R03 Types of income and deduction of tax: free practice questions

1. Question 1 of 5

   Which Act sets out the rules for taxing employment income, pensions and State benefits?

   Option A: The Income Tax (Trading and Other Income) Act 2005Option B: The Income Tax (Earnings and Pensions) Act 2003Option C: The Taxation of Chargeable Gains Act 1992Option D: The Income Tax Act 2007

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   The answer is B: The Income Tax (Earnings and Pensions) Act 2003

   ITEPA 2003 governs employment income, pension income and State benefits. ITTOIA 2005 covers trading, property, investment and other income, and the Income Tax Act 2007 holds the general machinery such as allowances.

   Why the other options are wrong

   A

   ITTOIA 2005 covers trading, property, savings and miscellaneous income, not earnings.

   C

   That Act deals with capital gains, not income.

   D

   The 2007 Act holds the general provisions, such as personal allowances and reliefs.

2. Question 2 of 5

   Freya sells craft items occasionally and receives £800 in 2026/27, with £300 of costs. What is her tax position?

   Option A: She must declare it and then claim the allowanceOption B: She is taxed on her profit of £500Option C: She is taxed on the full £800Option D: The income is exempt and needn't be declared

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   The answer is D: The income is exempt and needn't be declared

   The £1,000 trading allowance means trading income of less than £1,000 (before expenses) is exempt and doesn't have to be declared.

   Why the other options are wrong

   A

   Income below £1,000 doesn't need to go on a tax return at all.

   B

   Gross trading income under £1,000 is covered by the trading allowance.

   C

   The trading allowance makes the whole amount exempt.

3. Question 3 of 5

   A higher-rate taxpayer pays £6,000 of mortgage interest on a let residential flat in 2026/27. How is relief given for the interest?

   Option A: As a 20% tax reduction of £1,200Option B: No relief is availableOption C: As a tax reduction of £2,400Option D: As an expense, saving £2,400 at 40%

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   The answer is A: As a 20% tax reduction of £1,200

   Finance costs on residential lettings aren't deducted from rental profits. Instead, the landlord gets a basic rate tax reduction: £6,000 × 20% = £1,200.

   Why the other options are wrong

   B

   Relief is available, but only at the basic rate.

   C

   The reduction is restricted to the basic rate of 20%.

   D

   Residential finance costs can't be deducted as an expense.

4. Question 4 of 5

   How is interest on a UK building society account paid to an individual?

   Option A: Net of 20%, unless registered for grossOption B: Net of tax at the saver's marginal rateOption C: Net of 20% tax, which a non-taxpayer can reclaimOption D: Gross, with no tax deducted at source

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   The answer is D: Gross, with no tax deducted at source

   Bank and building society interest, and interest distributions from unit trusts, OEICs and investment trusts, are paid gross. Any tax due is collected through self assessment or the tax code.

   Why the other options are wrong

   A

   There's nothing to register; it is paid gross for everyone.

   B

   No tax is deducted at source.

   C

   Bank and building society interest is no longer paid net.

5. Question 5 of 5

   How are dividends from a UK company received by an individual shareholder?

   Option A: Net of 20% tax, reclaimable by non-taxpayersOption B: Net of 10.75% tax deducted by the companyOption C: With a 10% tax credit attachedOption D: As gross income with no tax deducted

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   The answer is D: As gross income with no tax deducted

   UK dividends are received gross. The shareholder's liability, if any, is worked out under the dividend allowance and dividend rates.

   Why the other options are wrong

   A

   Dividends aren't paid net of tax.

   B

   No tax is deducted from dividends.

   C

   Dividend tax credits no longer exist.

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