Financial Budgeting and Planning - Essay Example

 Financial Budgeting and Planning Question 1 You are required to calculate income tax for Penny for 2015/2016 and explain how it is calculated. You should explain clearly you are your reasons and the basis on which you are advising her. You should bear in mind that she has only vague notions as to how the different taxes operate and the basis on which they are assessed. You need to produce a plan to get her out of her money difficulties (including a household budget), and advise her how to cope in the future. Details £ £ Net income 21200 Add back: disallowable UK Dividends -2250 UK treasury stocks -500 Building society interest -400 clothes -150*12=-1,800 Sheldon clothes -80*12=-960 shoes -250 -6160 Taxable income 15,040 Details £ Taxable income 15,040 First, 20%*15,040 3,008 Payee 1,400 Tax payable 4,408 Net Income 10,632 Income tax is calculated by first finding the taxable income. Then you take the actual total income of the individual in question adding back capital expenditures and other revenue expenses that are not supposed to be taxed. Other incomes should also be lessen then are not supposed to be taxed. Then one is supposed to less the expenses that need to be taxed but had not be deducted and add the incomes that were supposed to be added but had not been added. The resultant figure is the taxable income. We then calculate the taxable liability. All figures below £ 31,785 should be taxed at a tax rate of 20 percent. Those incomes over £ 31,785 up to £ 150,000 should be taxed at a tax rate of 40 percent. Then one is supposed to less any tax relief, insurance relief, and pay as you earn to the individuals taxable income. The resultant figure is the income tax of an individual. For low-income earners, savings income will only be taxed at 10 percent. From penny’s example we took her total income of £ 21,200, we deducted UK dividends, UK treasury stock, building society interest and shoes as well as clothes since this should not be taxed but should be given wear and tear allowances. We later took her taxable income and multiplied it by 20 percent to get her tax for the year. From the table above, she pays £ 3,008, which we should also add the pay as you earn of £ 1,400, which she pays yearly. The resultant figure is the tax payable and should be deducted from her taxable income to get her net pay (Debar, G., 2012, Pp. 10-16). I should advice penny to cut on the budget and the money she is spending on shoes and the mortgage and the credit cards since this are increasing her burden and the amount she should pay back. From the information about penny’s credit cards, we see that she is owing many financial lending institutions huge amounts, which have accrued interest, and she is not able to pay back. I would also advise her to take credit cards and loans from banks and other financial institutions that have lower interest rates. For example, there is a credit card she took with an interest rate of 1509 percent, which is absurd and she should try as much as possible to stop taking credit cards and loans with high interest rates. I would also advise her to try as much as possible to try and saving in Savings and Credit Cooperative Societies as their interest rates are lower and sometimes one is not required to pay any interest rates (Mirlees Review, 2004, Pp. 355). I would advise her to prepare a household budget such that every year she is able to repay part of the mortgage and the credits cards and other loans that she may have. She should also not spend on shoes and clothes and also cosmetics like the hair, nail polish, salon et cetera until she is back on her feet. After she has repaid her credit cards, mortgage and loans, it will build trust in financial institutions and banks, which will enable her, get higher loans at low interest rates. In order to get out of money difficulties, penny should focus on budgeting on her income and she should not apply for credit cards as their interest rates are usually high (Juno & Nobles, 2004, Pp. 33-60). Question 2 For raj, advise him as to how he might finance his move to Leeds, and on cash and debt management. You again need to explain clearly how his salary will be taxed and about student loan repayment. Raj can finance his move to Leeds using various sources of finance. He can borrow from banks and other financial institutions. Here, raj should choose a bank or other financial institution that has a lower interest rate and flexible repayment terms. Raj can also finance his move to Leeds borrowing from friends and family. Since he has already borrowed from his parents a loan of £ 3,500, he should consider borrowing from his friends only if he is sure he will be able to pay them back. He should also borrow from his friends only if he is 100 percent sure that