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Income tax and national insurance contributions (NIC) liabilitiesSection CIncome TaxEmployment IncomeTrading Income

ACCA · Question 31 · Income tax and national insurance contributions (NIC) liabilities

Section C

Dr. Aris Thorne is a medical consultant. During the tax year 2023/24, he has two sources of income:

  1. Employment with the NHS.
  2. A private self-employed medical practice.

NHS Employment:
Aris receives a gross annual salary of £95,000. The NHS provides him with a petrol-powered company car (list price £35,000, CO2 emissions 135g/km). The NHS also pays for all his private fuel. Aris pays a professional subscription to the General Medical Council of £450, which is necessary for his employment.

Private Practice:
Aris prepares his accounts to 5 April each year using the cash basis. For 2023/24, his cash receipts from patients were £65,000. He paid the following expenses:

  • Medical supplies: £8,000
  • Lease of medical equipment: £4,000
  • Purchase of a new laptop for the practice: £1,500
  • Client entertainment (taking referring doctors to dinner): £800

Other Information:
Aris made gross personal pension contributions of £15,000 during the year. He has no other income.

Required:
Calculate Dr. Aris Thorne's Income Tax liability for the tax year 2023/24.

Note: You should show all workings, including the calculation of employment income, trading income, and the application of the personal allowance and tax bands. Assume the car benefit percentage for 135g/km is 32% and the fuel benefit base figure is £27,800.

How to approach this question

1. Calculate Employment Income: Salary + Car Benefit (List price x %) + Fuel Benefit (Base figure x %) - Professional Subscriptions. 2. Calculate Trading Income (Cash Basis): Receipts - Allowable expenses (Supplies, Lease, Laptop). Exclude client entertainment. 3. Calculate Net Income: Employment Income + Trading Income. 4. Determine Personal Allowance: Check if Net Income > £100k. If so, taper the PA. 5. Calculate Taxable Income: Net Income - PA. 6. Adjust Tax Bands: Extend the basic rate band by the gross pension contribution (£15,000). 7. Calculate Tax Liability: Apply 20%, 40%, and 45% rates to the respective bands.

Full Answer

**1. Employment Income:** Salary: £95,000 Car Benefit: £35,000 x 32% = £11,200 Fuel Benefit: £27,800 x 32% = £8,896 Less: Professional Subscription: (£450) Total Employment Income = £114,646 **2. Trading Income (Cash Basis):** Receipts: £65,000 Less: Medical supplies (£8,000) Less: Lease of equipment (£4,000) Less: Laptop (£1,500) - allowable under cash basis Client entertainment is disallowable. Total Trading Income = £51,500 **3. Net Income:** £114,646 + £51,500 = £166,146 **4. Personal Allowance:** Adjusted Net Income (ANI) = Net Income - Gross Pension ANI = £166,146 - £15,000 = £151,146 Excess over £100,000 = £51,146 Reduction in PA = £51,146 / 2 = £25,573. Since this exceeds the standard PA (£12,570), the PA is reduced to £0. **5. Taxable Income:** £166,146 - £0 = £166,146 **6. Tax Calculation:** Basic Rate Band extended by pension: £37,700 + £15,000 = £52,700 Higher Rate Band limit: £125,140 + £15,000 = £140,140 Tax on first £52,700 @ 20% = £10,540 Tax on £52,701 to £140,140 (£87,440) @ 40% = £34,976 Tax on excess above £140,140 (£166,146 - £140,140 = £26,006) @ 45% = £11,702.70 Total Income Tax Liability = £10,540 + £34,976 + £11,702.70 = £57,218.70

Common mistakes

Forgetting to taper the Personal Allowance, failing to deduct the gross pension contribution when calculating Adjusted Net Income, or treating the laptop as a capital allowance rather than an expense under the cash basis.
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