TX: Income tax and NIC

Answer: A. Car benefit = (List price × appropriate %) − employee contributions. At 55g/km, the percentage is 17%. Gross benefit = £28,000 × 17% = £4,760. Employee contributions = £50 × 12 = £600. Taxable benefit = £4,760 − £600 = £4,160. Option B (£4,760) ignores the employee's contribution. Option C uses an incorrect percentage. Option D is also incorrect. The taxable benefit is £4,160.

Answer: D. Class 1 employer NIC = (Salary − secondary threshold) × 15% = (£42,000 − £5,000) × 15% = £37,000 × 15% = £5,550 — option D. Option A (£6,300) applies 15% to the full salary with no threshold deduction. Option B does not correctly apply the £5,000 secondary threshold and 15% rate. Option C reflects using an outdated (pre-April 2025) secondary threshold rather than the current £5,000. Under FA 2025 the secondary threshold fell to £5,000, so option D is correct.

Answer: A. Step 1 — allocate personal allowance against non-savings first: employment £14,000 − PA £12,570 = £1,430 taxable non-savings. Step 2 — savings starting rate band: available up to £5,000, but reduced £1 for £1 by non-savings taxable income. Available starting rate band = £5,000 − £1,430 = £3,570 at 0%. Step 3 — tax on savings: £3,570 at 0% (starting rate); £1,000 at 0% (savings nil rate, basic rate taxpayer); remaining £6,200 − £3,570 − £1,000 = £1,630 at 20% = £326. Step 4 — tax on non-savings: £1,430 × 20% = £286. Step 5 — tax on dividends: £500 nil rate; £2,500 × 8.75% = £218.75 ≈ £219. Total = £286 + £326 + £219 = £831 — option A. Option B (£1,031) forgets the savings nil rate band (PSA), taxing £2,630 at 20% instead of £1,630. Option C (£1,545) ignores the starting rate band entirely, taxing £5,200 of savings at 20%. Option D (£545) applies the full £5,000 starting rate without restricting it by non-savings income, leaving only £200 of savings taxed at basic rate.

Answer: C. 'Work done on the asset' is the badge of trade that considers whether an asset was modified or enhanced before sale — strongly suggesting a trading rather than investment motive. The more work done to make an asset more saleable, the clearer the indication of trade. 'Motive for acquisition' relates to the taxpayer's intention at time of purchase. 'Frequency of transactions' considers how often similar transactions occur. 'Subject matter' considers whether the type of asset is commonly the subject of trade.

Answer: A. Cars are specifically excluded from the annual investment allowance. The machinery qualifies for 100% AIA (within the £1,000,000 limit). The car with 40g/km emissions (between 1 and 50g/km, non-zero) qualifies for the main pool 18% writing down allowance — not AIA, not FYA. Option B incorrectly claims AIA on the car. Option C is wrong — the 100% FYA applies only to cars with zero CO2 emissions. Option D uses 6% (special rate pool), which applies to cars over 50g/km.

Answer: A. Employment income is assessed on a receipts basis — it is taxed in the tax year in which the employee receives it (or is entitled to receive it). This is different from self-employment income which follows accounting period rules. Options B, C and D all describe incorrect bases for employment income assessment.

Answer: A. Helena can claim the excess of the approved rate over what her employer actually pays. First 10,000 miles: approved 45p, paid 30p = 15p shortfall × 10,000 = £1,500 deductible. Next 4,000 miles: approved 25p, paid 30p = employer pays 5p above approved rate, giving a taxable mileage allowance payment of £200. Net deductible = £1,500 − £200 = £1,300. Option B (£1,500) only counts the underpayment on the first 10,000 miles and ignores the overpayment on the next 4,000. Option C and D use incorrect calculations.

Answer: A. Car benefit = £24,000 × 17% = £4,080. Fuel benefit = £28,200 × 17% = £4,794. Total = £4,080 + £4,794 = £8,874. Both benefits use the same appropriate percentage as the car. Option B is the car benefit alone. Option C is the fuel benefit alone. Option D uses a different incorrect calculation.

Answer: D. The van benefit scale charge of £4,020 applies where the van is available for private use. The van fuel benefit of £769 is added where the employer pays for private fuel. Total = £4,020 + £769 = £4,789. Option A is the fuel benefit only. Option B is the van benefit only. Option C is the difference, not the total.

Answer: A. Form P11D is submitted by employers to HMRC to report taxable expenses and benefits provided to directors and to employees. It allows HMRC to assess the tax liability on those benefits. The P11D must be submitted by 6 July following the end of the tax year. Option B describes a self-assessment return. Option C describes form P87. Option D describes the full payment submission (FPS) under RTI.

Answer: C. Depreciation is never an allowable deduction for tax purposes — capital allowances are claimed instead on qualifying capital expenditure. Professional indemnity insurance (A), professional subscriptions (B), and postage and stationery (D) are all revenue expenditure incurred wholly and exclusively for business purposes and are fully allowable.

Answer: C. In the first tax year of trading, the assessable profit is the actual profit from the start of trade to 5 April. Petra started 1 October 2025; tax year ends 5 April 2026. Her 6-month accounts show £18,000, all of which falls in 2025-26. Option A (£36,000) annualises the 6-month profit to a full year — incorrect. Option B (£9,000) apportions incorrectly to 3 months. Option D (£12,000) also uses a wrong apportionment.

Answer: C. The £8,000 equipment qualifies for 100% AIA (well within the £1,000,000 limit), so it is fully deducted in year. The AIA claim means the equipment does not enter the pool. The existing pool of £40,000 gets 18% WDA = £7,200. Maximum claim = £8,000 + £7,200 = £15,200. Option A applies WDA to the combined £48,000 balance — this applies only if AIA is not claimed. Option B claims only AIA. Option D claims only WDA.

Answer: C. Where no specific claim is made, a trading loss is automatically carried forward and set against future profits of the same trade — no claim is needed and there is no time limit on this relief. Option A is incorrect — the loss is not wasted. Option B is wrong — capital gains offset requires a specific claim after utilising against income. Option D is wrong — carry back also requires a specific claim.

Answer: C. To relieve the loss as early as possible, Stefan first claims against total income of the loss year (2025-26), then carries back any remaining loss to the previous year (2024-25). He cannot carry back without first claiming in the current year — the current year claim must come first. Option A is wrong — HMRC requires the current year claim before carry back. Option B (carry forward) gives the slowest relief. Option D — capital gains offset is only available after the income claim.

Answer: D. Each partner is assessed individually on their share of profits. The basis period for an established partnership with a 31 December year end is the year of account ending in the tax year — the year ended 31 December 2025 falls in 2025-26. Each partner's share = £60,000 × 50% = £30,000. Option A incorrectly gives each partner the full partnership profit. Options B and C use incorrect profit shares.

Answer: D. Allowable revenue deductions: insurance £400 + repairs £600 = £1,000. Mortgage interest is not deducted from property profits — instead it gives a basic rate tax reducer. Capital expenditure (new kitchen £4,500) is not deductible. Profit = £14,400 − £1,000 = £13,400. Option A deducts all four items including mortgage interest and the kitchen. Option B deducts mortgage interest from the profit. Option C makes a different combination of errors.

Answer: C. Since April 2020, residential property finance costs cannot be deducted from rental profits. Instead they give a basic rate tax reducer: £6,000 × 20% = £1,200, deducted from Daniel's final tax liability. As a higher rate taxpayer (income > £50,270), Daniel loses the higher rate element of relief. Option A shows the old pre-2020 treatment. Options B and D are incorrect — relief is always at basic rate as a credit, not a deduction from income.

Answer: D. Grace is a higher rate taxpayer. Dividends are the top slice of income. The first £500 qualifies for the dividend nil rate band at 0%. The remaining £7,500 is taxed at the higher rate dividend rate of 33.75%. Tax = (£7,500 × 33.75%) + (£500 × 0%) = £2,531. Option A applies the basic rate dividend rate (8.75%) — only for basic rate taxpayers. Option B applies the additional rate (39.35%) — only above £125,140. Option C ignores the nil rate band.

Answer: D. All income (interest, dividends) and capital gains within an ISA are completely exempt from both income tax and capital gains tax. This is the primary benefit of the ISA wrapper. Options A, B and C all incorrectly suggest some tax applies — no tax applies to income or gains within an ISA.

Answer: D. The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000. Excess = £108,570 − £100,000 = £8,570. Reduction = £8,570 ÷ 2 = £4,285. Available PA = £12,570 − £4,285 = £8,285. Option A gives the full unreduced allowance. Option B (zero) only applies when adjusted net income reaches £125,140 or above. Option C is the amount of the reduction, not the remaining allowance.

Answer: D. First £37,700 at 20% = £7,540. Remaining £14,300 (£52,000 − £37,700) at 40% = £5,720. Total = £7,540 + £5,720 = £13,260. Option A (£7,540) only applies the basic rate to the first £37,700 and ignores the higher rate portion. Option B (£20,800) applies 40% to the full £52,000. Option C (£10,400) applies 20% to the full amount.

