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Income tax and NIC liabilitiesSection CIncome TaxTrading IncomeFHL

ACCA · Question 31 · Income tax and NIC liabilities

Section C: Constructed Response

Dr. Elena Rostova is an independent environmental consultant. For the tax year 2023/24, she has the following sources of income:

  1. Self-Employment (Trading Income):
    Elena's draft statement of profit or loss for the year ended 5 April 2024 shows a net profit of £95,000. This figure was arrived at after deducting the following expenses:
  • Depreciation: £4,500
  • Client entertaining: £1,200
  • Staff entertaining (annual Christmas party for her 2 employees): £250
  • Professional subscription to the Institute of Environmental Sciences: £350
  • Parking fines incurred while visiting clients: £150
    Capital allowances for the year have been correctly calculated as £3,800.

  1. Employment Income:
    Elena also works part-time as a lecturer at a local university. Her gross salary for 2023/24 was £22,000. PAYE deducted was £2,100. The university provided her with private medical insurance costing £800.

  2. Property Income:
    Elena owns a Furnished Holiday Let (FHL) in Cornwall. During 2023/24, the gross rental income was £15,000. Allowable expenses (excluding interest) were £4,000. She paid £3,000 in mortgage interest on the loan used to purchase the property.

  3. Investment Income:
    Elena received dividends of £4,000 from UK companies.

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

Note: You should show all workings, including the adjustment of trading profit, the calculation of property income, and the computation of adjusted net income to determine her personal allowance.

How to approach this question

1. Adjust the trading profit by adding back disallowed expenses (depreciation, client entertaining, fines) and deducting capital allowances. 2. Calculate employment income (salary + benefits). 3. Calculate FHL profit (remembering interest is fully deductible for FHLs). 4. Sum all income to find Net Income. 5. Check if Net Income exceeds £100,000. If so, restrict the Personal Allowance by £1 for every £2 over £100k. 6. Calculate tax using the correct bands and rates, remembering the dividend allowance (£1,000 for 23/24) and dividend higher rate (33.75%).

Full Answer

This comprehensive question tests multiple areas of Income Tax. Trading Income requires adding back non-allowable expenses. Client entertaining and fines are never allowable. Staff entertaining is allowable if it's an annual event under £150 per head. FHLs benefit from special rules, notably that finance costs (mortgage interest) are fully deductible as an expense, unlike standard residential lets which only get a 20% tax reducer. Because Elena's Adjusted Net Income (£131,850) is over £100,000, her Personal Allowance is reduced by £1 for every £2 of excess. The excess is £31,850, so the reduction is £15,925, which completely wipes out her £12,570 allowance. Finally, dividends are taxed as the top slice of income. The first £1,000 is at 0%, and the rest falls into the higher rate band, taxed at 33.75%.

Common mistakes

Restricting the FHL mortgage interest to 20%. Forgetting to restrict the Personal Allowance. Using the wrong dividend allowance (£2,000 instead of £1,000 for 23/24).
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