R03 Income tax and NIC planning: free practice questions

1. Question 1 of 5

   Fred, a higher-rate taxpayer, wants to 'lend' savings to his basic-rate wife so the interest is taxed on her, keeping the right to have it back. Will this work?

   Option A: No, because spouses can't transfer assetsOption B: Yes, if they hold the account jointlyOption C: No, the transfer must be outright with no benefit kept by FredOption D: Yes, as spouse transfers always work for income tax

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   The answer is C: No, the transfer must be outright with no benefit kept by Fred

   To shift income, transfers between spouses must be absolute and unconditional, with no future benefit to the transferor. A loan he can recall is a settlement, so the income stays his. The risk of divorce is a factor.

   Why the other options are wrong

   A

   They can, if the transfer is outright.

   B

   A joint account with a retained right still taxes Fred on his share.

   D

   A conditional transfer is a settlement, leaving the income taxed on Fred.

2. Question 2 of 5

   A company pays £15,000 into the personal pension of the owner's wife, who works for it. When is the contribution deductible for the company?

   Option A: When pay plus pension is reasonable for the work she doesOption B: Only if she owns sharesOption C: Never, as she is a family memberOption D: Always, as all employer contributions are deductible

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   The answer is A: When pay plus pension is reasonable for the work she does

   Employer contributions aren't taxed on the employee and attract no NICs. They're deductible if salary and pension together are a reasonable reward for the work; excessive amounts may fail the wholly and exclusively test.

   Why the other options are wrong

   B

   Shareholding isn't the test.

   C

   It can be deductible if reasonable.

   D

   Excessive contributions for a relative may not be deductible.

3. Question 3 of 5

   When is taking dividends instead of salary least likely to save tax overall for a director-shareholder?

   Option A: When the company pays 25% or 26.5% and the dividends are taxed at higher ratesOption B: When the dividends fall within the £500 allowanceOption C: When the director wants to avoid NICsOption D: When the company pays corporation tax at 19% and the director is a basic-rate taxpayer

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   The answer is A: When the company pays 25% or 26.5% and the dividends are taxed at higher rates

   Dividends avoid NICs but come from taxed profits. They work best with small profits taxed at 19% and basic-rate dividend tax; with 25% or 26.5% corporation tax and higher-rate dividend tax, there may be little or no saving.

   Why the other options are wrong

   B

   Dividends within the allowance always save tax.

   C

   Avoiding NICs is the reason dividends can help.

   D

   That's where dividends are most likely to save tax.

4. Question 4 of 5

   When do class 4 NICs stop for a self-employed person reaching State Pension age?

   Option A: At the end of the tax year in which they reach State Pension ageOption B: At age 75Option C: On the day they reach State Pension ageOption D: They never stop while the person carries on trading

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   The answer is A: At the end of the tax year in which they reach State Pension age

   Class 1 (and voluntary class 2) stop at State Pension age, but class 4 stops at the end of the tax year in which SPA is reached. SPA is rising from 66 to 67 between May 2026 and March 2028.

   Why the other options are wrong

   B

   That's a pension contribution age, not an NIC one.

   C

   Class 1 stops at SPA; class 4 runs to the end of that tax year.

   D

   They stop after the tax year of reaching SPA.

5. Question 5 of 5

   A business owner wants to share profits with her husband by forming a partnership. What is needed for this to work?

   Option A: An off-payroll working assessmentOption B: Genuine involvement by both, ideally with a written agreementOption C: Registration with Companies HouseOption D: Just adding his name to the bank account and sharing

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   The answer is B: Genuine involvement by both, ideally with a written agreement

   Profit sharing needs both spouses genuinely involved as partners, with a written partnership agreement highly desirable. There's little scope if the business supplies personal services caught by the off-payroll rules.

   Why the other options are wrong

   A

   If IR35 applies, there's virtually no saving.

   C

   Partnerships aren't registered there.

   D

   Both must genuinely be partners.

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