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Scenario 1

Describe about the Report on Taxation Fundamentals BAF-5-TAF?

Scenario 1

Taxable Income and Income Tax of Susan Phillips

Particulars

 Amount (£)

Salary

 

              95,060.10

Taxable Benefits

Car's Taxable Value

                     6,725.00

Fuel's Taxable Value

                     5,944.90

              12,669.90

 

Accommodation

Annual Value or rateable value whichever is higher

                     9,600.00

Expensive Flat

                     3,780.00

Ancillary Services:

Furniture: £35,000 * 20/100 * 11/12

                     6,416.70

Computer: £5,000 * 20/100 * 9/12

                        750.00

              20,546.70

Gross Salary

            128,276.70

 

Calculation of Tax:

Particulars

Non-savings

Savings

Dividends

Tax already deducted

 Total (£)

Salary

128,277.00

        128,276.70

BSI

8,017.00

1,604.00

            8,017.00

Dividend

14,252.00

1,425.20

          14,252.00

Total

128,277.00

8,017.00

14,252.00

3,029.20

        150,546.00

                      -  

P.A

0

0

0

0

                      -  

128,277.00

8,225.00

14,252.00

3,029.20

       150,546.00

Tax Computation

Tax at Basic rate         34,991   x 20%     =  £ 6998.00

                                    34,991

Tax at Higher rate       93286     x 40%    =  £37,314.00

BSI                              8,017      x 40%    =  £3,206.8

                                    136294

Tax as per calculation

Dividend                      14252    x 32.5%  =  £4631.9

                                    150546

Tax as per Calculation                      

£52,150.7

Tax paid 

 (3,029.20)

Tax liability                                                                                       =  £49121

Basic rate band is extending to £34,991 by addition of £3,206 to low rate band of £31,785.

So Basic rate band   =   £31,785 + £3,206 =  £34,991

Higher rate band      =   £153,206

Notes:

1.      Details of Car

Car – Porsche Macan S Diesel

List Price - £45,942 inclusive of VAT

CO2 Emission – 159 g/Km

Technical Specs of the Car

Power – 190 KW at 4,000 – 4,250

Acceleration – 6.3 secs from 0 – 100 km /h

Height – 1,624 mm

Wheelbase – 2,807 mm

Length – 4,697 mm

Engine – 3.0 L V6

Standard Specification

Side blades, Dual-tube twin pipes, thermally tinted insulated glasses, electric seat adjustment, Multi functional sports steering wheels, gearshift paddles, Automatic rear hatch, Macan wheel of 18 – inch, Sport button.

Car’s Taxable value – Calculate it on the list price, to the extent provided by the employer. Susan’s employer gives £25,000 for the car. Hence, the given value is taken for calculation.

Formula = List price/Amount given by employer * Applicable percentage

Applicable percentage: For CO2emission up to 100g/km – 15%

Above 100 g/km to Actual CO2 emission/5 = (159 g/km – 100 g/km) / 5 = 59/5 = 11.9%

Total to a maximum of 37%  = 26.9%

Taxable value of car = £25,000 * 26.9/100 = £6,725

2.      Personal Allowance

It is allowed for gross salary below £121,200 on average. As, the gross salary is £128,276.70, no personal allowance allowed.

3.      Taxable value of Fuel = Take £22,100 as the amount of fuel irrespective of how much the employer is giving and how much is used for personal or business purpose.

Value = £22,100 * Applicable percentage

= £22,100 * 26.9/100

= £5,944.9

4.       Salary is as per DOB of 01.06.95 which is then divided by 10. £950601/10 = £95060.1

5.      Accommodation

It is taxable on the basis of higher of the rateable or annual value of the accommodation.

The annual value is not given. Rateable value is £9,600. Hence, the taxable value is £9,600.

6.      The other taxable value on Accommodation is calculated when the total cost price of it is more than £75,000 at the rate of 2%. The expensive value is £3,780.

7.      The additional service in the accommodation is taxable. Furniture is an additional benefit. The asset given by the employer is taxed at 20% flat rate on the asset’s value.

Taxable value of Furniture £35,000 * 20/100 * 11/12 = £6416.70

Taxable value of Computer £5,000 * 20/100 * 9/12 = £750

8.      Other Incomes:

a.       Building Society Interest

Net amount = 5% of Gross Salary.

Interest on building society = 5/100 * £128,277 = £6,413.85

Gross Interest on Building Society = £6,413.85 * 100/80 = £8,017

Grossed up is @ 80%

b.      Dividend

Net amount = 10% of Gross Salary

Dividend = 10/100 * £128,277 = £12,827

Gross of dividend = £12,827 * 100/90 = £14,252

Grossed up is at 90%

c.       Charitable donation

2% of Gross Salary

Charitable Donations: 2/100 * £128,277 = £2,565

Grossed Charitable donation = £2,565 * 100/80 = £3,206

Grossing up is at 80%

9.      Taxation rate for year 2015/2016 is:

£0 - £31,785 – 20%

£31,786 - £150,000 – 40%

Over £150,000 – 45%.

