SECTION A

Income Tax Calculation

JASON’S INCOME TAX LIABILITY -2022/23

£
Non-Saving Income
Trading Income (W1) 150,207
Employment Income (Note 1) 11,728
161,932
Saving Income
NS&I Bank Interest Received – Exempt NIL
Bank Interest Received (Note 2) 75
75
Dividend Income
Dividend Income Received (Note 2) 6,200
6,200

Net Income 168,207

Less: Personal Allowance (Note 3) NIL
Taxable Income 168,207

Income tax liability Computation

Non-Saving Income £
Basic Rate Band (£37,700 @ 20%) 7,540
Higher Rate Band (£112,499 @ 40%) 45,000
Additional Rate Band (£18,008 @ 45%) 8,103

Saving Income
Saving Income Nil Rate band for NIL
Additional Tax – None
Additional Rate Band (£75 @ 45%) 34

Dividend Income
Dividend Income Nil Rate Band (£2,000 @ 0%) NIL
Additional Rate Band (£4,200 @ 38.1%) 1,600

Income Tax Liability on £168,207 62,277

Less: PAYE (38)

Income Tax Payable 62,239

Class 2 NIC

£3.05 per week (Small Profit Threshold) £159

Class 4 NIC

Class 4 NIC £1-£9,500 per year Nil

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 (£9,501 – £50,000) @ 9% £3,663
(£50,000-above) @ 2% £2,004
£5,667

(W1) Trading Income

Adjusted Trading Profits

7 months period Year ending 31 Dec

ending 31 Dec 2021 2022
£ £
Net Profit/ Loss as per accounts (W2) (2,483) 132,809
Add: (Disallowed Expenses)
Depreciation (Note 4) 16,340 31,890
Wages (Note 5) 700 1,200
Light and Heat (Note 6) 0 0
Bad Debts (Note 7) 0 0
Motor Cost (Note 8) 520 1,600
Dough Mixer (Cost of Sales) 0 0
Personal Withdrawals (Cost of Sales) (450 x 20%) 0 90
(Note 9)
Entertaining Clients (Note 10) 1,800 2,100
Gift to Clients (Note 10) 480 250
Leased Estate Car (370 x 7months x 15%) (Note 8) 389 0
Leased Estate Car (370 x 12 Months x 15%) (Note 8) 0 666
Repairs (Replacement of Secure Electric Shutters) 50 320
(Note 11)

17,796 170,725
Less: Capital Allowances (W3) (27,234) (20,518)

Tax Adjusted Trading Profit/ Loss (9,438) 150,207

Basis Period Calculation:

- 2021/22 (First Year Opening Year)

01.06.2021 to 05.04.2022 [(£10,188) + £150,207 x 3/12] £37,551

- 2022/23 (Current Year Basis)

01.01.22 to 31.12.22 y/e to 31.12.2022 £150,207

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(W2) Net Profit/ Loss

7 months Period ending to 31 Dec 2021 (£2,483)

(£232,633-£138,321-£61,500-£16,340-£4,163-£1,960-£4,320-£2,640-£962-£2,750-£2,160)
Year ending to 31 Dec 2022 £132,809
(£398,800 – £119,978-£92,400-£31,890-£7,216-£30-£5,462-£2,770-£1,385-£2,015-£2,845)

(W3) Capital Allowance

Capital Allowances - 7 months period ending 31 Dec 2021

General Private Use Business Allowances

Pool Asset Use %
£ £ £ £
TWDV b/f 0 0 0
Addition:
Not Qualifying
for AIA and FYA
- Ford 15,500
Focus
Qualifying for AIA
and FYA
-Oven 8,000
-Kitchen 18,000
Equipment
-New Dough 800
Mixer
26,800
Less: AIA (26,800) 26,800
Allowance
(1,000,000 x
7/12)
0 0

Less: WDA (6%) (543) @ 80% 434

(15,500 x 6% x
7/12)

TWDV c/f 0 14,957

Total Allowances 27,234

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Capital Allowances - year ending 31 Dec 2022

General Special Rate Private Use Business Allowances

Pool Pool Asset Use %
£ £ £ £ £
TWDV b/f 0 0 14,957 0
Addition:
Not Qualifying
for AIA and FYA
-Prius 25,000
Qualifying for AIA
and FYA
-Energy Saving 3,000
Equipment
-Boiler 12,000
-Replacement 19,680
Oven
34,680
Less: AIA (34,680) 34,680
Allowance
(£1,000,000)
0 0