Answer: D. Income above the threshold: £68,000 − £60,000 = £8,000. Number of complete £200 bands: £8,000 ÷ £200 = 40. Charge = 40 × 1% × £2,500 = 40% × £2,500 = £1,000. Option A (£2,500) would apply if income exceeded £80,000 (100% charge). Option B (£1,250) uses 50% incorrectly. Option C (£500) uses 20%. The charge is £1,000 — 40% of the benefit.

Answer: C. Between primary threshold and UEL: (£50,270 − £12,570) × 8% = £37,700 × 8% = £3,016. Above UEL: (£58,000 − £50,270) × 2% = £7,730 × 2% = £155. Total = £3,016 + £155 = £3,171. Option A (£3,016) ignores the 2% on earnings above the UEL. Option B applies 8% to the full salary above the primary threshold. Option D also uses incorrect calculations.

Answer: C. Personal pension contributions are paid net of basic rate (20%) tax relief at source. Gross contribution = £12,000 × 100/80 = £15,000. The basic rate band is extended by £15,000, meaning more of Felicity's income falls at 20% instead of 40%. The additional higher rate relief = £15,000 × 20% = £3,000, claimed through self-assessment. Option A gives the wrong gross and ignores higher rate relief. Option B grosses up at 80/100 incorrectly. Option D is wrong — higher rate relief is not given via PAYE.

Answer: C. The employment allowance reduces the employer's Class 1 NIC liability. Oakfield Ltd is eligible so: £14,200 − £10,500 = £3,700 net employer NIC payable. Option A ignores the allowance. Option B is the allowance itself. Option D is incorrect.

Answer: C. Class 1A NIC is paid by the employer on most taxable benefits in kind at the Class 1A rate of 15%. Class 1A = £8,400 × 15% = £1,260. Option A uses 14%. Option B uses 20%. Option D uses 10%. Class 1A is paid by the employer only — the employee pays income tax on the benefit but not NIC.

Answer: A. Class 4 NIC is charged in two bands. On profits between the lower and upper limits: (£50,270 − £12,570) × 6% = £37,700 × 6% = £2,262. On profits above the upper limit: (£62,000 − £50,270) × 2% = £11,730 × 2% = £235. Total Class 4 NIC = £2,262 + £235 = £2,497. Option D (£2,262) stops at the main band and omits the 2% charge on profits above £50,270. Options B and C apply incorrect rates or bands to the full profit. Remember the upper band is charged at only 2%, mirroring the structure of employee Class 1 NIC.

Answer: D. A 30 April year end gives the longest gap between earning profits and when they are assessed and taxed — profits earned in the year ended 30 April 2026 are assessed in 2025-26 (since the accounting year end falls in 2025-26), but the tax is not due until January 2027. This maximises cash flow. Option A (5 April) coincides with the tax year but gives no deferral advantage. Option C (31 March) is treated as equivalent to 5 April for basis period purposes. Option B (31 December) gives a gap but not as long as 30 April.

Answer: C. Under rent-a-room relief, only the excess of gross receipts over the £7,500 limit is taxable. Taxable profit = £9,200 − £7,500 = £1,700. Option A (£0) would apply if gross receipts were £7,500 or less. Option B (£9,200) ignores the relief entirely. Option D (£7,500) is the exempt limit, not the taxable amount.

Answer: A. Late RTI filing penalties apply per month of default. For employers with 1–9 employees, the monthly penalty is £100. Meridian Ltd has 4 months of late submissions: 4 × £100 = £400. Option B (£200) would apply to 2 months. Option C (£100) is a single month. Option D (£800) applies to employers with 10–49 employees (£200/month × 4).

Answer: A. Under the cash basis, most capital expenditure is deductible as a revenue expense (unlike under the accruals basis where capital allowances apply separately). Cars are the exception — they follow the normal capital allowances rules even under cash basis. Option B is wrong — under the cash basis, income is recognised when received (cash), not when earned. Option C is wrong — the cash basis is optional, not compulsory. Option D is wrong — loan interest is restricted to £500 per year under the cash basis.

Answer: A. Pre-trading expenditure that is revenue in nature and would have been allowable if incurred after trading commenced is treated as if incurred on the first day of trading. This allows Zara to deduct £2,400 in the period commencing 1 July 2025. Option B is wrong — specific relief exists for pre-trading expenditure. Option C is wrong — this is revenue expenditure, not capital. Option D is wrong — the expenditure is treated as first-day-of-trading, not in the actual period incurred.

Answer: C. Integral features of buildings — including electrical systems, cold water systems, lifts, escalators, heating and air conditioning — are allocated to the special rate pool and attract an 18% or 6% writing down allowance (6% for special rate). AIA can be claimed on integral features. Option A (office furniture) goes to the main pool. Option B (new electric car with zero emissions) qualifies for 100% FYA — it does not enter the pool. Option D (computer) goes to the main pool.

