Taxation: Calculation of Income Tax, NIC and Allowable Deductions for Employment and Self-Employment

This article provides a detailed calculation of income tax, NIC and allowable deductions for employment and self-employment. It covers topics such as property income, trading income, savings income, dividends, and employer NIC. The article also includes a memo with advice on option selection for tax. Course code and college/university are not mentioned.

TAXATION

Table of Contents
SECTION A.....................................................................................................................................3
Option 1: Employment....................................................................................................................3
1. Calculation of Property Income taxable in 2022-23................................................................3
2. Calculation of total income tax payable by Bridget for 2022-23............................................6
3. Calculation of National Insurance Contributions payable by Bridget for 2022-2023.............7
4. Calculation of NIC payable by Air Engineering Limited........................................................7
Option: 2 – Self employment...........................................................................................................7
1. Calculation of total income tax payable by Bridget for 2022-23............................................9
2. Calculation of amount of NIC payable by Bridget 2022-23..................................................10
3. Calculation of amount of employer NIC payable by Bridget................................................10
SECTION B...................................................................................................................................10
REFERENCES................................................................................................................................1
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SECTION A
Option 1: Employment
1. Calculation of Property Income taxable in 2022-23
Property 1
Particulars Details Amount (£)
Total Rental income £600 * 12 7200
Less Allowable expenses:
Repair and Maintenance 1300
Insurance 350
Total 3650
Taxable property income 4550
Property 2
Particulars Details Amount (£)
Total Rental income £750* 8 6000
Less Allowable expenses:
Insurance 305
Advertisement for new tenants 610
Total 2915
Taxable Rental Income 4085
Property 3
Particulars Details Amount (£)
Lease premium 17500
Less £17500*(5-1) @2% -1400
Premium assessed 16100
Annual rental income 7800
Rent received -5600
Insurance 305*8/12 375
2575
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Taxable rental income 13525
Property 4
Particulars Details Amount (£)
Total rental income 9000
Less Allowable expenditures: 1140
Taxable rental income 7860
Total property income Less Property income allowances = 4550 + 4085 + 13525 + 7860 =
£30020
Calculation of Employment taxable income of Bridget for 2022-2023
Particulars Details Amount (£)
Assessable Income:
Annual Salary 75000
PAYE Deduction 38500
Annual Bonus 7250
List Price (24150 – 2415) 21735
Co2 (working note 1) 6381
Mileage (18000 * 30% * 12p) 648
Interest on loan paid by
employer to Bridget
1000
(25000 * 4%)
House removal expenses
benefit provided by employer
17000
Staff party cost paid by
employer
500
(250*2)
Annual subscription of CIPD
paid by employer on behalf of
employee
575
Computer cost used for
Bridget personal use (Loan
1850
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provided by employer)
Club membership subscription
paid by employer on behalf of
employee
1100
Mobile telephone 1020
(85 * 12)
Total assessable income 172199
Allowable Deductions:
Interest on loan charged by
employer
375
(25000 * 1.5%)
Exempt removal expenses and
benefits
8000
Mileage (10000*45p) 4500
Milage (8000* 25P) 2000
Fuel benefits (24600*30%) 7380
Deduction of annual
subscription of CIPD
575
Deduction on employee’s
contribution towards car
running cost (related to 70%
business miles)
756
(1080 * 70%)
Pension contribution 12000
Total Deductions 42342
Taxable employment income 129857
Working note 1
Salary = £122943
Less £100000
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Total = £22943
22714/2 = £11471.4
Personal allowances £1099
When the income exceeds £100000 the personal allowances is lowered by £1 for every
additional £2
Starting personal allowances £12570
Working note 2
Car registered after 6 April 2020