Disposal (Lower
of Cost or TWDV
or Sales)
-Original Oven (15,000)
-Kitchen (1,200)
Equipment
(16,200)
Balancing Charge 16,200 (16,200)
No WDA Claim 0
Less: WDA (6%)
-Prius (£25,000 x (1,500) 1,500
6%)
-Private Use (897) @60% 538
Asset (£14,957 x
6%)
TWDV c/f 0 23,500
Total Allowances 20,518

Note:

 Capital Allowance is available on the plant and machinery and motor vehicles purchased by Jason
during both periods. Capital Allowances of £27,234 in the first period and £20,518 in the second
period will be deducted after adding up the disallowed expenses.
 Ford Focus bought in the first period will not Qualify for any AIA (Annual Investment Allowances)
and FYA (First Year Allowances). CO2 emission in Ford Focus exceed 50 g/km qualifying for only 6%
WDA (Writing Down Allowance) and it will be calculated separately in Private Use Asset Column.
Where the WDA will be apportioned to 7 months of 6% WDA and further reduced to 80% of
business use of £434.

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  Plant and Machinery qualifying for AIA and not FYA are Oven, Kitchen Equipment and new dough
mixer. AIA is apportioned to £583,333 (£1,000,000 x 7/12). Total purchase cost of all the plant and
machinery of £26,800 falls within the available limit of AIA.
 In the 2nd period, Energy equipment, boiler and replacement oven also qualifies for AIA for £34,680.
Employee Prius CO2 emission exceeds 50g/km and hence it falls under Special Rate Pool column.
Special Rate Pool qualifies for 6% WDA only. Hence providing relief of £1500.
 The disposal of the equipment are treated under general pool column and hence a balancing charge
arises which will reduce the capital allowances to £16,200.

Note 1: Employment Income

PAYE of £38 will be added back to the provided value of Employment Income of £11,690. £11,728 will be
the Employment Income that will be used to calculate income tax liability.

Note 2: Bank Interest and Dividend Received

In order to calculate the income tax liability, the amount received in Bank Interest and Dividend Income will
be used.

Note 3: Personal Allowance on High Income Individuals

The PA is gradually reduced for individuals with income in excess of £100,000. A taxpayer with ANI in excess
of £125,140 will therefore be entitled to no PA at all, as the excess above £100,000 is twice the PA. In case
of Jason’s Income is £167,710 which exceeds £125,140.

Notes of adjusting trading profit

Note 4:

To calculate the adjusted tax profits, the disallowed expenses are added back to the profit/loss. -
Depreciations for both periods are added back.

Note 5:

Wages include the salary of Jason (i.e., £100 per month) and Bessie’s (i.e., £200 per month). Bessie’s wages
are in excess to the commercial rate (i.e., £100 per month). The excess of £100 per months will be
disallowed.

Note 6:

Light and heating is the regular expense for the purpose of the doing business. Assuming that there has
been no personal use by owner in which case the personal use of the light and heat will be disallowed.

Note 7:

Bad Debts of types are allowable expense for the business for tax purposes.

Note 8:

Motor Cost includes the private use of Ford Focus in both periods. Hence the motor cost of £520 (20% of
£2600) and £1600(40% of £4000) are disallowed and added back to the profit/ loss.

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Jason’s leased car is a high emission car exceeding CO2 emission of 50g/km. Therefor, 15% of the rental
cost is disallowed. £389((£370 x 7 months) x 15%) for first period and £666((£370 x 12 months) x 15%).

Note 9:

Cost of Sales includes the cost of £450 that is used as personal drawing of bakery product. The profit
element which is £90(£450 x 20%) is added back in the profit of the second period.

Note 10:

Entertaining cost includes the costs of client entertaining and gifts of clients. Both these costs are
disallowed and are added back in the profit/ loss of both periods. Gifts to client are only allowed if it cost
less than £50. Cost of staff parties are an allowable deduction.

Note 11:

Under the repairing cost, first period includes oven repair which is a capital expenditure, which is a
disallowable expense for tax purposes. Because it is a cost of initial repairs in order to make the over usable
for the first time. Whereas the cost of replacement of broken battery shutter to more improved ones is a
capital expenditure as it is improving its efficiency. Hence disallowable expense and will be added back to
the profit.

