Complete notes covering Workshop 7 of the University of Law's Business Law & Practice Module.
- Calculating Income Tax
- Calculating Capital Gains Tax
- Calculating Corporation Tax
- Trading Loss Reliefs
Income Tax, Capital Gains Tax, and Corporation Tax
Income tax
There is no statutory definition of income but income payments and receipts have an element of recurrence.
Who pays?
The following are liable to pay income tax:
✔ individuals;
✔ partnerships (partners are individually responsible for the tax due on their share of partnership profits);
✔ personal representatives (who pay the deceased’s outstanding income tax and income tax chargeable during the
administration of the estate); and
✔ trustees (who pay income tax on the income produced by the trust fund).
× NB: Companies pay corporation tax.
× NB: Charities are generally exempt from paying tax. There are tax-efficient ways of giving money to charities,
for example, Gift Aid.
→ Tax year: 6th April 2018 – 5th April 2020
The steps to work through to calculate the amount of tax payable are as follows:
Step 1 Calculate the total income
Step 2 Deduct any allowable reliefs: The resulting sum is net income
Step 3 Deduct any personal allowances: The resulting sum is taxable income
Step 4 Separate NSNDI, savings income and dividend income, and calculate the tax on each type of
income at the applicable rate(s) (starting rate, basic rate, higher rate and additional rate)
Step 5 Add together the amounts of tax from Step 4 (to give the overall income tax liability)
Step 1: Calculate the total income
Chargeable sources → Aggregate all chargeable sources of income.
of income ● No statutory definition of income.
● Money received will be income if there is an element of recurrence.
o E.g. salary, profits from a business or interest paid on bank account.
Specified sources Income is charged to income tax if it comes from a source specified by the ITTOIA 2005 and the
ITEPA 2003.
✔ Trading income: ITTOIA 2005, Pt 2 SEE CORPORATION TAX NOTES
✔ Property income: ITTOIA 2005, Pt 3
✔ Savings and investment income: ITTOIA 2005, Pt 4 (dividends)
✔ Employment and pension income (anything arising out of employment): ITEPA 2003
✔ Miscellaneous: ITTOIA 2005, Pt 5 (interest)
Gross up any income → Gross amount– Received by the taxpayer without any tax having been deducted. E.g. Trading,
received net Property, interest and dividend.
→ Net amount – Amount the taxpayer receives will already have had tax deducted from It at
source. E.g. employment income.
⇒ To work out the total income of a taxpayer, it is necessary to find out what sources of
income he has, calculate the income arising under each source and then add all the ‘gross’
income together – e.g. trading, property, employment, etc.
PAYE – tax deducted → Where told a PAYE deduction is made on salary, make a note of amount deducted (step 6).
at source ● For most taxpayers, their main source of income will be employment income, from
which tax will have been deducted at source. The payee receives the net amount, not
the gross amount.
● Salaries and other employment income are assessable under ITEPA 2003 using the Pay
As You Earn system (PAYE).
o Under the PAYE system, the employer deducts from the employee’s salary and then
pays to HMRC income tax at the appropriate rate at the time the salary is paid.
Step 2: Calculate net income
1
, BLP WS7
Total income less allowable reliefs = net income
Deduct any → Deduct any allowable reliefs (remove sums of money from income tax calculation)
allowable reliefs ✔ Relief for trading loss applied here.
✔ Interest payments on a qualifying loan.
o Cap of £50,000 or 25% of income whichever is greater as of April 2013 (Finance Act
2013).
o Qualifying loans include the following:
▪ A loan to buy a share in a partnership or to contribute capital or make a loan
to a partnership
▪ A loan to invest in a close trading company
▪ A loan to personal representatives to pay inheritance tax
Trading loss reliefs
Relief and When is What can it be Which years Advantages/ When to
ITA loss set against Disadvantages claim for a
section suffered loss?
Start-up loss First four years Total income, Carried back to the Pro: helpful in reducing burden The first
relief: s72- of trading for subject to a three years preceding on new businesses, when they anniversary of
81 any business. £50k/25% cap the loss. Earlier years are at highest risk of failure and the 31 Jan in the
first. need capital to buy assets/repay tax year where
financing. loss was
Con: personal allowance wasted. assessed.
Carry Any accounting Total income, The tax year of the loss Pro: allows T relief on total The first
across/carry year of trading. subject to a OR income/flexible as to what year is anniversary of
back relief: £50k/25% cap The tax year preceding taken first the 31 Jan in the
s64 it Con: lose personal allowance if tax year where
If any loss Is left reduced to nil loss was
over, may set that If either of these is assessed.
against chargeable reduced to nil, set
gains for the tax year unused balance against
of loss preceding or actual
year to/of the loss.
Carry Any accounting Trade profits (must Against subsequent Pro: The fourth
forward year of trading. be same trade) profits, taking earlier Personal allowance not wasted anniversary of
relief: s83- years first. May carry Can set against later years when the 31 Jan in the
85 on indefinitely until may be in a higher tax bracket tax year where
loss used up. Con: loss was
All loss will eventually be used up assessed.
T must wait until future profits of
trade become taxable before he
benefits from the loss
Losses can only be set aside
against trade profits, not income
Carry back Loss suffered Trade profits (must Any profits made in Pro: The fourth
of terminal in final 12 be same trade) final tax year. Then, Can reclaim tax paid in previous anniversary of
trading loss: months of can carry back up to years from HMRC final year of
s89-94 trading. three years preceding Personal allowance not wasted trading.
the final tax year. Take Con:
later years first. Loss may not be totally relieved
Use in conjunction with another
relief
Carry Any losses not Losses are carried
forward relieved by s64 forward and set
relief on and s89 when against income
corporation taxpayer received from the
of a transfers company, either as
business: business to a dividends or a
s86 company director’s salary.
wholly/mainly
(at least 80%)
in return for
shares in
company
2
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller izalpcnotes. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £2.99. You're not tied to anything after your purchase.
