Income Tax Computation Report for Nicola – 2024/25 UK Assessment
Section A
Income Tax Computation – This Section Carries 50 Marks
Nicola is 38 years old, married and has 2 children (twins). She currently works as a consultant for “French Pier plc” (FP) a large engineering consultancy. On 1st April 2024 she was appointed as lead consultant on the rail systems installation on the HS2 project. As the step up to Project Director has resulted in a significantly increased remuneration package Nicola would like to know what her 2024/25 tax liability will be, and she has asked for your help. Nicola provides the following information.
The new annual salary is £YYYYMM/2* plus 3 project progress bonuses estimated at £15,000 each payable in March 2025, July 2025 and December 2025. In April 2024 Nicola received a bonus of £8,000 in respect of a completed contract in February 2024.
*Note: You should use your year and month of birth and divide by 2. For confidentiality reasons please feel free to use another date within 3 years.
Nicola has been a member of the FP pension scheme since joining the company in 2018. Under the scheme Nicola pays 6% of her salary into the fund. FP also pay 6% of Nicola’s salary into the fund. The salary stated above is gross before any deductions. Tax on the FP salary is deducted under PAYE and the P60 for the year to 5th April 2025 reveals that £47,500 tax has been deducted.
In recognition of the Project Director status French Pier have provided a revised benefits package as set out below.
Company Cars:
- On 6th July 2024 Nicola was given the use of a new Mercedes C300e Urban Edition Saloon for which FP paid £44,960 although the manufacturer’s list price was £51,460. Nicola tells you that this is a 2-litre hybrid vehicle and that she was told that relevant emission and mileage information is available on the Mercedes-Benz UK website. FP will pay all costs (including private fuel) which for the period to 5th April 2025 are servicing £1,800, road tax £465, insurance £2,250 and fuel £1,950. Nicola kept a record of mileage and in the year to 5th April 2025 Nicola drove 16,000 miles of which 75% were business miles.
- Prior to 6th July 2024 FP provided Nicola with a petrol 1.6 Kia Sportage which had a P11D value of £29,470 and CO2 emissions of 108 g/km. Nicola paid for all petrol and claimed a fuel-only mileage rate of 16p. Mileage expense claims reveal that Nicola claimed 5,500 business miles. FP paid all servicing and running costs: road tax £195 (per annum), insurance £1,650 and servicing and repairs in the three-month period amounting to £975.
Hotel Accommodation:
- During the year to 5th April 2025 Nicola stayed in Birmingham near to the main construction offices although she also stayed at various locations along the HS2 route.
Hotels were usually of 4 star standard with gym facilities and a swimming pool. The cost to FP was £11,000 (50 nights at £220.00 per night). You understand that if lower quality hotels had been used without a gym and swimming pool (eg Premier Inn!) then the total cost would have been around £6,500 (50 nights at £130.00).
- As a reward for working long hours and some weekends the Chairman of FP gave Nicola, her husband and two children an all expenses paid trip to Disneyworld in Florida. The total cost of the 8 day trip was £3,200 (including flights, full board hotel and car hire). As the trip was in May 2024 (a particularly busy time) Nicola had to work for two of the days whilst away – looking at plans and some online meetings.
- As the project will become very intense and busy FP’s Projects Director arranged for
Nicola to stay in an apartment near the Birmingham construction office from 1 February
- The accommodation has an annual value of £8,000 and a market value of £380,000, FP will pay £1,500.00 per month rent. Other costs (council tax, service charge and utilities) amount to £250.00 per month. The apartment has furniture to the value of £8,200 and the official interest rate is 2.25%.
Equipment:
- FP have provided Nicola with an Apple MacBook Pro cost £1,600, Apple iPhone 16e £600,00, Apple iPad Pro £1,000 and a Canon EOS R10 digital camera £1,250. Although used for work FP have made it clear to Nicola that she is free to use all items for personal use and Nicola thinks that on average the personal use amounts to around 40%. All items except the camera have been available since 6th April 2024. The camera was made available on 6th July 2024.
- Since 6th July FP have provided Nicola (on a loan basis) a Sony home cinema system. The system cost £2,500. Nicola makes no contribution to FP for the system.
Loan:
- On 6th July FP loaned Nicola £36,000. She made no repayments in the year but she did pay interest of £320 to FP.
School Fees:
- On 5th January 2025 Nicola’s two children started at St Hilary’s (a private school in Surrey). FP will pay the school fees as the Chairman feels that this will help Nicola to focus on her projects. The per term fees are £5,345.00 for each of the two twins. The fees are payable one week after the start of the term and Nicola contributes £1,000 for each child. Lunch costs and transport costs are in addition to the fees and are paid by Nicola.