Note 13:

Bank Overdraft interest is an allowable expense for tax purposes.

Note 14:

Sundry Expenses is an allowable expense for tax purposes.

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SECTION A (Part b)

To: Jason

From: Tax Student

Subject: Jason’s Income tax payable

Introduction

Jason is a sole traders of bakery items in Catford, London. Income tax return is due to be submitted by 31 st
January 2024 for tax year return of 2022/23. According to the data provided by Jason of his Trading profits
and other income, the total tax liability that is due by the end of tax year 2022/23 is £68,065. His total
taxable income falls in additional tax rate band. No personal allowance can be availed by Jason. Remember
tax year of 2022/23 begins from 6th April 2022 to 5th April 2023.

To calculate the tax liability of a tax year of 2022/23, we need to calculate the trading income in tax year
2021/22. Remember, Jason has provided us with unadjusted trading profits and in order to calculate the
trading income, we need to calculate the adjusted trading profits with adding back all the disallowed
expenses and deducting capital allowance on purchases of plant and machinery and cars. Finally, the basis
of period to calculate the trading income for the respective tax years 2021/2022 and 2022/23.

Calculating unadjusted trading profits

The sales revenue for the business period are £232,633 for 7-months period to 31st December 2021 and
£398,800 for year to 31st December 2022. The revenue is calculated by using the date of birth (i.e., 8 th
February 1994).

Resultantly, the unadjusted trading profits/ loss comes to (£2,483) and 132,809 for the 7-months period to
31st December 2021 and year to 31st December 2022 respectively.

Calculating Adjusted Trading Profits

 To calculate the adjusted tax profits, the disallowed expenses are added back to the profit/loss. The
detail notes are provided in the Jason’s Tax Liability computation.

Calculating basis period for tax year.

 After computing the tax adjusted profit/loss. First year opening year basis applies from the date of
commencement of business till 05th April 2022. In Jason case, 2021/22 trading income is calculated
to £37,551.
 Second period is calculated on Current Year Basis. Year ended period to 31 st December 2022 of total
12 months is used. Overlap profit is created in this case from 1st January 2022 to 5th April 2022 (3
months profit of £37,301). Trading income for the tax year 2022/23 is £150,207.

Bank Interest Recieved

Bank Interest is an allowable income for tax income tax calculation and will be taxed on the interest
received during the tax year. Saving Nil Rate Band will not be applicable to Jason’s income tax liability
because she is additional income individual. In Jason’s case the Bank Interest falls in additional tax band.

Dividend Income:

Dividend income is taxed on the income actually received. Dividend Nil Rate band of 2,000 is charges with
zero tax. The remaining dividend income of £4,200 will be taxed at additional rate band.
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Personal Allowance:

Jason’s is a high-income individual. The PA is gradually reduced for individual in excess of £100,000. The
reduction of PA is based on the Jason’s adjusted net income (ANI). Jason’s ANI is in excess of £125,000, as
she is a high-income individual, hence she will not be entitled to her personal allowance.

Income Tax Liability for the year 2022/2023

Income tax liability is calculated on income on a strict order:
1. Non-Saving Income
2. Saving Income
3. Dividend Income
Jason’s Total Taxable income is £168,207. It will be taxed within all three slabs of rates. The
income tax liability for the year 2022/23 will be £62,239.
National Insurance Contribution (NIC) for the year 2022/23
Jason will be liable to 2 types if NICs.
 Class 2 NIC
 Class 4 NIC
Class 2 NIC is payable as the tax adjusted trading profit of £150,207 exceed the small profit
threshold of £6,515. The maximum total class 2 NICs payable for the tax year 2022/23 is therefore
£159 (£3.05 × 52 weeks).
Class 2 NICs, a self-employed individual may also be liable to class 4 NICs. Jason’s Class 4 NIC for
the tax year 2022/23 is £5,667.

Conclusion
Jason is a high-income individual therefore his tax liability and NIC are higher. Due to higher
trading income, most of the basic rate and higher band is utilized in Non-Saving Income
(Employment income & Trading income). Further Personal Allowance is bought to Nil due to high
income individual.

