Analysis of economic data, monetary policy, interest rates or business cycle
MANAGING YOUR MONEY – PERSONAL FINANCIAL PLANNING
CASE STUDY
George and Patrick are both
21 years old and graduated with First Class degrees from Hull University
Business School in July 2019. George
studied Accounting and Patrick studied Marketing. They are good friends and
shared a house with some other students whilst at University. They have both now gone their separate ways
although they have kept in touch with each other and managed to meet up a few
times since Graduation in July. They regularly chat to each other about career
progression and ask for each other’s advice on various financial matters.
George
George started a job as a
trainee accountant with the Hull office of QXD, a national firm of Chartered
Accountants, on 1 July 2019. QXD kindly
allowed him to have a day off in July to attend graduation. His gross starting salary was £28,000 a year
and he was automatically enrolled in QXD’s occupational pension scheme,
contributing 10% of his salary. QXD have
also included George in their group health insurance scheme and the firm will
pay the annual premium of £670. George’s
student loans for tuition and maintenance amounted to approximately £45,000
when he graduated. HMRC have issued a PAYE Code of 1250L but, having taken a
Taxation module as part of his degree, George does not think this is correct
bearing in mind his earnings whilst still a student, his pension contributions,
his benefit in kind and his student loans. He is worried that he may not be
paying enough tax and he may get a large bill after the end of the tax year.
George is sharing a rented
house with three other young professionals, but he hopes to be able to buy a
small house or flat of his own very soon.
He likes the Victoria Dock area of Hull and this would be convenient for
work as it is within walking distance.
He has had a look on the Rightmove website and thinks he could find a
two-bedroomed house for about £120,000, or a flat for around £100,000. He has managed to accumulate savings of
£5,000 in an ISA and he thinks his parents would lend him some more money
towards a deposit. He is vaguely aware
that there are other costs involved in purchasing your own property and living
alone, but he hasn’t really thought about this seriously. His Mum mentioned a washing machine and
cooker the other day and he realises now that he may need to purchase other
items such as a bed, a table and chairs as the house or flat is unlikely to be
furnished.
Continued
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Case
study continued …
George managed his finances
quite well whilst he was a student. He
had a part-time job in Costa Coffee and prior to starting his new job he earned
a total of £2,400 between 6 April 2019 and 30 June 2019. No tax was deducted as his earnings were too
low. Now he has
started his new job and he
knows he will have to budget carefully if he is to be able to buy his own
property. He has given some thought to
the likely costs of living on his own (apart from mortgage costs) and has come
up with the following monthly figures:
George – anticipated monthly
expenses
£
Food and cleaning materials 160
Council tax 80
Heating and lighting 70
Phone and broadband 50
Clothes 100
Going out 120
Sporting subscriptions,
travelling to away fixtures etc 90
Sundries (gifts for family
and friends, one-off items) 75
Savings (rainy day fund) 50
George deals with all of
his financial affairs via the internet, using online banking and various apps,
and makes payments for everyday expenditure using his smartphone or the
contactless facility on his debit or credit card. He doesn’t usually ask for or
keep receipts from supermarkets, coffee shops, bars or other outlets that he
visits. Just recently he has been really
busy with his new job and his active social and sporting life and hasn’t got around
to checking his bank or credit card transactions. He still receives paper bank
and credit card statements through the post, as well as notifications from HMRC
(here again he hasn’t got around to telling these organisations that he doesn’t
need them anymore) and they are accumulating unopened in the vestibule of his
block of flats, which is open to the general public. He has every intention of sorting all of this
out when he has a spare Saturday afternoon, but these happen very rarely.
Patrick
Patrick also has
well-advanced plans but they are rather different to George’s. He has always
wanted to “be my own boss” and work for himself instead of being employed by
someone else. He is very ambitious for
the future. He started his own business “Party Time” whilst at university,
organising social events for students and others. This has proved to be quite successful and he
anticipates that his accounting profit for the year ended 31 March 2020 will be
approximately £10,000. This figure (which
Patrick calculated himself) is after deducting the following items as expenses:
£
Depreciation of van 3,000
Patrick’s Income Tax and National Insurance Contributions
(2018-19) 2,400
Patrick’s cash drawings of £300 a week 15,600
Continued
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Case
study continued ….
Patrick doesn’t think that
he will have to pay any 2019-20 income tax based on these figures, because his
accounting profit is less than the Personal Allowance. He has been chatting to George (who, as
explained above, achieved a First in his BSc Accounting degree) over a few
beers in the pub. George has been trying
to explain to Patrick that in fact he will have some tax to pay, as well as
some NI contributions, because his accounting profit will have to be “adjusted”
for tax purposes. The adjustments will
include Capital Allowances for the van (see below).
The van has been painted in
bright colours and shows the logo of the business as well as all Patrick’s
contact details. It was purchased brand
new on 1 April 2018 for £12,000. Patrick uses it 50% for the business and 50%
privately, and this proportion has been agreed with HMRC. On professional
advice, for tax reasons Patrick did not claim Annual Investment Allowance (AIA)
on the original purchase in 2018-19, only Writing Down Allowance (WDA) of 18%
(adjusted for private use). George has
told him that he can deduct WDA of £885 this year and has shown him this
calculation:
Private Tax
Use %
deductible
£ £
Original cost 01.04.2018 12,000
WDA @ 18%
(2,160) 50%
1,080
Balance carried forward to 2019/20 9,840
WDA @ 18%
(1,771) 50%
885
Balance carried forward to 2020/21 8,069
Patrick is totally confused
by all of this “accounts speak”. He now
wonders whether he might have been better off running his business though a
one-man limited company. One of his other friends has told him that the tax
situation is much simpler for companies because the owner is treated as being
an employee for tax purposes.
