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Personal matters

The Chartered Insurance Institute turns its attention to passing J01 – the exam on personal tax. As candidates grapple with the technicalities, there are techniques to help them with the main problem areas

Passing the personal tax unit of the CII’s Diploma in Financial Planning – known as J01 – demonstrates to your clients that you understand
three important areas:

  • The basic structure of the tax system and self-assessment
  • The main taxes on income and capital that can be charged on individuals, self-assessment and how tax liabilities are calculated
  • The effect of residence and domicile on a person’s UK tax liability.

Although candidates will have to grapple with the technical side to achieve the necessary pass mark, there are exam tactics that can serve them well. Here, we will tackle the areas of the syllabus that tend to present the most frequent problems:

Candidates should remember to show all workings and adopt a structured approach to calculations so nothing is missed

1.3: The operation of selfassessment, how payments are calculated, payment due dates, penalties for non-compliance, obligations of the taxpayer to report to HMRC.

It’s important that candidates understand self-employment tax payment dates, as exam questions will test you on tax liabilities for either specific tax years or trading periods. And there are three golden rules to follow:

Tax year liabilities
The first payment on account for any tax year is due on January 31 in that tax year, with the second on the following July 31 and final balancing payment on the next January 31.

2: The first and second tax payments due on account are half the previous year’s liability. The final balancing payment is the total tax bill for
that tax year less the two payments made on account. Trading year ends

3: The tax is worked out based on the tax year in which the trading year ends. So, a trading year ending June 30, 2008 will be taxed in the
08/09 tax year.

2.0: Understand when and how income tax is applied to different types of income
Candidates need to have a structured approach to ensure they deal with deductions properly, don’t miss anything, gross everything up accurately and tax the income in order of priority.

Two areas where candidates struggle are lack of practice at expanding the basic rate band and not showing all workings. So, it’s worth
looking at previous examiners’ reports which show the columns needed to separate types of income – non-savings, savings and dividends, each with the grossing up workings written down.

Also, deductions such as occupational pension contributions or the personal allowance should be deducted from non-savings income first.

3.3: Annual maximum contributions for individuals with more than one employment or a mixture of employed and selfemployedearnings during a tax year
As one of the more complicated areas for NI, candidates need to remember that if a person is paying maximum class 1 at 11 per cent, they are already paying for a lot of their entitlements under the NI scheme, so should not pay for those entitlements again from other, self-employed earning NI. Hence there is no need to pay class 2 and class 4 should only be at 1 per cent over £5,715 and not at 8 per cent.

4.0 Understand when and how capital gains tax applies to an individual’s gains
Working out a “part disposal” is an important skill to master. For example, you may be asked to work out the gain on a plot of land sold for £200,000, with the remaining land valued at £800,000. The original purchase price of the total land was £50,000.

Candidates should sit back and look at the big picture rather than get immediately consumed with formulae or processes.

In this case, the logic is that the total value of the land is £1,000,000, with 20 per cent (£200,000) being sold off. Therefore, the purchase price of the plot would have been 20 per cent of the £50,000 paid for it, that is, £10,000.

The gain is therefore £200,000-£10,000 = £190,000

5.0: Understand the tax treatment of different kinds of investments
Let’s face it, there are a lot of products to know about and most have been examined over the years. The paper usually either picks on two or three and asks questions generating three or four marks on each, or sometimes picks one specific product and sets eight marks on it.

Needless to say, those products that have more restrictions or more complicated reliefs and restrictions will be the ones capable of generating eight marks – such as distributor funds, enterprise investment scheme or venture capital trusts.

So, be armed with key tax features of the more complex products that have not been tested in the last couple of papers.

6.0: Understand when and how inheritance tax applies
The bit that most candidates dislike is “gifts before death” and how to calculate IHT on them. The best approach on a death calculation is:

  • Ignore the estate itself at first – deal with the tax on gifts prior to death first
  • Deduct two lots of £3,000 annual allowance from any lifetime gifts if the case study says “no other gifting has been made”
  • Start seven years before death and work forward, dealing with gifts in chronological order
  • Always use the death Nil Rate Band (NRB), never the NRB at the time of the gift when calculating death IHT.
  • Taper tax, not gifts.

7.0: Understand the impact of an individual’s residence and domicile status on liability to UK tax
The remittance basis for tax on foreign income was introduced in 2008 and particularly affected non-UK-domiciled people.

It is worth looking at the summary boxes and flowcharts on the HMRC website showing who has to pay what. Looking beyond the study text is often a good way of learning about and understanding content.

Along with having the specific knowledge needed to handle the questions, candidates should remember to show all workings, adopt a structured approach to calculations so nothing is missed and take the time to study the last three papers to familiarise themselves with typical questions.


1: Understand the basic structure of the tax system and self-assessment.

Susan Brown works on a self-employed basis. She has worked in this capacity for a number of years and plans to continue for the foreseeable future. Her trading year is October 1 to the following September 30. Her income tax liabilities for the last three trading years have been as follows:

Trading year Income tax liability (£)

1 October 2006 to September 30, 2007

1 October 2007 to September 30, 2008

1 October 2008 to September 30, 2009

a: State the dates on which Susan needs to make income tax payments in respect of the profits for the 2008/09 trading year (3)

Rule 3: This is the 09/2010 tax year (as trading year ends bet-ween April 09 and April 2010)

Rule 1: First payment due in that tax year is Jan 31, 2010, then July 31, 2010 then Jan 31, 2011

b: State the payments Susan will need to make to HM Revenue and Customs on each of the dates identified in (a) for the 08/09 trading year, showing how each payment is calculated.

Rule 2: First amount is half previous year – so 50% of £13,500 = £6,750 The next amount in July is a further £6,750

The final balancing payment is the final 09/10 tax year tax liability of £14,500 less the £13,500 paid so far, that is, £1,000

2: Understand when and how income tax is applied to different types of income

Example of expanded
basic-rate band

Fred makes a personal pension contribution of £400 a month and also gives £800 to gift aid in 2009/10. Calculate, showing all your workings, his expanded basic-rate tax band (5)

£400 x 12 x 100/80 = £6,000
£800 x 100/80 = £1,000
£37,400 + £6,000 + £1,000 = £44,400


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