Taxation Fundamentals: Calculation of Income Tax and National Insurance Contribution

This article covers the calculation of income tax and national insurance contribution for the assessment year 2020-2021. It also explains the difference between tax evasion and tax avoidance and the policies introduced by HMRC to reduce them. Additionally, it discusses the capital gain tax in the case of property selling. The article is relevant for students studying taxation and related subjects.

TAXATION
FUNDAMENTALS

Table of Contents
SECTION A.....................................................................................................................................3
Calculation of Fiona's income tax payable and also National Insurance Contribution for the
assessment year 2020 – 2021.......................................................................................................3
SECTION B.....................................................................................................................................5
Part 1............................................................................................................................................5
Part 2............................................................................................................................................7
Part 3............................................................................................................................................8
REFERENCES................................................................................................................................1
Appendix..........................................................................................................................................2

SECTION A
Calculation of Fiona's income tax payable and also National Insurance Contribution for the
assessment year 2020 – 2021
Particulars Calculations Amount (£)
Annual Salary of Fiona 94020
Dearness allowances (Bonus) 15000
Gross Salary 109020
Add Allowable Income:
Interest received on her
building society account
94020 * 4% 3760.8
Dividend received on
investment
94020 * 10% 9402
Company accommodation Note 1 4100
Less Allowable deductions
Contribution to HMRC 94020 * 5% -4201
Charitable donation 94020 * 3% -2820.6
Car benefit Note 3 -3490
Car fuel benefit Note 3 -666
Personal allowances -12500
Taxable Income 102605.2
Income Tax liability 37500 * 20% + 65105.2* 40%
7500 + 26042.08
-33542.08
Less Capital gain tax liability Note 2 -190
Less NIC Class 1 -4025

(33542.08 * 12%)
Disposable Income 64848.12
Note 1: Calculation of company accommodation
In the given case, the actual cost basis will be used to calculate the benefit of living
accommodation. It is because the actual cost of the property including improvement is above
£75000 i.e., 180000 + 31000 = £211000
The rented value of the accommodation in the year 2020 to 2021 is £11600
Accommodation benefits which is also known as deductions and rent a room relief is £7500
So, the taxable income is equal to £11600 — £7500 = £4100
Note 2: Calculation of capital benefits of Fiona on music system sale
Particulars Amount
Music system Sale value 3000
Less payment paid by Fiona -2000
Capital benefits 1000
Tax rate 19.00%
Capital gain tax liability 190
Note 3: Calculation of Car benefits (see appendix)
Value of car = £24500
The car is registered before 6th April 2020
Type of engine and CO2 emission is electric charge with the electric range less than 30 miles
Car fuel scale charge = £24500
Car Benefit = £24500 * 14% = £3490
Car fuel benefits = £666 (allowable deductions)

SECTION B
Part 1
(a) Calculation of income tax and National Insurance Contribution Liability under each option
Option 1:
Income Tax liability calculation
Particulars Calculations (£) Amount (£)
Annual Salary 50000
Less Deductions:
Train ticket cost 2400/52 × 48 -2215
Personal allowances -12500
Taxable Income 35285
Tax rate on taxable income 20% (basic rate)
Income tax liability 35285 * 20% 7057
Option 2:
Particulars Calculations (£) Amount (£)
Annual Fee 50000
Less Deductions:
Travelling expenses 5200 miles* 39p/miles -2028
Personal allowances -12500
Taxable Profit 35472
Tax rate on profits 20% (basic rate)
Income tax liability 35472 * 20% 7094.4
National Insurance contribution liability
Option 1:

Class 1: If the employees earn more than £184 a week that their NIC are automatically deducted
by the employer.
Here, in the given option annual salary is 50000 which because per week salary of 50000/ 52 =
£962 per week which is higher than £184 per week.
So, the NIC liability in first option will be as follows:
= £35285 * 12% = £4234.2.
Option 2:
NIC liability in case of self-employed is Class 2 and Class 4:
Class 2 = £3.05 a week = £3.05 × 52 = £158.6
Class 4 = £35472 * 9% = £3192.48
(b) Calculation of Disposable income after all deductions
Option 1:
Particulars Amount (£)
Taxable income 35285
Less Tax liability -7057
Less NIC liability (Class 1) -4234.2
Disposable Income 23993.8
Option 2:
Particulars Amount (£)
Taxable income 35472
Less Tax liability -7094.4
Less NIC liability (Class 2) -158.6
Less NIC liability (Class 4) -3192.48
Disposable Income 25026.52
(c)