Adjust these rates as per charitable donation made.

10.  Building society interest attracts higher rate as the gross income with its inclusion exceeds the basic rate band.

11.  Divided attracts higher rate band as the gross income with its inclusion after inclusion of BSI exceeds the basic rate band.

12.  The Tax liability is to the nearest zero.

  1. National Insurance contribution

This is a contribution towards state pension deducted by the employer.

Calculation of NIC:

Calculation of NIC:

Band

NIC

£0 - £672

0%

 £0

£673 - £3,532

12%

   343.20

Over £3,532

2%

         87.79

Total monthly NIC

      430.99

Total Annual NIC = Monthly NIC * 12

   5,171.88

Salary on month basis: 95060/12 = 7921.67

     
  1. Car is Porsche Macan S Diesel with List price of £45,942. CO2 emission is 159 g/km

The calculation of taxable car value depends on the list price. However, the employer is just providing £25,000 amount of car. Therefore the additional benefit amount is taken as £25,000.

The formula for taxable value of car is: List price of the car or the amount of benefit provided by the employer * Applicable percentage.

Applicable percentage as calculated above is 26.9%. It is limited to the percentage of 37% if the applicable percentage exceeds it. As per the formula the taxable amount of car is £6,725.

Fuel is provided for unlimited amount. The amount of fuel for taxable value purpose is £22,100. It doesn’t matter how much amount of fuel is provided and how much is used or not used for business purpose. The value calculated for taxable purpose is £5,944.90.

  1. Accommodation

To calculate the taxable value, the rateable value and the annual value of the accommodation should be known. Here, the annual value is not given. Therefore, the rateable value of £9,600 is taken. Where ancillary costs like water expenses, council rates, etc. are also paid by the employer, is added to taxable value of the accommodation.

  1. Expensive value of accommodation

Another additional taxable value of accommodation is taken for tax purpose, where the value of the property is more than £75,000.

Such excess amount will attract 3% rate on it. It is calculated as £3,780.

  1. Furnished Accommodation

Where the accommodation provided by the employer is furnished, then additional benefit’s taxable amount is also calculated.  Computers, clothes, furniture, etc are additional types of benefits. They are taxable at flat rate of 20%.

The value of furniture as additional benefit at 20% rate for 11 months period is £6,416.70. The furniture is availed from 6 May 2015 and tax period is till 6 April 2016.

  1. Computer is also an additional benefit. The taxable value for it will also be computed at 20% rate for 9 months. The computer is used from 6 July 2015. Taxable value is £750.
  1. Salary

Employee has to pay tax on the salary provided by the employer. It includes all additional benefits. Amount of £95,060 is taxable under the head salary. Few additional benefits like parking space at office, one mobile phone, etc is not taxable.

  1. Personal Allowance

The amount of £10,600 can be claimed by the taxpayer. However, where the salary amount exceeds the amount of £100,000, the personal allowance reduces at every 2% increase of salary to every 1$ decrease in the allowance.

Calculation of Tax

Because of the charitable donation made for amount of £3,206, the taxpayer is allowed to increase the basic and the other rate bands by such amount. Therefore, for tax purpose, the basic rate band after including £3,206 is £34,991 and the higher tax rate band after including £3,206 is £153,206.

  1. Building society interest

The tax is charged at such interest at 20%. Therefore grossing up is done at 80%.

It is taxed after salary. It is taxable at basic rate band. However, if the taxpayer is a higher tax payer, then his rate band of 40% is charged on it. The taxable amount is £8,017.

  1. Dividend

The tax is charged at such dividend at 10%. Therefore, grossing up is done at 90%. It is taxed after Building society interest. When the taxpayer is a higher tax payer, then the higher rate of 32.5% is charged on dividend. The taxable amount is £14,252.22

  1. National Insurance Contribution

It is deducted by employer for state pension scheme till the age of state pension age. The employees contributing for NIC comes under class 1. The rates for contribution are as follows:

£0 - £652 – No contribution

£652 - £3,532 – 12%

Over £3,532 – 2%

It is calculated on the salary amount only. No additional benefits are considered for NIC. The contribution in NIC is £5,171.88

Basis of Assessment

Accrual system is followed in United Kingdom to assess the Income in a particular taxation period. Deduction is allowed to be subtracted from the income earned from various properties. It depends on what type of property is dealt with, as there are different rules for different properties.

Allowable expenses

They are related to the property. It should be noted that such expenses can be claimed by a landlord only. It means that the property must be a rental property. The expenses which are allowed as deduction are:

Water rates, electricity expenses, council taxes, gas expenses.

Insurance on property

Fees of accountant

Mortgage interest on property taken for buying such property

Cost of services like wages of those who are taking care of the property such as gardener, etc.

Agent’s fees

Legal fees related to renewal of the lease which is less than 50 years, or for lets of the year.

Repair and the maintenance of the property.

Expenses related to phone calls or telephone bills, stationary

Expenses on advertisement made for renting to new tenants.

