Tax Planning
What CF6 tests
Tax planning tests knowledge of personal taxation, reliefs, timing and the boundary between avoidance and evasion.
Core rules
- Personal income tax is governed by statute and administered by state internal revenue services for individuals; PAYE is withheld by employers.
- Taxable income is gross income less allowable deductions and Consolidated Relief Allowance: the higher of 200,000 or 1% of gross income, plus 20% of gross income.
- Apply the current graduated bands; capital gains, VAT and stamp duties are separate.
- Planning tools include pension contributions, qualifying life insurance, timing of income, income splitting and tax-efficient savings. Avoid sham arrangements.
- Tax avoidance uses the law; evasion is illegal.
Worked example
Gross income is 6m. CRA = higher of 200,000 and 1% x 6m = 60,000, so 200,000 + 20% x 6m = 1.2m, total 1.4m. Taxable income = 4.6m. Using PITA bands: 300,000 at 7% = 21,000; 300,000 at 11% = 33,000; 500,000 at 15% = 75,000; 500,000 at 19% = 95,000; 1.6m at 21% = 336,000; remaining 1.4m at 24% = 336,000; tax = 896,000. Reasoning: reliefs reduce taxable income, not the tax bill by the same amount.
Traps
Applying CRA twice; using gross instead of taxable income; treating capital receipts as income; missing filing deadlines; recommending evasion.