On The Spot Blogs

#Tax Myth 7 - The Highest Income Tax Rate Is 50%

You may be aware that income of £150,000 and above suffers a tax rate of 50%.

What is less well known is that at a lower level of income the tax rate is in fact higher than 50%.

For income of between £100,000 and £116,210, the income tax rate is 60%.


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#Tax Myth 5 - You have to pay national insurance to earn a state pension

Employees who earn at least £107 per week or £464 per month for a full tax year will be achieving a credit towards the 30 years they need in order to earn a basic state pension.

At these earnings there is no national insurance to pay by you or your employer. Your employer may be your own company.

Therefore, you aren't paying anything to earn a state pension.


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Budget 2012 - Wealth Creators 1, Wealthy Grannies 0. Simplification 2, Complication 1.

Today's Budget certainly had a strong business emphasis to encourage and incentivise business growth. On the other hand, artificial transactions set up simply to avoid tax would not be tolerated.

Administrative Simplifications For Business

A very important message for business is the introduction of more simplification. HMRC are merging parts of their online screens so it's easier to check your tax due and paid. PAYE and NIC administration is being merged possibly followed by a merger of the rates. If your turnover is less than £77,000 you can opt to prepare your accounts on a cash basis. Helpfully, this is the same as the VAT threshold so you needn't worry about VAT either.
Therefore you may find the navigation of the tax system that bit easier. I also suspect this means small businesses won't be subject to the new business records checks so often as the risk of an error must be much lower and it can't be worth an Inspector's time.
Any of your staff earning less than £8,105 this tax year and £9,205 next tax year, often part time employees, will pay no income tax and little national insurance. However, this seems to mean the PAYE system must still be operated and this will allow your staff to achieve their state pension credits. Importantly, it may help in the recruitment and retention of part time staff, as they will have a higher take home pay. Always something useful to know when hiring staff.

Corporation Tax Rate Simplification

Profits up to £300,000 are taxed at 20% and profits over £1.5m are taxed at 24% from April 2012. Profits in between £300,000 to £1,500,000 suffer a higher marginal rate than the 24%. With the continual reductions to the main corporation tax rate, it looks as though the Chancellor wants all companies to eventually pay the lowest 20%. This is very welcome as it means companies don’t have to worry about crossing the £300,000 threshold which does cause successful companies some issues.


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#Tax Myth 2 - Tax Reliefs For Funding Your Company Are Always Available

With SMEs having to be more creative as to how to fund their companies, it's become more likely that you may fall on the wrong side of a tax rule.

The traditional method of a company borrowing the money direct from a bank is a no-go area for many SMEs. Even when a loan is granted, it comes with a fee, a high interest rate and you have to provide a personal guarantee against your assets, even the family home.
With tighter cash flow in the recession there is a greater need for working capital, so the funds may not even be for expansion, but merely to enable the company to continue trading.
Consequently, SMEs have been forced to look elsewhere. You may find it costs less to borrow the money personally or, at the very least, it's easier. If you have to provide security you're no worse off if your company had borrowed the money.
If you take out a personal loan and lend those funds to your company, it works very well. You charge your company an interest rate, probably the same or a bit more than the amount you're paying. Your company saves 20% corporation tax, you would get taxed on the amount it pays you, but you claim tax relief because you've lent money to your company. The net tax on you is £Nil and your company receives a 20% tax saving.

What if you take out or use an existing personal overdraft or credit card? It's tempting as it's easy and flexible. However, the rules are different and this has been confirmed in a recent tax case.


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