Personal Tax 1.5

A2c2h2

Hello,

I've got my exam coming up and am slightly confused by the answer given in the FY14 practice assessment for this question.

Answers:

Salary 106,329
Employee pension contrib. 6,379
BIK Car 3,350
BIK Fuel 4,190
BS interest (Grosses up) 1,350
Subs 290
Personal allowance 5,725
Taxable income of 102,825

Why is the taxable income not 106,329 - 5,725 = 100,604?

I've been looking at this for a while and am utterly confused.

shamil91

Hello there,

Right with Salary you are told that from the 1st of January 2014 - 1st January 2015 it will be £105,800 but you need to work out for the tax year of 2014/2015 so the start of the tax year will be 6 April 2014 till 5 April 2015. So firstly we need to work out the number of months till 1st January 2015 before the rise. So we will start off working out how many months till December. So starting off with April the total months till end of December will be 9 months. So in order to work out the salary for 9 months it will be £105,800 x 9/12 = £79,350. The remainder of the final 3 months will need to work out as there is a 2% rise on the salary. So 2% of £105,800 = £2,116 so years salary including bonus increase would be £107,916. So in order to work out the final 3 months it will be £107,916 x 3/12 = £26,979 So we add the totals up in order to give us the salary it will be £79,350 + £26,979 =£106,329 (Salary for 2014 / 2015)

Employee's contribution will be 6% of the salary. So in order to work it out it will be £106,329 x 6% (6/100) = £6,379 (rounded down)

Employers contribution is always exempt (NIL) and the contribution by the employer is always higher or at least equal to the employee's contribution

Benefit in Kind for a car is going to be based on the co2 emission as a percentage x list price (car price when brand new). But for this question we are not told that information so we would just take it as £3,350

Benefit in Kind for petrol is going to be based on the co2 emission as a percentage x fixed cost (usually given on the tax notes). But for this question we are not told that information so we would just take it as £4,190

Interest from Bank and building society gross amount will be : Next amount received x 100 / 80 (as 20% is deducted at source). So it will be £1,080 x 100 / 80 = £1,350 Gross bank interest

Interest from ISA is always exempt (NIL)

Professional subscription will stay the same of £290 (allowable deduction / expense)

Personal allowance will be reduced according to the adjusted net income. The standard personal allowance for someone is under 65 is £10,000. But because her income is over £100,000 it will need to be adjusted. So we need to work out the revised personal allowance.

It will be net income which is Total income you get less the allowable deduction. Total Income is £106,329 (salary) + £3,350 (benefit in kind car) + £4,190 (benefit in kind fuel) + £1,350 (interest from building society = £115,219. Now allowable deduction which is : £6,379 (Employees contribution) + £290 (professional subscription) = £6,669 So net income will be £115,219 - £6,669 = £108,850.

We not need to work out the revised personal allowance. So we use the standard personal allowance of £10,000 (but will be reduced). We take the net income of £108,850 we need to get the adjusted net income. In order to do that we would reduce the net income by the Gift aid donation (gross) which is NIL as there is no gift aid donation made, also we would deduct any personal pension contribution (gross) but none has been made so adjusted net income is : £108,850. You then have your limit of £100,000 so the exceed amount is £8,850. You then have reduction in personal allowance which will be 50% of the exceed which is £4,425. Then you finally have reduction in personal allowance which is £10,000 - £4,425 = £5,575

(I dont get how they got £5,725)

Taxable income will be : Your employment income less your allowance expenses. So if you remember employment income will be : £106,329 (salary) + £3,350 (benefits car) + £4,190 (benefits fuel) = £113,869. You then have your expenses which is : £6,379 (employee contribution) + £290 (Professional subscription) = £6,669. So assessable or taxable employment income will be £113,869 - £6,669 = £107,200

Now you must remember the income tax computation which says you must include the employment income which is £107,200 + £1,350 (interest received) = £108,850 That is your total income. (you must remember in the exam please note that you may also get trading income plus property income and dividends received too (all must be gross figures). You then usually deduct the relieves if there were any in order to get the net income but there isnt any. So we would just take the total income which is £108,850 then deduct it by the personal allowance of £5,575) = £103,275 Taxable income