Patrick is living with his
parents in Beverley. He moved back in
with them and his younger brother and sister after graduating and leaving the
shared student house. He runs the business from his bedroom and has taken over
the garage and his Dad’s shed for storing party materials. He doesn’t pay any rent or contribute towards
food or household costs. Despite being very generous and wanting to support him
in his endeavours, Mum and Dad are getting a bit impatient with Patrick’s
attitude to money and think it is time he “stood on his own two feet”. He can
be rather thoughtless and selfish, taking the rest of the family for
granted. He forgot to give his Mum a
Mothers’ Day Card or gift this year. He
doesn’t help with household chores or cooking and comes and goes as he
pleases. Sometimes he stays out
overnight at one of his friends’ houses or comes in very late without giving
any warning and waking everyone up.
Continued
on next page
Case study continued ….
Patrick has now realised
that he needs to reorganise his business and private life and be more
considerate to his family. Despite
running a profitable business and having no living costs for the past year he
does not have any savings at all. He now
thinks that he needs to raise some finance so that he can rent or buy some
office and storage space for the business, perhaps with living accommodation
above so that he can move out of the family home. His parents cannot afford to lend or give him
any money for this purpose so he is considering other options. The following sources of funds have passed
through his mind:
Mortgage
Secured bank
loan
Bank overdraft
Unsecured bank loan
Peer-to-peer lending
0% credit card
Payday loan
Borrow from Grandma
Borrow from friends
Start saving
Recently Patrick met a man
in a pub who asked him if he would like to make some extra cash “all above
board mate”. The man introduced himself
as Eric and explained that Patrick would become a “Money Transfer Agent”,
helping businesses to get around the red tape of making payments abroad. All Patrick would have to do would be to allow
his bank account to be used for overseas transfers, and he would earn a 10%
commission on all successful transactions.
Eric assured Patrick that this procedure was entirely legal and that
there were no risks involved, financial or otherwise. Patrick is quite intrigued by the idea as
there doesn’t seem to be much time input needed, and as explained above he is
in need of some additional funds. He is
seriously thinking about doing as Eric suggests.
The requirements for the assignment
are shown on the next page
REQUIRED:
- Prepare
an income tax computation for George for 2019-20, taking into account his
earnings from various employments, pension contributions and benefit in kind.
Calculate his income tax liability for the year. Calculate his monthly employee National
Insurance Contributions. From the
figures you have prepared calculate his monthly “take home pay” from the date
he commenced his employment with QXD. Explain how the PAYE code issued by HMRC
has ben computed and whether or not it is accurate. Is George correct to worry about receiving a
large tax bill at the end of the tax year? - marks
- Prepare
a monthly cash budget for George, on the assumption that he purchases his own
property, clearly setting out details of his income and expenditure and any
surplus or deficit for the month. As
well as the expenses listed in the case study you should include mortgage and
any other relevant monthly costs related to setting up his own home. - marks
- Calculate
the adjusted profit for tax purposes for Patrick’s business for 2019-20. Compute his income tax liability and National
Insurance Contributions for the year (on the assumption that his only income is
from the business). Explain to Patrick why
he is taxed on his adjusted trading profit rather than the accounting
profit. Critically evaluate the difference
in tax treatment between the owner/manager of an incorporated and an
unincorporated business. - marks
- Answer
either (i) or (ii) below (but not both).
Each part is worth 30 marks:
- Based
on the research you have done to answer question (b) above, explain in detail
whether in your opinion George can afford to buy his own home at this stage in
his life. What are the various housing
options open to him in the next few years, and what action does he need to take
now to achieve an arrangement which suits both his aspirations and his
finances? Give your reasoned recommendations.
Advise George on his
attitude to financial and identity security.
- What
advice would you give to Patrick about suitable sources of finance to enable
him to develop his business in the future?
Explain your recommendations in detail, commenting on how different
sources of finance are suitable for different kinds of expenditure. Comment on
Patrick’s ideas about borrowing from family and friends.
Advise Patrick on the
advisability of taking up Eric’s suggestions of becoming a Money Transfer
Agent.
REMEMBER – YOU
SHOULD ANSWER (d) (i) or (d) (ii) BUT NOT BOTH
Total:
100 marks
ADVICE
ON HOW TO COMPLETE THE ASSIGNMENT
You may find that it is
difficult to keep within the word limit of 1500. To get around this, you could include your
detailed calculations in appendices and then refer to them in the body of the
text. Alternatively, you could prepare
them as tables which will not be included in the word count or import
photographs of your workings prepared on an Excel spreadsheet. Whichever way you do it, you can only submit ONE document and it must be in Word.
If you exceed the specified
word count of 1500 words by more than 10%, remember that penalties will be
applied in accordance with university policy.
If your work is shorter than the limit you will automatically penalise
yourself as your work will not be in sufficient depth.
Use 1.5 line spacing and Arial
11 point font.
Remember to put the module
number and your student number on the front sheet.
The marking scheme
is reproduced below. Read this carefully
and make sure that your work addresses all of the criteria in the best way that
you possibly can.
Marks will be awarded for
evidence of wider reading and research.
Ensure that you adequately cite your sources and include them all in the
list of references.
A high standard of presentation
and academic writing is required throughout.
Do not use the first person.
LEARNING OUTCOMES
The
module has the following Learning Outcomes, which are tested by this assignment:
- Gather, analyse and evaluate personal financial data
- Critically analyse relevant financial data and recommend
appropriate solutions to fiscal or financial problems - Select and interpret financial and fiscal data as the basis for
personal financial planning - Develop problem-solving skills and provide outline solutions to
potential financial problems - Create, understand and manage budgets
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