fbpx

Exam Traps: Tax Stumbling Blocks – Income Tax

Taxation is one of the most complex and important topics that underpins much of financial planning – and it’s the topic that causes most consternation for students.

Tax is tested across multiple papers of the diploma and advanced diploma modules. It can seem complicated, but mostly it is about following a process or set of rules. Once you know the rules, you should be well on your way to exam success.

Here we examine Income tax an area that typically cause confusion or trip up students.

Income tax

Income tax also features in a number of exams. A common stumbling block is understanding how to calculate income tax.

First of all, make sure you read the question properly. If it states the person has taxable income, then this is income after considering the available allowances.

Income that falls within available allowances is not taxable. The first £12,500 of income falls within the current personal allowance (the allowance changes to £12,570 from April 2021).

Use the guide below for calculating income tax

1. Calculate gross income from all sources in this order:

  • earnings, including pensions and income from rental property;
  • savings income, but not chargeable gains from life assurance policies;
  • dividends;
  • chargeable gains.

2. Deduct any reliefs from income, such as business losses or interest on a loan to invest in a partnership.

3. Deduct the personal allowance. This is reduced for those earning more than £100,000 of adjusted net income, and lost completely at £125,000 or more. Extend the basic- and higher-rate tax bands if necessary, for example by the gross amount of pension contributions made via the relief-at-source method.

4. Work out the tax on the income, using the extended tax bands if applicable.

5. Finally, apply any tax reducers, such as a transferred personal allowance.

Tax is a subject tested across multiple papers of the diploma and advanced diploma modules and it’s a topic that causes most consternation for students. Need extra study support? Check out our range of CII courses: https://redmilladvance.com/courses/

Are you studying for your Diploma in Financial Planning?

Try our blended study option  

As well as all the benefits of our existing digital study support, we have the option for you to join a full-day in a virtual classroom session with our expert training team. This one-day session is designed to get you in the best possible shape for your upcoming exam and allows you to discuss and explore areas of your study directly with our expert training team.

Check out our blended learning options below:

R01: http://bit.ly/3Y9DnLr
R02: https://bit.ly/3Yk1RBR
R03: http://bit.ly/3DVsQLQ
R04: http://bit.ly/3jKD6ja
R05: http://bit.ly/3HH8Zky

Redmill Advance is a learning provider and e-learning specialist offering CII and CISI exam support. 

 

Connect with Redmill

Stay up to date with the latest industry news. Connect with us on the below channels for insights, new jobs, helpful tips and more.

Latest News

An easier way to record your CPD

An easier way to record your CPD

  From a recent survey of 500 Financial Advisors on Continuous Professional Development (CPD) when presented with a scale of 1-10 where 1 is extremely painful and 10 is the peak of enjoyment, a...

CII 2024 Exam Dates

CII 2024 Exam Dates

The CII 2024 exam dates are now available. So, where to start… Step 1: Book your exam with the CII Exam Exam Date Recommended Study Start Date AF1 Personal Tax and Trust Planning 20/02/2024...

ASCOT LLOYD ACADEMY ACHIEVE UNPRECEDENTED RESULTS

ASCOT LLOYD ACADEMY ACHIEVE UNPRECEDENTED RESULTS

Redmill Advance is delighted to report on the unprecedented success of the Ascot Lloyd Academy Launched in April 2023, the first inaugural academy cohort achieved an unprecedented first time pass in...