After analysing the two options, it is identified that there is no other options available in
order to select the best alternative. It is because in the given question the annual salary and
turnover of the individual is same so the factor which make the difference between both the
options is deductions and allowances along with the liability of national insurance contribution.
On this basis, the disposable income of both the option is calculated. Disposable income means
the income of individual after all deductions, tax liability, NIC and many other social security
(Lymer and Oats, 2020). It is identified from the analysis of disposable income of both option
that the disposable income of individual in the second option is higher than the first option thus
they have to go with the second option for the purpose of personal income tax assessment.
Part 2
A. Difference between tax evasion and tax avoidance
Tax evasion Tax avoidance
The tax evasion is being referred to as the
avoiding of tax payment by using some illegal
measures.
On the other hand, the tax avoidance is the one
which involves avoiding the tax payment but
within the provision of law.
The tax evasion is unlawful way of reducing
the tax payment and in this case the defaulter
may be punished or penalties may be charged.
In against of this, the tax avoidance involves
modifying the intention of the person to make
changes in tax but this is done by complying
with the provision of law only (Nikolakakis
and et.al., 2020).
The tax evasion can be stated as concealment
of tax
Whereas the tax avoidance is known as
hedging of the tax in accordance to law.
The evasion of tax involves the deliberate
manipulation within the tax and this may result
in the fraud.
On the contradictory note, the tax avoidance is
known as taking of unfair advantage of the
shortcomings of the laws.
The tax evasion is being undertaken after the
tax liability is being aroused.
In against of this, the tax avoidance is being
done before the tax liability occurs.
B. Two recent policies introduced by HMRC for reducing tax avoidance and evasion.

Both the tax avoidance and evasion are not good for the country and due to this, it need to
be managed and maintained in proper and effective manner. The main policy being introduced
by HMRC is that they charge the penalties and also imposes different types of the sanctions in
case there is non- compliance with the tax and its rules. This is the step wherein the HMRC
charges and penalises the defaulting party who is either avoiding or evading the tax payment.
On the other hand, another strategy or policy being brought by HMRC for ensuring that
right tax is paid at right time the HMRC involves the following approach which involves
promote, prevent and respond. In case of promote, the HMRC promotes the compliance of tax
and all the relevant laws (Cano, 2020). In addition to this, prevent involves preventing the non-
compliance by undertaking proper use of available data in proper and useful manner. In the end,
the respond involves responding the to the case of tax evasion and avoidance in proper manner
so that it is complying with all the rules and regulations.
Part 3
By evaluating the case information, it was analysed that Mrs Jill is having two leaseholds
and three freehold houses. On this, she paid some legal fee, stamp duty and other related charges
for acquisition. After that she also renovated the property and then sold for profit. During the
year there was not any other income for Mrs Jill. In the present case, the income and the tax
charged over the income will be treated as capital gain tax and not the personal income tax. The
reason pertaining to the fact is that in case the business of Mrs Jill was to buy and sell the
property then the income will be taxed as the personal income tax. But in the present case there
is not any mentions that the buying and selling of the property is being done on the basis of the
trading. Hence, in the present case, the tax will be charged as the capital gain tax because Mrs
Jill is having profit on the income generated by selling the property purchased with the intention
of investment only (Brewer and Tasseva, 2021).
On the other hand, in case the purchase of property was done on the basis of the trading
then the income was taxed as the personal income tax. Moreover, the capital gain tax will be
charged over the income earned on the selling of the property with profits. For instance, the lands
were purchased at £50000 and the cost of repairing and acquiring is £5500 then the total cost is
£55500. Suppose the lands are being sold at £67500 then the total profit earned will be £12000.
Thus, the capital gain tax will be charged over the profit being earned that is £12000. So that
capital gain tax will be charged over the profit and this will be charged on the prevalent rate

being applicable at that time (Ghodsi and Webster, 2018). On the other hand, in case this would
have been the case of personal income tax then the amount of profit that is £12000 will be added
in the total income and then the personal tax rate will be applied and total tax will be calculated
which will be treated as personal tax.

REFERENCES
Books and journals
Lymer, A. and Oats, L., 2020. Taxation: Policy and Practice-2020-2021.
Nikolakakis, A. and et.al., 2020. Fowler v HMRC (UK Supreme Court): Neither Fish nor
Fowler: Tax Treaty Implications of Domestic Deeming Rules.
Cano, M. C., 2020. UK government makes concessions on IR35 changes. International Tax
Review.
Ghodsi, Z. and Webster, A., 2018. UK Taxes and Tax Revenues: Composition and Trends.
Intech Open. 74380. pp.83-96.
Brewer, M. and Tasseva, I. V., 2021. Did the UK policy response to Covid-19 protect household
incomes?. The Journal of Economic Inequality. 19(3). pp.433-458.
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Appendix
Mini Electric car costing £24500, Britain favourite little car with less than 30 miles to the charge
and 80% charging within 35 minutes.
2