Up to 75g/km = 19%
1% for each complete 5g/Km = 7%
Total 19% + 7% = 26%
Diesel = 4%
List price = £21735
Less running contribution cost (90*12) = (1080)
Total = £20655
Less 30% = £6197
Less Private fuel cost (45*12) = (540)
Total 61970-540 = £5657
Calculation of Bridget Saving income
Particulars Details Amount (£)
Bank Interest 1050
Less Personal saving
allowances (higher rate tax
payer)
500
Total Saving income 550
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Calculation of Bridget Dividend income
Particulars Details Amount (£)
Dividend income 2450
Less Dividend allowances 2000
Taxable dividend income 450
2. Calculation of total income tax payable by Bridget for 2022-23
Non
savings Savings Dividends Total
Tax
deducted
£ £ £ £ £
Employment income 129,857 129,857 38,500
Property income 30,020 30,020
Other income 0
Savings income 550 550
Dividends 450 450
Total income 159,877 550 450 160,877
Less: personal allowance 12,570
Taxable income 147,307 550 450 148,307
Tax payable:
Non savings income 37700 @20% 37700*20% 7540
109,607 @40% 109607*40% 43842.8
Savings income 550 @0% 0 0
Dividend income @ 0% 0 0
450 @7.5% 450*7.5% 33.75
147307
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Less: tax already paid (PAYE
Deduction) 38,500.00
Less Tax relief on
mortgage interest 600*20% 120.00
Tax payable 12796.55
3. Calculation of National Insurance Contributions payable by Bridget for 2022-2023
Being an employee, Bridget needs to pay Class 1 NIC on their earnings from employment such
as salaries and bonuses.
Annual Salary of Bridget + Bonuses = £75000 + £38500 = £113500
Earnings per week = £113500 / 52 = £2184 (approx.)
On first £184 = Nil
Income between £184 and £967 = 12% = £783*12% = £93.96
Income above £967 = 2% = £1217 * 2% = £24.34
Total Class 1 NIC payable by Bridget = £96.96 + £24.34 = £118.3
4. Calculation of NIC payable by Air Engineering Limited
Being an employer, Air Engineering Limited need to pay Class 1A NIC on the value of the
benefit in kind at the rate of 13.8%.
= £24600 * 13.8% = £3394.8
Option: 2 – Self employment
Calculation of total income tax payable by Bridget for 2022-23
Particulars Amount
Income from self - employment
Consultation fees (Revenue from sales) 156250
Allowable deductions
Entertaining clients and contacts 4000
Wages paid to husband 11000
General expenses
Subscription paid to Chartered Institute of Personnel and 575
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Development
Miscellaneous allowable expenses 340
Depreciation or capital allowance of car 5328
Contribution made to personal pension scheme 9600
Payment of lease premium 4200
Capital allowance on office furniture 3600
Other travel expense 2150
Telephone and communications 2112
Call charges 480
Bank interest and charges 4360
Insurance 1920
Printing, postage and stationery 1835
Heat and light 2100
Consumables 650
Motor and fuel expenses 2316
Total allowable deductions 56566
ADD: Trading income allowance 1000
Taxable income 98684
Notes:
 Entertainment expenses paid for Clients and contacts is deductible when it is paid for
hosting existing or potential clients who are not employees of the business. Further, to
deduct expenses as client entertainment it must be provided for free as per HMRC.
 Wages paid to husband is allowable to the full as it is against the provision of genuine
accounting services to the business. However, wages paid to son is not allowed against
the business income for tax purpose as he is not involved in business affairs and
accordingly, can’t be justified for deduction as business expense.
 Subscription paid to CIPD is allowed as deduction because CIPD form part of approved
professional organization. However, donations paid to political parties of 295 will not be
deducted as a general expense because it is something associated with personal aspects
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only. Also, parking fines borne by Bridget is not deductible against business income
because it is something paid for breaking the law.
 Capital allowance for car = 24000 list price
As CO2 emission is over 75g/km,
Allowance will be as follows:
163-75 = 88g higher
1% increase per 5g
88 / 5 = 18%
Up to 75g / km = 19%
Rate of capital allowance = 19% + 18% = 37%
Add on benefits = 60%
Assessable benefit = 24000 * 60% * 37% = 5328
*(40% of the car is used for private purposes)
 Contribution of personal pension scheme will be allowable as expense as it below the
maximum cap of £40,000 (annual allowance).