Foreign taxes paid on EEA FHL

Notes

Loss

It incurs in case where the allowed expenses exceed the income received from the property. The amount of loss from one property is to be adjusted with income from different property, if any. Loss from EEA FHL property is adjusted with EEA FHL income only. In case, where the loss still sand out even after adjustment, then it is to be carried forward to the next tax year. Where, loss is carried forward from past years, and then it is to be adjusted with current tax

There are different types of properties for which different rules are followed. They are:

  • Furnished property letting
  • Foreign property letting
  • Own property letting
  • Letting of property while living abroad

Capital Expenditure

Such expenses are incurred from the purpose of long term prospective. Example is renovation to the property, up grading it, etc. They are not of revenue nature which incurs at every shot period of time. A record is to be kept for the same. They are not allowed generally as deduction from the income of the property. However a furnished property can claim deduction on capital expenditure. Such expense is related to the use of furnishing in the property which obviously gets tear and wear. Due to this 10% of the net rent is deducted from the net rent under wear and tear allowance. White goods are also covered in it like crockery, etc.

Difference between expenses claimed or allowed in a furnished letting and an un-furnished letting.

  • Un-furnished letting – All expenses of revenue nature can be claimed. No capital expenditure allowed.
  • Furnished Letting – Under this also revenue expenses is claimed and additionally under wear and tear allowance, 10% of the net rent is claimed for furnishing which is capital expense.

Different Rules for Different properties.

  1. Own property letting – It is the letting where the property of the owner (where the owner is living) is let out for tenancy. The rental income derived from such property is taxable after it exceeds the limit of £4,250 which is a tax-free amount. The limit is compared after allowing the claimed expenses from the income of the property.
  1. Furnished lettings – It is the letting where the property of the owner which is not used for living by him is rented out. It is completely furnished. It should be noted that in order to be a furnished house letting, it must be located in EEA (European Economic Area) or in United Kingdom.

To qualify as a furnished letting three conditions are to be qualified.

  1. Condition of availability - The furnished property is to be available for letting for at least 210 days in the taxation year.
  2. Occupation condition – Where there are many properties, the letting should which exceeds 31 days continuously should not exceed 155 days period in the taxation year.
  3. Letting condition – The property is to be occupied or let out to public for at least a period of 105 days minus the living days by the relatives, or friends. In short he 105 days should be commercially let out.

There can be a case where the property is not let out for given no. of days, but there are many furnished let out properties. In such case, average occupancy can be applied by summing up the total occupancy days from all properties divided by number of properties. It should exceed the given number of days.

There can be another case, where the furnished property is let out for 105 days in some years, and in some years it is not. There the period of grace election can be applied. For this it is treated as furnished letting as long as the occupation condition and the condition of availability are met.

The loss of Furnished letting in UK can be set off with the property in the same location and in the same way loss of EEA furnished letting can be set off with the property in the same location.

Income from furnished letting which is taxable is computed by as:

Income from the furnished property XXX

Less: Allowable expenses of revenue nature (YYY)

Net RentZZZ

Less: Capital expenditure allowed at 10% of net rent   (ZZ.Z)

Net taxable Income  DDD

  1. Leased Property – The taxable income of such property is calculated as follows:

Lease premium amount£30,000

Less: Premium * 2% * (Term period – 1)

: £30,000 * 2/100 * (20-1) £11,400

Taxable Amount of leased property £18,600

References

Anon, 2015, Rent a room in your own home, accessed on 10th March 2016, Available at: https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

Anon, 2015, FHL, accessed on 10th March 2016, Available at: https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2015

Anon, n.d, Macan S Diesel Engine, accessed on 10th March 2016, Available at:  https://www.telegraph.co.uk/motoring/car-manufacturers/porsche/10462521/Porsche-Macan-SUV-unveiled.html

Anon, 2015, Income tax when you rent out a property: working out rental income, accessed on 10th March 2016, Available at: https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Anon, 2015, how the lease premium is charged, accessed on 10th March 2016, Available at: https://www.hmrc.gov.uk/manuals/pimmanual/pim1205.html

Anon, n.d, Macan S Diesel, accessed on 10th March 2016, Available at:  https://www.porsche.com/uk/models/macan/macan-s-diesel/

Anon, 2014, Expenses and benefits, accessed on 10th March 2016, Available at:  https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/409158/480_2015.pdf

Anon. n.d, Allowable expenses and Allowances, accessed on 10th March 2016, Available at: https://www.which.co.uk/money/tax/guides/tax-on-property-and-rental-income/allowable-expenses-and-allowances/

Anon, 2015, UK Property notes, accessed on 10th March 2016, Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/420043/SA105-Notes-2015.pdf

Anon, 2013, Tax on employer provided assets and computers, accessed on 10th March 2016, Available at:  https://www.contractorcalculator.co.uk/tax_on_assets_from_employer.aspx

Anon, n.d, Tax on dividends, accessed on 10th March 2016, Available at: https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed

Anon, 2015, how NIC is calculated, accessed on 10th March 2016, Available at: https://www.contractorcalculator.co.uk/hows_national_insurance_contributions_calculated.aspx

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