Please note that is how I got the answer I do know it is not correct according to AAT but if you use the similar method and their figures you will get the same answer as they do. Only difference is the Personal Allowance I cant solve as to how they got that and I got something else not much difference in the personal allowance though

All I would suggest is go over the income tax computation and assessable employment income. Dont worry I know this is quite difficult even I got confused at times (my worst part is working out the months of salary I always go wrong on that very annoying)

Hope this kind of helps you out

Sorry its so long tried to break it down as much as possible

Kind regards

Shamil

A2c2h2

Hi Shamil,

Thanks for the lengthy reply, I've actually managed to figure it out!

There is a minor error in your reply, in that the £115,219 - £6,669 is actually £108,550, not £108,850.

This is the difference between the personal allowance you have and the personal allowance the answer gives: £8,550/2 =£4,275.

£10,000 - £4,275 = £5,725.

The taxable income is taken as:

Salary
(Employee pension contributions)
BIK Car
BIK Fuel
BS Interest
(Prof. Subs)

Copied from above: It will be net income which is Total income you get less the allowable deduction. Total Income is £106,329 (salary) + £3,350 (benefit in kind car) + £4,190 (benefit in kind fuel) + £1,350 (interest from building society = £115,219. Now allowable deduction which is : £6,379 (Employees contribution) + £290 (professional subscription) = £6,669 So net income will be £115,219 - £6,669 = £108,550.

We then simply take the £5,725 from the £108,550, which leaves us with the £102,825!

To be honest, I wouldn't have seen it without such a detailed answer, so hopefully anybody with any doubts about this question will see this in future.

Thanks Shamil!

shamil91

Hi again,

Thank you for the reply, I thought so there was a mistake I was writing so much my brain was dead literally haha. Plus I am due to take my personal tax exam soon I never usually write that much in my practice questions takes ages literally. Perfect you got it, sorry for the mistakes, was helping you out while revising too for several exams, just so busy at the moment got alot going on.

I wish you all the best with your exam if you need any more help feel free to just post on here and will help you out.

Kind regards

Shamil

A2c2h2

Hi Shamil,

To be honest 1.10 is stumping me, I'm unsure about how to calculate the balance carried forward?

According to the matching rules, you have to apportion the appropriate cost to the number of shares sold, however the £25,600 cost hasn't been halved in line with the buying of shares within the 30 day time period, any idea?

shamil91

Hello again,

Thank you for the question appreciate it unfortunately I don't have access to a computer in order to see the question would it be possible if I told you the answer and working out tomorrow? Also in simple terms to remember the matching rules is: same day disposal proceed and purchase of shares, you then have disposal of shares within the next 30 days (shares disposed of and purchased in the next 30 days) finally it is shares in a share pool which must he from the same company and class.

I can definitely help you tomorrow hope that is ok

Kind regards

Shamil

A2c2h2

Hi Shamil, tomorrow is absolutely fine!

Thanks

shamil91

Thank you very much

shamil91

Hi there,

I have given it a go, truthfully even I struggled had to look at answer and work back. I always got confused with matching rules within 30 days. So sorry if it seems a bit confusing even I found it confusing and will be doing this before my exam. Please see link to see my working out. My layout is a bit different to theirs but similar way, I did have to change it to match them. See link : https://www.dropbox.com/s/wh1rbnvs0gtdiff/Shares Question and Answer.doc?dl=0

Sorry again

Kind regards

Shamil

hasan

Hi guys, When do you have your Personal Tax exam? I will be sitting the exam next Wednesday and if you guys are going to do it prior to my exam date. It would be grateful if you could provide info based on how your exam went?

shamil91

Hi Hasan,

I have my exam in a week, good luck with your exam on wednesday. I am sure you will do well and pass

Kind regards

Shamil

hasan

Thanks Shamil and Likewise

shamil91

Thanks Hasan,

Appreciate it

Kind regards

Shamil