he will get the engineering job. Raj has taken other loans and he might not be credit worthy for other money lending institutions and banks. He should look for a way to first repay his loans and acquire other loans with low interest rates and flexible terms of repayment. Raj has not been managing his cash and debt well. Form the information about raj, he is losing £ 60 every month and he does not know where it goes to neither has he provided for it. He has been spending too much on books, internet, and parties and clubbing which should not be the core reason why he went to university in the first place. He should try to budget for all his cash including the cash he spends on the university and the cash he receives from his parents and other credit lending institutions. Raj should learn to manage his debt well by repaying what he already owes to his parents, the credit cards, other money lending institutions, and the school loan and other loans. This can be done by taking volunteer jobs and other small pay jobs, which he will use the proceeds from these jobs to pay back all the loans starting from the credit card, the school loan and even what he owes his parents. This will enable Raj’s parents to trust that he can be able to live independently and be able to manage his cash properly and efficiently (Bruno, R., 2009, Pp. 216). Raj will be taxed on all the allowances less the expenses. The expenses will comprise of £ 80 per month for books, £ 85 per month for clothes and downloads £ 95 per month for the share of electricity and gas bills for the flat, which implies that he shares a flat with some other person. He will also have to provide for £ 60 since they disappear out of the blues but based on the fact that the money keeps on disappearing every month and he has a roommate that could be the root of where his money has been disappearing to. To tax him we also need to less £ 290 for food and £ 250 per month for parties and nights out. Every month, raj pays interest rate of 5 percent on the bank overdraft and an interest rate of 18.9 percent on the credit card debt. This also needs to be deducted as it is an expense to him. When you less all the amounts from Raj’s allowance of £ 550 and the resultant amount become a loss, raj should not be taxed but if it is a profit, raj should be taxed (Gov.UK., 2013, Pp. 30-35). You should try to outline a strategy for Leonard and penny, which would allow them to plan for the future, including the decision to move into the on-campus flat. No detailed computations are necessary but you should be able to give general guidelines on the strategy. In order to plan for the future, Leonard and penny need to formulate a budget to push them through. They should also plough back percentage amount of their earnings every month to a savings and credit cooperative society, which does not have a high repayment interest. Leonard and penny should take their children, raj, and Sheldon to a seminar or a conference where they will be educated on cash and debt management. Here they will be able to learn on how to live by their incomes and not to overspend on things that do not have core value to their lives like parties and night out. They will also learn how to invest and save for the future. Raj and Sheldon can invest for the future by having shares in other companies, by saving in banks and other financial institutions, by investing in land and the real estate and the like. The decision to move on the on-campus flat is very wise since the house will be paid for by the campus. Leonard will also be entitled to other allowances like car allowance, a huge salary, free meals, private healthcare services for him and his family, insurance services, protective clothing allowance, annual cleaning costs of the flat, travel costs and other allowances will be paid for. In light of this, I would advise Leonard and his family to move to the on-campus flat (Graham, R., 2012, Pp. 272). References Debar, G. (2012). The Beginners Guide to Tax. Pp. 10-16. Available at https://www.gov.uk/income-tax [Accessed 2nd Dec. 2015]. Mirrlees review. (2004). Reforming the Tax System for the 21st Century. Pp. 355. Available at http://www.ifs.org.uk/mirrleesReview/design [Accessed 2nd Dec. 2015]. Juno & Nobles. (2002). the Economics of Taxation, Chapter 2. Pp. 33-60 [Accessed 2nd Dec. 2015]. Bruno, R. (2009). Self-assessment System. pp. 216. Available at https://www.gov.uk/self-assessment-tax-returns/overview [Accessed 2nd Dec. 2015]. Gov.uk. (2013). Guide to Taxation for the Self-employed. Pp. 30-35. Available at https://www.gov.uk/business-tax/self-employed [Accessed 2nd Dec. 2015]. Graham, R. (2012). University Intellectual Property: A source of Finance and Its Impact. Pp. 272. Available at http://site.ebrary.com/id/10754295/ [Accessed 2nd Dec 2015]. Read More