AAT L4 Personal Tax (UK Income Tax) 3 — Questions and Answers
Question 1: Class 1 National Insurance Contributions (primary) are paid by:
- Employers on all employee earnings
- Employees on earnings between the primary threshold and upper earnings limit (Correct answer)
- Self-employed individuals on trading profits
- Directors on dividend income
Correct answer: Employees on earnings between the primary threshold and upper earnings limit
Primary Class 1 NICs are paid by employees on earnings between the primary threshold (£12,570 p.a. in 2024/25) and the upper earnings limit (£50,270 p.a.), at 8% in 2024/25.
Question 2: For 2024/25, the income tax rate on dividend income falling in the basic rate band (above the £500 dividend allowance) is:
- 0%
- 7.5%
- 8.75% (Correct answer)
- 10%
Correct answer: 8.75%
The dividend tax rate for basic rate taxpayers is 8.75% from 2022/23 onwards (previously 7.5%). Higher rate taxpayers pay 33.75%; additional rate taxpayers pay 39.35%.
Question 3: The UK savings income starting rate band of 0% (currently £5,000) applies when:
- An individual has more than £5,000 of savings income
- An individual's non-savings income is below the basic rate limit, allowing savings income to be taxed at 0% up to £5,000 (Correct answer)
- All savings income is tax-free for basic rate taxpayers
- Only pensioners can use the starting rate for savings
Correct answer: An individual's non-savings income is below the basic rate limit, allowing savings income to be taxed at 0% up to £5,000
The 0% starting rate for savings applies to savings income falling within the first £5,000 of the basic rate band, but only if an individual's non-savings income does not use up this starting rate band first.
Question 4: Gift aid donations allow higher rate taxpayers to claim additional tax relief by:
- Deducting the gross donation from their income
- Extending the basic rate band by the gross donation, reducing higher rate tax (Correct answer)
- Receiving a cash refund from HMRC directly
- Adding the gross donation to their personal allowance
Correct answer: Extending the basic rate band by the gross donation, reducing higher rate tax
Gift aid donations extend the basic rate band (and higher rate threshold) by the gross donation amount. Higher rate taxpayers pay 40% on income above the extended band instead of 40% within it — effectively getting 40% relief on their 20% cash donation (the charity claiming 20% basic rate).
Question 5: Which of the following is a tax-allowable deduction for computing employment income?
- Commuting costs from home to a regular place of work
- Expenses incurred wholly, exclusively, and necessarily in the performance of the duties of employment (Correct answer)
- Professional society membership fees paid voluntarily
- Clothing for work that is suitable for everyday wear
Correct answer: Expenses incurred wholly, exclusively, and necessarily in the performance of the duties of employment
Deductions against employment income are very restricted: the 'wholly, exclusively, AND necessarily' test is the strictest in UK tax. Commuting, voluntary memberships, and everyday clothing all fail this test.
Question 6: The rent-a-room scheme allows an individual to receive up to £7,500 per year tax-free from:
- Renting a second property
- Letting furnished rooms in their own main residence (Correct answer)
- Commercial property lettings
- Renting out a garage or storage space
Correct answer: Letting furnished rooms in their own main residence
Rent-a-room relief exempts up to £7,500 per year of gross rental income from furnished letting of rooms in the landlord's main residence. If income exceeds £7,500, the individual can elect to use rent-a-room or the normal property income rules.
AAT L4 Personal Tax (UK Income Tax) 3
Class 1 National Insurance Contributions (primary) are paid by: