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Income Tax is, broadly speaking, a tax on all income the source of which is situated in the United Kingdom, or which is received by individuals who are residing in the United Kingdom. Income Tax is not a permanent tax which is levied until repealed or amended by subsequent Act of Parliament. It remains in force for one year only and has to be re-imposed annually by the Finance Act that stipulates the basic and higher rates of the tax for that year together with other variations, allowances and reliefs.
Income may be generated in differing ways, some only after expenditure (e.g. on trade stock), some may involve risk so that expenditure may exceed income in some years, some may be irregular (e.g. incomes of authors). Conversely some income may be generated without expenditure, risk or irregularity, (e.g. interest from Building Societies). These different sources of income were classified in the Income and Corporation Taxes Act 1988 (ICTA 1988) (this followed similar provisions from earlier Acts) under various Schedules, each Schedule being subject to special rules regarding the assessment of the income to which it applies. These Schedules are now repealed for income tax purposes, although Schedules A and D remain for corporation tax purposes.
The aim of the Tax Law Rewrite Project was to rewrite the United Kingdom’s primary direct tax legislation to make it clearer and easier to use, without changing the law. The project has resulted in income tax legislation being divorced from corporation tax and is now enacted in:
- The Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) is effective from April 2003,
- The Income Tax (Pay as You Earn) Regulations 2003 (SI 2003 No. 2682) is effective from April 2004,
- The Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) is effective from April 2005,
- The Income Tax Act 2007(ITA 2007) takes effect from 6 April 2007.
ITEPA 2003 imposes charges to income tax on employment income (parts 2 to 7); pension income (part 9); and social security income (part 10). This replaces Schedule E.
ITTOIA 2005 imposes charges to income tax on trading income (part 2); property income (part 3); savings and investment income (party 4); certain miscellaneous income (part 5). This replaces Schedule F and for income tax purposes only, Schedules A and D.
ITA 2007 covers a miscellany of provisions.
The ‘administrative’ self-assessment rules in the Taxes Management Act 1970 are unchanged by the rewrite project.
The Schedules set out in s.15 to 20, ICTA 1988 are shown below to assist in understanding the historic background, as follows:-
Schedule A - applied to income accruing from ownership of an estate or interest in land, eg rent (replaced for income tax purposes by ITTOIA 2005, but still applicable for corporation tax);
Schedule B - applied to income derived from the occupation of commercial woodlands but was abolished from 6 April 1988;
Schedule C - applied to income from interest, dividends and annuities received from the Government or public bodies (including foreign states); Schedule C was repealed from 1996-97
Schedule D - is divided into six "cases":-
- Case I applies to income from a trade;
- Case II applies to income from a profession or vocation;
- Case III applies to income from interest, annuities, annual payments and discounts, not taxed at source;
- Case IV applies to income from overseas securities;
- Case V applies to income from overseas possessions and pensions;
- Case VI applies to other income not falling under any of the foregoing cases and not charged under any other Schedule.
Replaced for income tax purposes by ITTOIA 2005, but still applicable for corporation tax.
Schedule E - applied to income from offices, employments and pensions. This was replaced by ITEPA 2003 from 6 April 2003;
Schedule F - applied to income from dividends and other distributions by companies. This was repealed by ITTOIA 2005. For Income Tax this type of income is now within Part 4, ITTOIA 2005 and for Corporation Tax, company distributions remain in Part VI, ICTA 1988.
It was for the convenience of assessment that income was classified in Schedules. However, it should be borne in mind that Income Tax is the same tax no matter on what class of income it may be levied. For example, a person may be in receipt of rents from property (part 3, ITTOIA 2005 [former Schedule A]) and may also be receiving a substantial income from either a trade or profession (part 2, ITTOIA 2005 [former Schedule D]). The portion of gross income accrued from rents which is liable to tax is determined in accordance with the rules in part 3, ITTOIA 2005. The exact sum on which the profits of the business, trade or profession, are assessed to tax is determined by the rules in part 2, ITTOIA 2005.
Since the introduction of independent taxation on 6 April 1990 all individuals, whether married, in civil partnership, or single, are independently assessed to income tax. Prior to that date the income of a married woman was generally treated as if it were part of her husband's income.
The Income Tax year is from 6 April in one calendar year to 5 April in the subsequent calendar year, and that year is technically known as the year of assessment being identified by the two years in which it falls, eg 2006/2007.
The total income assessed in accordance with the Income Tax acts detailed in 1.3 above, less annual payments and allowances, which are not subject to Income Tax, is known as the taxpayer's taxable income. The taxable income will be less than, and may substantially differ from, the taxpayer's actual total income in the year.
There are various allowances and reliefs which can be deducted from an individual's income to arrive at the taxable income. These are set each year and included in the Finance Act which puts into law the statements made by the Chancellor of the Exchequer in the Budget.
Income tax is charged either at the starting rate, basic rate or higher rate, depending on the level of taxable income. In 2006/2007 the rates are: Starting Rate : 10%; Basic Rate : 22%; Higher Rate : 40%.
Self Assessment (SA) was introduced for individuals, trusts and partnerships in 1996/97.
Under the SA system taxpayers are, in principle, responsible for the calculation of their own tax liability and the submission of that calculation to HM Revenue & Customs.
Personal taxpayers can comply with the self assessment requirements by either
- Including a calculation of tax liability in their tax return, or,
- Filing the tax return only (at an earlier date) so that HMRC can do the calculation and advise the taxpayer of the amount to pay.
In very general terms HMRC may query a taxpayer's self assessment by opening an "enquiry" into the tax return. Apart from the discovery of incomplete disclosure, or fraud, an enquiry into a return cannot be opened more than 12 months after the last filing date unless the return is filed late in which case the time limit is 12 months from the date of actual filing. The last date for filing Income Tax returns is the 31 January following the end of the year of assessment (eg. for the tax year 2006/2007 the last filing date is 31 January 2008).
The calculation of tax is a complex subject. HMRC issue various leaflets explaining most aspects of Income Tax. Details of these leaflets and HMRC’s published internal guidance manuals may be obtained from their web site: http://www.hmrc.gov.uk/