 Payment of lease premium is tax deductible during the life of the lease as trading
expenses.
Calculation of allowable lease premium
Lease premium paid = 28000
Less: 2% * (6-1) * premium (28000) = 2800
Premium assessed on landlord = 28000 – 2800 = 25200
Length of the lease = 6 years
Premium assessed on landlord for each year for 6 years = 25200 / 6 = 4200
Therefore, deduction allowable as expense for 2021/22 = 4200 which Bridget would be
allowed to deduct for each year for 6 years.
 Capital allowance on office furniture will be calculated on the basis of main rate pool as
it form part of plant and machinery of the business.
The allowable amount = 20000 * 18% = 3600.
 Other travel expense include expenses incurred on both Bridget and her husband,
however deduction of £1100 will be allowed only for expenses associated with Bridget as
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it was related to business and husband was not visiting for the business purpose, so
expenses related to him will not be allowed for deduction against business income.
 Out of telephone and communications expenses of 2300, 940 is associated with Bridget’s
mobile phone contract and of this 20% is for personal use. Therefore, allowable
deduction for this expense would be = 940 * 80% = 752. Amount charged against profit =
752 + 1360 = 2112.
 Call charges allowable as deduction = 800 * 60% = 480.
 Bank interest and charges where 2100 is associated with the loan to purchase the car
which is used 40% for personal purposes. Therefore, 2100 * 60% = 1260 + 3100 (other)
= 4360.
 Motor and fuel expenses = 3860 * 60% = 2316.
1. Calculation of total income tax payable by Bridget for 2022-23
Non
savings
Savings Dividends Total
£ £ £ £
Employment income 0 0
Trading income 156,250 156,250
Property income 23,820 23,820
Other income 0 0
Savings income 550 550
Dividends 450 450
Total income 180,070 550 450 181,070
Less: personal allowance 0
Taxable income 98684 550 450 80,276
Tax payable:
Non savings income
98684 19% 98684*19% 18750
Savings income 550 @0% 0 0
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Dividend income @ 0%
450 @7.5% 450*7.5% 33.75
Tax payable 18784
2. Calculation of amount of NIC payable by Bridget 2022-23
Under class 2
3.05 * 52 week = 158.6
Under class 4
Profits = 98684
Up to 9568 = NIL
9568 to 50270 = 9% (50270 – 9568 = 40702 * 9% = 3663.18)
Over 50270 = 98684 – 50270 = 48414 * 2% = 968.28
3. Calculation of amount of employer NIC payable by Bridget
Travel expense borne by Bridget for her husband = 1100 * 13.8% = 151.8
SECTION B
MEMO
To: Bridget
From: Taxation Consultant (Chartered Accountants, Hart & Bannon LLP)
Date: 1st April 2022
Subject: Advice on Option selection or tax planning.
Option 1 Employment
Employment is a term demonstrate in respect to all such individual who are earning their income
in the form of salary. The salaried individual become a part of this section of income tax
liability. They earn income every month by the employer. This option can also select by the
Bridget as a part of earning income. In this individual require to join certain organization as an
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employee and earn potential revenue as a part of serving the employment opportunity. The
income remain constant in this section as the salary only get increase once in a year. This option
will allow the person to pay tax liability in the income from salary section. All the tax deduction
available for the salaries individual are found liable for the deduction in this section n. This
option find very secured as the risk is limited in this.
Option 2 Self employed
Bridget can approach this option. In this option some kid of business is open. Self employment is
totally based on creating the employment opportunity by own-self. This option will allow to
conduct a complete business operation and earn potential return out of business operations are
performed. This option would potentially allow the person to generate income by delivering the
business operation. The income presented in this is not taxable in the manner of salary rather it is
go into the income from business section. Business income is the net profitability remain after
deduction of all expenses of the organization. This option can select which will allow the person
to entertain all the advantages and deductions a self employed person entertain out of executing
to the business operations. This option is very fruitful as it allocate many advantages which will
allow the individual to generate the potential income and find income taxable under the income
from business section.
