UK Income Tax and Trust Principles

Comprehensive vocabulary flashcards covering UK Income Tax rules, allowances, benefits in kind, pension reliefs, and trust taxation.

Income Tax Ordering Rule

The statutory sequence for applying income tax: non-savings income (salary, pension, and rent) is taxed first, followed by savings interest, and then dividends. Taxable income is calculated after deductions and the Personal Allowance, and tax reducers are deducted after calculating the total tax bill.

Personal Allowance and Taper

The standard tax-free allowance of $£12,570$. For individuals with an adjusted net income above $£100,000$, the allowance is reduced by $£1$ for every $£2$ over that threshold (half the excess), being fully lost once income reaches $£125,140$.

English Income Tax Rates and Bands

Tax rates applied to taxable non-savings income in England: $20\%$ on taxable income up to $£37,700$, $40\%$ on the slice between $£37,700$ and $£125,140$, and $45\%$ on income above $£125,140$. When combining the full Personal Allowance with the basic-rate band, the higher-rate threshold equates to a gross salary of $£50,270$.

Starting Rate for Savings

A special $0\%$ tax band of up to $£5,000$ for savings interest. The available band is calculated as $£5,000$ minus taxable non-savings income (such as salary or pension after the Personal Allowance), with a minimum of zero.

Personal Savings Allowance (PSA)

A nil-rate band for savings interest separate from the starting rate, providing $£1,000$ for basic-rate taxpayers, $£500$ for higher-rate taxpayers, and $£0$ for additional-rate taxpayers. Total taxable income (including dividends) determines which allowance applies.

Dividend Allowance and Tax Rates

An allowance taxing the first $£500$ of dividend income at $0\%$ across all tax bands, including additional-rate taxpayers. Dividends above this allowance are taxed at $10.75\%$ (basic rate), $35.75\%$ (higher rate), or $39.35\%$ (additional rate), with dividends positioned in bands before applying the allowance.

Band Utilization of 0% Allowances vs. ISA Income

Savings and dividend allowances taxed at $0\%$ do not extend the income tax bands and still consume band capacity. By contrast, Individual Savings Account (ISA) income is completely exempt and is excluded entirely from the tax computation.

Grossing Up Formula (20% Deduction)

The calculation used to convert a net figure back to its gross equivalent after a $20\%$ deduction: $\text{Net} \div 0.8$, where $£80$ net equals $£100$ gross. Bank interest and UK dividends are typically paid gross, whereas certain annuities have tax deducted at source.

Pension Tax Relief Mechanisms

The three systems for pension contributions: Relief at source (the pension provider reclaims and adds basic-rate tax relief), Net pay (employee contributions are deducted directly from salary prior to Income Tax calculation), and Salary sacrifice (the employee formally gives up salary and the employer pays an equivalent contribution).

Personal Pension Tax Relief Limits

Limits on tax-relieved pension contributions: tax relief for an eligible person under $75$ is restricted to the greater of $£3,600$ gross or $100\%$ of relevant UK earnings. The standard annual allowance is $£60,000$ (including employer contributions); unused annual allowance can be carried forward, but carry forward cannot be used to exceed the relevant UK earnings limit.

Band Extension via Gift Aid and Relief-at-Source

Gross Gift Aid payments and gross relief-at-source pension contributions reduce an individual's adjusted net income and expand both the basic-rate and higher-rate tax band limits by their gross amount.

Gift Aid Tax Relief Rules

A charitable giving system where the charity reclaims $25\text{p}$ per $£1$ donated ($20\%$ basic-rate tax). Higher-rate donors can claim additional relief, but if a donor has not paid sufficient Income Tax and Capital Gains Tax (CGT) to cover the charity's reclaim, the donor must pay the difference to HMRC.

Company Car Purchase Contribution Cap

A capital contribution made by an employee towards the purchase of a company car, capped at a maximum deduction of $£5,000$ off the list price before applying the car benefit percentage (for example, at $37\%$, a $£5,000$ deduction reduces the taxable benefit by $£1,850$).

Company Car and Private Fuel Benefit Calculations

The formula for car benefit is adjusted list price multiplied by the car benefit percentage. Private fuel benefit is calculated as a fixed figure of $£29,200$ multiplied by the identical percentage, where partial employee repayments do not reduce the taxable fuel benefit.

Cheap Employer Loan Exemption and Calculation

Employment loans are exempt from benefit-in-kind taxation if total outstanding balances do not exceed $£10,000$ throughout the year. If exceeded, the benefit is calculated using the official interest rate (specified as $3.75\%$) minus interest actually paid (for instance, a $£20,000$ loan at $2.75\%$ generates a $£200$ taxable benefit).

Taxable vs. Exempt Employer Benefits

Categorization of benefits in kind: private medical insurance and typically rent-free accommodation are taxable, while group income protection premiums, employer-paid work indemnity insurance, qualifying training, and one qualifying mobile phone are generally exempt.

Qualifying Relocation Payment Exemption

A statutory relief where the first $£8,000$ of qualifying employee relocation expenses is exempt from tax, leaving only the excess taxable as an employment benefit (for example, $£12,500 - £8,000 = £4,500$ taxable benefit).

Trading Allowance

A $£1,000$ tax-free allowance for gross trading receipts before deducting expenses. If gross receipts exceed $£1,000$, the taxpayer can elect to deduct the flat $£1,000$ allowance instead of calculating actual business expenses.

Qualifying Loan Interest Deductions

Interest eligible for deduction from total income, including borrowing used for qualifying business investments or loans taken to pay Inheritance Tax (IHT) on death (available for up to $1$ year). Ordinary home mortgages and buy-to-let loans do not qualify for this deduction.

Marriage Allowance vs. Married Couple's Allowance

Marriage Allowance allows the transfer of $£1,260$ of unused Personal Allowance to a spouse or civil partner, reducing tax by up to $£252$. Married Couple's Allowance applies only if at least one spouse was born before $6\text{ April }1935$, providing tax relief equal to $10\%$ of the allowance (full $£11,700 \times 10\% = £1,170$ off tax).

Parental Settlement Rule for Minor Children

An anti-avoidance rule whereby interest from gifts made by a parent to an unmarried minor child is treated entirely as parental income if it exceeds $£100$ per parent, per child, per tax year. If the interest is exactly $£100$ or less, it remains taxed as the child's income; gifts from grandparents do not trigger this rule.

High Income Child Benefit Charge (HICBC)

A tax charge assessed on the partner with the higher adjusted net income if income exceeds $£60,000$. The charge claws back the benefit at a rate of $1\%$ per $£200$ of income above $£60,000$, reaching full recovery ($100\%$) at $£80,000$.

Bare vs. Interest-in-Possession vs. Discretionary Trusts

Trust classifications: in a bare trust, the beneficiary is absolutely entitled to both capital and income and is taxed directly; in an interest-in-possession trust, the beneficiary has an automatic right to trust income; in a discretionary trust, the trustees hold full discretion over distributions to beneficiaries.

Discretionary Trust Taxation and the Tax Pool

Trustees pay tax at $39.35\%$ on dividend income and $45\%$ on other income above standard exemptions. Discretionary income distributions carry a $45\%$ tax credit ($\text{cash received} \div 0.55 = \text{gross distribution}$), with the trust's tax pool tracking previously paid tax to ensure adequate coverage for that credit.