Answer: D. Cars are excluded from the AIA and from first year allowances (unless zero-emission). A car with emissions of 80g/km (over 50g/km) is allocated to the special rate pool at 6% WDA. A car with 1–50g/km would go to the main pool at 18%. New zero-emission cars attract 100% FYA. Option A (100% FYA) is only for new zero-emission cars. Option B (18% main pool) applies to 1–50g/km cars. Option C (AIA) is not available for cars.

Answer: C. The SBA applies at 3% per year on a straight-line basis on the qualifying construction cost. £500,000 × 3% = £15,000 per year. Unlike plant and machinery, there is no writing down balance — the allowance is simply 3% of cost each year. Option A (£90,000) uses an 18% rate. Option B (£30,000) uses 6%. Option D (£50,000) uses 10%.

Answer: D. Early years (opening years) loss relief allows losses arising in the first four tax years of a new trade to be carried back against total income of the three years before the loss year, taking the earliest year first. For a loss in 2025-26, Luisa can carry back to 2022-23, 2023-24, and 2024-25 in that order (earliest first). Option A only allows one year. Option C skips 2024-25. Option B describes current year/carry back relief, not early years relief.

Answer: A. A UK property business loss is automatically carried forward and set against the first available future profits of the same property business — option A. Unlike trading losses, property losses cannot be set against general/total income, so option B is wrong. There is no claim to relieve the loss against total income of the current or prior year (option C describes trading-loss-style relief). There is no three-year carry-back for property losses (option D); carry-back applies to terminal trading losses, not property losses. The loss simply accumulates until the property business produces profits to absorb it.

Answer: D. When a short lease premium is received (lease of 50 years or less), part is treated as property income. Taxable amount = Premium × (51 − n)/50, where n = lease duration in years. Taxable = £100,000 × (51 − 30)/50 = £100,000 × 21/50 = £42,000. Capital element = £100,000 − £42,000 = £58,000. Option A treats the full premium as income. Option B reverses income and capital. Option C incorrectly splits 50/50.

Answer: A. Interest on a loan taken out to purchase a share in a partnership in which the borrower works is a qualifying loan interest payment, deductible from total income. This reduces Edward's adjusted net income and his income tax liability. Option B is incorrect — qualifying loan interest is specifically allowed. Option C is wrong — the interest is not deducted in the partnership computation. Option D is wrong — it is a full deduction from total income, not a basic rate reducer.

Answer: D. Gift Aid donations are treated as paid net of 20% basic rate tax. Gross donation = £1,600 × 100/80 = £2,000. The basic rate band is extended by the gross donation (£2,000). For a higher rate taxpayer, this means an additional 20% of the gross donation is reclaimed via self-assessment: £2,000 × 20% = £400. Option A gives the wrong gross and ignores higher rate relief. Option C gives the correct gross but ignores higher rate relief. Option B uses the wrong gross-up.

Answer: A. Mutuality of obligation — where the worker is obliged to accept work offered and the engager must provide it — is a key indicator of employment. There is an ongoing, reciprocal obligation between both parties. Option B (own equipment) indicates self-employment. Option C (right of substitution) indicates self-employment — a genuine right to send a substitute suggests no personal service. Option D (financial risk) indicates self-employment — employees are shielded from business risk.

Answer: B. Personal allowance = £12,570 covers the first £12,570 of income. Theo's total income is only £7,000, which is less than the personal allowance. Therefore no income tax is payable and the savings starting rate band and savings nil rate band are not even needed — the personal allowance alone makes the entire £7,000 tax-free. Options A and C suggest tax is payable when income is below the PA. Option D gives the right answer but for the wrong reason — it's the PA that covers it, not a combination.

Answer: C. A beneficial loan creates a taxable benefit equal to the notional interest: loan × official rate = £30,000 × 3.75% = £1,125. Note: loans of £10,000 or less are exempt — but Paula's loan of £30,000 exceeds this threshold, so the full benefit applies. Option A incorrectly applies the exemption to a loan over £10,000. Option B is the loan principal, not the benefit. Option D uses an incorrect rate.

Answer: C. Transferring the rental property to Bella means the rental income (£8,000) will be taxed at her rate (20%) instead of Arthur's higher rate (40%), saving tax. Transfers between spouses are on a no gain/no loss basis for CGT, and stamp duty land tax generally applies but the income-shifting benefit can be significant. Option A — Arthur's income is well above £100,000 and his PA is already reduced; transfer of PA is not available in this scenario. Option B — HMRC cannot reallocate income. Option D — there is no 'joint assessment' for income tax in the UK.