With the help of the above calculation it is clear that the tax payable liability within the
case of employment is less as compared to self employment. Hence it is advisable to the
company that they must choose the option of employment. The reason underlying this fact is that
the tax liability or tax payable within the case of employment is only 7329.35. On the other hand
in case of self employment the total tax payable is 15096.1 9. This simply implies that I'm the tax
liability for a person is more in case when they are self employed and rather in the situation of
employed.
Along with this the reason for tax liability less in case of employed person is that there is
much different kind of deductions which are provided to the employees. These deductions and
benefits are not provided within the case of the self employed. The reason underlying this fact is
that the self employed people do not have to comply with the deduction. In addition to this when
a person has employed with any of the organisation then there are many different benefits which
government provides to that company with respect to tax and other deductions. Thus, this is an
opportunity for the employed people that they have to pay less tax on the earnings which they
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earn from the company and others are well. But and case of self employee people there are very
less deductions and benefits being provided to them and because of this tax liability of self-
employed people is high.
On the comparison of income tax payable data it is clear that the employment income for
unemployed person is high and there is no employment income for a self employed person.
Hence this makes a huge difference in the calculation. Along with this and other major difference
is relating to personal allowance. In case of unemployed person there is a personal allowance
which reduces the taxable income. But in case of a self employed person there are not any
personal allowances. Hence this affects the tax payable of unemployed person and a self
employed person to a high level. It is advisable to Bridget that must go for the option of
employment for the benefit of tax payable.
Along with this is the reason for which it people prefer to be employed other than the tax
liability is that it provides a job security to the person as well. This is the most common and
important benefit of being employed was stopped along with the reduction and tax there is also a
job security for the person in case of employment. But in case of self employed person there is
no surety of having a work all the time. There might be situations where in the person might not
be having work to do and the tax liability is also more. Hence it is advisable to project that they
must go for the option of employment only for getting the benefit of both less taxes and high job
security.
National Insurance Contribution is basically an amount payable by employee individuals
as well as employer to HM Revenue and Customs (HMRC). The HMRC is UK government’s
non-minitrial department. It analysed that from both the option calculation that in case of
employment option Bridget need to pay NIC under only Class 1. It is because Bridget is
employee in the given case. But on the other hand, in the case of self-employed option, Bridget
needs to pay NIC under class 2 as well as class 4 as their profit are more that the limit of £6515
and £9569 respectively in a year. Thus, it is advisable to Bridget that they should join Air
Engineering Limited as an employee rather than starting their own business. It is also advisable
to Bridget because in the case of self-employed option, she need to pay the tax with the flat rate
of 19% and the trading income allowances is only £1000 only. But in the case of employment
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option, the personal allowance available to employed individual is £15570. Also, Bridget needs
to pay tax in slab rates.
NIC and different classes associated with are meant for paying amount of NIC to the
HMRC who is responsible for collecting taxes in UK. It allows for getting certain benefits such
as insurance and pension schemes in the time of unemployment. In the given case, it has been
seen in the above case that in being employment Bridget was paying comparatively less amount
towards NIC while being self-employed she has made higher payment towards NIC. Further, in
case of self – employment she has not taken into account the NIC cost associated with employees
that is, her husband and son and after taking them into account she needs to pay much higher
amount towards NIC which leads to getting more benefits in future while being unemployed both
for her own and her husband and son as well.
Furthermore, while being self – employed Bridget could get benefited from several facilities and
assets that she could use partly for both personal and private purposes which leads to further
great savings which is not possible in the duration of employment.
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REFERENCES
Books and journals
Melville, A., 2020. Melville's Taxation: Finance Act 2020, 26th Edition. Pearson UK.
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