ACCA paper F6 UK Basic Income Tax computation | PAYE, Exempt income & Charitable giving | Example

Example 4

Peter who is single and earns £51475, made gift aid payment totaling £1960

Required

His income tax liability

Solution

Net income Less: PA Taxable income	51475 (6475) 45000

		£
Income tax	£39850 (W) £5150 × 40%	7970 2060 10030

Working

His basic rate band is extended by the gross gift aid payments £37400 + (£1960 × 100/80)= £39850

ACCA paper F6 UK Basic Income Tax computation | PAYE, Exempt income & Charitable giving

PAYE

Pay as you earn (PAYE) is the system used for collecting income tax and national insurance at source from the earnings paid to the employees.

Exempt income

The following are the main categories of exempt income

·         Interest on national savings certificates

·         Interests on repayments on overpaid income tax or capital gain tax

·         Redundancy payments

·         Scholarships or bursaries

·         Wages in lieu of notice

·         Interests and dividends from individual savings account (ISAs)

·         Child benefits

·         Betting and gamming winnings

·         Some social security benefits

Charitable giving

Gift aid scheme is a tax efficient way of giving money to charity. Under this scheme, the payment to the charity is treated as if basic rate tax has been deducted from source. The payment is grossed up by 100/80.

Tax relief is given by extending the basic rate tax band by the gross amount of the contribution.