Income Tax Computations - Lecture 2

These flashcards cover key vocabulary and concepts related to income tax computations from the lecture notes.

What is the process of income tax computation?

The calculation of tax owed on income earned by individuals.

What is a personal allowance?

The amount of income an individual can earn before they start paying income tax.

How is net adjusted income determined?

It is the income remaining after considering allowable deductions, such as charitable donations and pension contributions.

How do charitable donations impact a tax calculation?

Amounts donated to charity can provide tax relief, which affects the final income tax calculation.

What are personal pension contributions?

Payments made into a personal pension plan that can be deducted from taxable income to reduce tax liability.

What characterizes the self-assessment system?

A system where individuals are responsible for reporting and paying their own taxes based on their actual income.

What happens to the personal allowance when income exceeds 100,000?

This is the income threshold at which the personal allowance begins to taper down.

What is a tapered personal allowance?

The systematic reduction of the personal allowance as an individual's income goes above 100,000.

What results in an effective tax rate of 60\% ?

The specific rate at which income beyond 100,000 is effectively taxed when the personal allowance is being reduced.

What is the threshold for personal allowance reduction?

The specific income limits at which the allowance starts to decrease or is completely eliminated.

Who is defined as a basic rate taxpayer?

An individual whose taxable income falls within the primary basic rate tax band.

Who is defined as a higher rate taxpayer?

An individual whose income exceeds the basic rate band but stays below the additional rate band.

What is the dividend allowance?

A specific amount of dividend income that individuals can receive tax-free.

How does the starting rate for savings function?

It is a tax band that allows a certain amount of savings income to be taxed at a lower specialized rate.

What constitutes taxable income?

The portion of income subject to taxation after all allowances and deductions have been subtracted.

What does a tax computation document provide?

A detailed calculation illustrating how the final tax liability was determined.

Are professional subscriptions tax-deductible?

Yes, fees paid for professional memberships may be deducted for tax purposes.

What is the process of grossing up?

The method of converting the net amount of a donation into its gross equivalent for tax reporting.

What is the Gift Aid scheme?

A program that allows charities to claim back the basic tax paid on donations by taxpayers.

What is the definition of tax planning?

The strategic arrangement of financial affairs to maximize tax efficiency and minimize liability.

What is HMRC?

Her Majesty's Revenue and Customs, the UK department responsible for tax collection.

What is tax relief?

A reduction in tax liability offered on specific expenses, such as pension contributions and donations.

What are self-assessment penalties?

Fines charged for failing to submit a tax return or failing to pay taxes on time.

What are payments on account?

Advance payments made by self-assessing taxpayers toward their next year's tax liability.

Is interest charged on late tax payments?

Yes, interest accrues over time on any unpaid tax amounts.

What is an annual tax return?

The document used to report total income and calculate the year's tax liability.

What are late submission penalties?

Specific fines incurred when a taxpayer fails to submit their return by the government deadline.

What qualifies as a reasonable excuse?

A valid justification for missing a tax obligation that might lead to a reduction in penalties.

How is gross income defined?

Total income earned by an individual before any tax or deductions are taken out.

What is a tax year?

The annual period used for assessing income, determining tax rates, and submitting returns.

What does rolling forward tax liabilities mean?

The process of carrying over unpaid tax amounts into subsequent tax periods.

What are the primary taxpayer responsibilities?

The legal obligations to accurately report income and pay the required taxes to the government.

What is exempt income?

Specific types or sources of income that are not subject to any income tax.

What are tax bands?

Specific ranges of income that are each subject to a different percentage of tax.

What is a marginal tax rate?

The tax rate that applies specifically to the next pound of taxable income earned.

What is the pension lifetime allowance?

The limit on total pension savings an individual can accumulate without incurring extra tax charges.

What is the authorized mileage rate?

The standard rate per mile that can be claimed for business travel expenses.

Are professional fees tax-deductible?

Payments for services provided by professionals may be deducted from taxable income if they meet specific criteria.

What is tax liability?

The total amount of tax an individual is legally required to pay to the government.

What is an investment product in the context of tax?

A financial product intended for growth that may offer specific tax-saving benefits.

Is charity registration required for Gift Aid?

Yes, a charity must be officially registered to claim back tax on taxpayer donations.

What are tax brackets?

The defined income ranges used to apply different tax rates.

What is tax efficiency?

Structuring one's financial affairs in a way that minimizes the total amount of tax paid.

What are digital tax accounts?

Personal online portals where taxpayers can view their records, income, and liabilities.

What is Capital Gains Tax?

A tax levied on the profit made from disposing of or selling an asset.

What are income thresholds for tax rates?

The set income levels that determine when an individual moves from one tax band to another.

What does openness to tax authorities signify?

Ensuring full transparency and honesty regarding income sources and taxes paid.

What are tax deductions?

Specific amounts that are subtracted from gross income to arrive at a lower taxable income figure.

What is a tax code?

A code provided by HMRC that tells an employer how much personal allowance and tax rate to apply to an employee.

What are self-assessment system changes?

Ongoing or future updates to the legal procedures for reporting and paying tax.

What is a monthly deduction?

Tax taken directly from an employee's salary by the employer each month before the net pay is received.

How is income from unit trusts taxed?

Tax may be applicable on any income or returns generated from investments held within unit trusts.

What do tax administration changes refer to?

Periodic updates to the administrative processes used for tax collection and reporting.