or building an extension. Routine
maintenance, repairs and insurance is not deductible.
b) Expenditure wholly and exclusively incurred in establishing, preserving or defending title to
the asset. An example is the cost of legal fees incurred to resolve J. boundary dispute.
Incidental costs of disposal
Examples are legal fees and estate agent's fees.
Note that expenditure which is deductible for income tax purposes cannot be deducted when
calculating a capital gain.
Disposals
The gift of a chargeable asset
Tax is chargeable on some gift for example making a gift to a spouse, civil partner or charity usually
won't lead to Capital Gains Tax (disposal of the gift by a spouse may attract CGT).
You must keep a not of what the asset cost when you gift this to a spouse. If the spouse disposes of
the asset the gain will need to be calculated.
The death of the taxpayer
On death there is no disposal by the deceased, so there is no charge to CGT. The personal
representatives acquire the deceased's assets at the market value at the date of death.
Relief’s
Some reliefs maybe available for example relief’s to encourage investment in a business.
Exempt
Private dwelling house
Damages for personal injury
Hold-over relief
This enables some one to make a gift to a business without paying capital gains tax. If the business
receiving the gift disposes of it then the person disposing of it will pay the full tax owing including
the donors tax. Either the donor or the donee must elect to claim hold-over relief.
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Roll-over Relief
This is where the CGT is postponed when an item is disposed of provided the money is reinvested in
the business. The CGT must be paid when the new asset is disposed of.
Roll-over relief on incorporation of a business
The CGT is deferred when someone sells their interest in an unincorporated business e.g.
partnership or sole trader. Instead of money the person receives shares but does not pay CGT until
these share are sold.
Relief for re-investment in' certain unquoted shares
CGT is postponed provided the proceeds are reinvested in certain shares of an .
To encourage investment in small company shares, it is possible for an individual to defer payment
of (CGT on an)'chargeable gain provided the proceeds of sale are re-invested in certain shares in an
un quoted trading company. This is dealt with in S.4.
Trading profits of a Business, Sole Traders and Partnerships
Calculating trading profit
Trading profit = Sales or turn over – (deductible income expenditure + capital allowances)
The sales turn over is also termed Chargeable Receipts. The income must be income and not a
capital receipt.
Capital Allowances
A capital allowance allows the depreciation of a capital asset to be off set against income profit (for
sole traders, partners and companies). That is when you spend money on an asset you cannot claim
the whole amount back in the first year.
Assets examples include:
Farm machinery, computers, industrial buildings, manufacturing equipment and tools
If there is more than one asset they are said to be pooled and an allowance is granted on the pool.
Write down allowance
Annual allowance can be set against tax. The basic annual rate is 20%.
Write down value = value at the beginning of the tax year or purchase – write down allowance
Annual Investment Allowance AIA = £100,000 is deductible
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