During the year to 5th April 2025 Nicola paid to get some safety clothes for her work. FP did provide them but they were too big and uncomfortable so Nicola bought a high vis jacket and some protective boots, these cost £125. FP did say that they would reimburse these amounts if Nicola submitted a claim however she felt that the company had been very good to her and was reluctant to make a claim.
Nicola has a payroll giving arrangement (Give As You Earn) whereby 2% of her salary is deducted and given to Oxfam.
Nicola gives you additional relevant detail on her financial affairs:
Although very busy working for FP Nicola has a small freelance consultancy where she writes reports for insurance companies in claim cases which have to go to court. She also writes technical articles for engineering magazines and journals. For the year to 31st March 2025 Nicola will have profits of £6,500. Under the 2023/24 profit apportionment transition arrangements Nicola had transition profits (after overlap relief) of £8,500.
Nicola lives in a large house and for the last two years she has rented a room to the daughter of a friend who has a job at a local care home. The daughter pays £600 a month and costs in relation to this are minimal – Nicola estimates that additional annual costs, mainly electricity, amount to £250.
During the year to 5th April 2025 Nicola received £1,840 bank interest, £1,200 dividends from FP and £850 from an Individual Savings Account (ISA). She also paid private pension premiums amounting to £18,000 (these are made net of tax at 20%) and made several additional charitable donations (British Heart Foundation, the St Hilary’s School Voluntary Fund and Battersea Dogs Home) amounting to £1,200.
Nicola receives child benefit allowance for her two children. In 2024/25 she received £1,331 for one child and £881 for the other.
Required:
Based on the above information write a report to Nicola setting out her liability to Income Tax and National Insurance for the tax year to 5th April 2025. Your report should explain the treatment of the various items.
(20 marks – 1,000 words)
You must clearly show all the relevant calculations in detail, added as supporting documents to your report. Your calculations should be set out in a way that Nicola (not an expert) can easily understand. You should use and submit an Excel worksheet for your calculations.
(20 marks)
Remember! Nicola is an engineer, so she is good at maths and numbers, and does have some business/financial understanding but does not have much knowledge of taxation. Therefore, you have to be very clear in your explanations and presentation. You should reference any information sources, state any assumptions you make and identify any additional information you might need.
SECTION B
Part 1
Making tax digital.
Whilst gathering the information in part A above you pause for a coffee and a chat.
Over coffee Nicola talks about her future plans. As explained above she has a small consultancy business. She explains that working for FP is great, they pay well but it’s hard work and full on, such that she has limited time for her family. Her little girls are growing up and she feels that she is “missing seeing and celebrating changes as they get older”. She tells you that once her work on the HS2 project is complete she is planning to leave FP and focus on her self-employed consultancy. She is confident that she can “grow the business”.
She goes on to tell you that she has heard about the HMRC making tax digital (MTD) project and wonders how it will affect her business going forward.
Required:
Write brief notes explaining the likely impact of MTD on Nicola’s business.
Present your detailed notes in a report format. (Calculations are not required for this question).
Your summary should be detailed enough to be understood by Nicola – a non-tax specialist. It may contain examples if that will improve the clarity of your report.
(15 marks – 1,000 words)
Part 2
The badges of trade.
During your discussions Nicola tells you that at one of the court cases she was helping out on there were various discussions “about something called the badges of trade. Can you tell me what they are and what they indicate?”.
Required:
Write notes explaining the badges of trade. You should support your explanations with relevant cases.
(15 marks – 500 words)
Part 3
Environmental issues.
As your meeting with Nicola continues she explains that she has become very concerned about the future, especially the global environment. She tells you “it’s my two girls that I am most worried about. If we don’t get the planet right it’s their generation that will suffer. She then points to a quote attached to her fridge freezer.
“The climate crisis is both the easiest and hardest issue we have ever faced. The easiest because we know what we must do. We must stop the emissions of greenhouse gases. The hardest because our current economics are still totally dependent on burning fossil fuels, and thereby destroying ecosystems in order to create everlasting economic growth.
Greta Thunberg eco activist
And to another one on the notice board:
“I am telling you there is hope. I have seen it, but it does not come from the governments or corporations. It comes from the people”
Greta Thunberg eco activist
Nicola goes on to ask “is that true, governments don’t do anything?” Our UK government must be doing something? I thought there were lots of green taxes? Maybe we can discuss again when you come back with my tax calculations and report.
Required:
In advance of future discussions with Nicola write a brief set of notes identifying how the UK tax system seeks to reduce environmental damage and preserve the environment.