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SECTION B

PART 1- Impact of taxes and tax planning – Finance Act 2022

To: Mr. A (Partner at Firm XYZ)

From: Tax Manager

Title: Impact of taxes on Redundancy payment

Summary

The purpose of this report is to provide a detailed overview of the taxation of redundancy pay, Payment in
Lieu of Notice (PILON), and gardening leave in the UK. And this payment will be reviewed under the
referencing of legislation ITEPA 2003 Section 62 & Section 401-416. The report will also discuss how to
determine whether benefits are being paid as 'services rendered under employment' or 'as compensation
for breach of the employment contract'.

Gardening Leave

This is a leave benefit paid to an employee when the employers allow the employee to stay away from work
while still being paid. Its is often used by the employer to prevent the employee from using sensitive
information while being at work. Gardening Leave is subject to Income tax and NICs.

Payment in Lieu of Notice (PILON)

PILON is an amount paid by the employer to an employee when their employment contract is terminated
without notice. PILON can be either Contractual or Non-Contractual. If it is contractual termination of
employment agreement then it is subject to NIC and Income tax.

If it is non-contractual termination of employment, then as per ITEPA 2003 legislation, is considered a

‘breach of employment contract’, which will result in tax-free up to the equivalent of the employee's basic
pay for the notice period.

Redundancy Payments

The employees that have been made redundant are paid compensation by the employer. Redundancy
payments are taxable, but there are few exemptions. The statutory redundancy payment is fully exempt
and genuine discretionary termination has first £30,000 exempted. The first £30,000 of redundancy pay is
tax-free, and any amount over this subject to income tax at the employee’s marginal rate. Statutory
redundancy payments are partially exempt and fall under the same category as genuine discretionary
termination payments. However, statutory redundancy is paid at such a level that it is currently impossible
to receive over £30,000 and so it will always be fully exempt. Genuine Ex-Gratia exemption limit is reduced
if statutory payments are received as well.

Computations

Taxable amounts are assessed in the year of receipt. It is paid net of PAYE if paid before leaving. It is paid
net of 20%/40%/45% income tax if paid after leaving. It is taxed as the top slice of the individual’s taxable
income (after dividend income) at the individual’s highest marginal rate of income tax.

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Conclusion

Redundancy payments, PILON and gardening leave are all subject to income tax and NICs. The first £30,000
is always exempt and the rest is assessed as the top slice of the individual’s taxable income (after dividend
income) at the individual’s highest marginal rate of income tax. Non-contractual termination of
employment is tax free up to the limit of £30,000 limit as well, equivalent to employee’s basic pay for the
notice period. It is important to determine whether benefits are being paid as 'services rendered under
employment' or 'as compensation for breach of the employment contract' because it affects how they are
taxed. Section 401 of ITEPA 2003 sets out the rules for determining the nature of a termination payment.

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SECTION B

PART 2- The Importance of Overseas Workday Relief – Finance Act 2022

To: Mr. A (Manager at Firm XYZ)

From: Tax Manager

Title: Overseas Workday relief and its conditions

Introduction

Overseas Workday Relief (OWR) is a tax relief that is applicable to income earned outside of the UK by
those who are non-UK domiciled. If a person qualify it means that such earnings are regarded as tax free by
HMRC.

Conditions to claim OWR

You must meet all of the following precise criteria to be eligible to claim Overseas Workday Relief:

- UK tax resident. They must have spent more than 183 days in the UK in a tax year. Or he may have a
UK home or ‘UK ties’, if spent less than 183 days in a tax year in the UK.
- The individual must have sufficient ties in the UK (like a spouse or a partner, children, or a home in
the UK.
- Be employed in the UK and perform duties wholly or partly abroad.

Planning for OWR

An employee who wishes to claim overseas workday relief in the future should consider the following
planning steps when starting a work assignment that allows them to claim OWR:

- Keep accurate record to support the claim. The employee can detail record of the travel history,
and the work activities that were performed during the visit to abroad.
- Employee should sign and keep the written agreement from their employer that confirms the
nature of the visit and the days spent abroad.

In conclusion to the detail provided above, employee claiming for the OWR, should properly monitor his
ties to the UK to ensure the sufficient ties are being met and that all the record is being kept for future use.
He should be a UK resident and should not be a UK domiciled.

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