“Not many People know that!”

Earlier this year Sir Michael Caine railed against the introduction of the 50% top rate of income tax by the Chancellor. “If the top rate goes beyond 50%, then I shall leave the UK” he was quoted as saying.

I have news for Sir Michael. He needs to start packing his suitcase now! The top rate will be 51%. Sir Michael had forgotten about the 1% national insurance hike which the Chancellor introduced a few years ago.

In fairness, Sir Michael is not the only one to overlook this. The Chancellor tends to as well. This is pretty much the highest accolade for a stealth tax.

Yet, for people with income just above the £100,000 the actual marginal rate is going to be 61%.

Of course, Sir Michael can simply leap on a plane and change his residence at a moments notice. That sort of pre-emptive action is not possible for must British taxpayers.  What they can do is to plan to minimise impact of the tax hikes when they come in on 6th April next.

That is indeed where we might come in. We are looking for the opportunity to advise businesses on what can be done. If you need some advice give us a call on 01376 326266.

Paul Short looks at Take Home Pay

At little while ago I did an article for the web site trying to demonstrate that take home pay was not always a good indicator of someone’s pay package. It all depends on the extras. Since then, we have had the furore over MP’s expenses (cue my web article of 15 January 2007).

MP’s have been at it for a long time. Their base salary does not look anything super duper. But then add on the expenses and gross these up at their marginal rate of tax because they are tax free and then add on the copper plated pensions, provided out of the public purse, plus a few other perks and you have a formidable pay package, which if maximum allowances were claimed could be in the region of £355,000 a year.

Now there is something of a witch hunt on MP’s at the moment. We should remember that many of the expenses are authentic and justifiable and should not be regarded as part of their pay package but some are not. Even so, some MP’s pay package will come to a tidy sum. It is, of course, hugely tax efficient. All the benefits within and outside of Westminster are tax free, leaving some modest exposure to 40% tax on the top slice of their Parliamentary salary.

Now let us compare their situation with that of one of the purported high earners whom I shall call Gordon. I am still frustrated that MP’s define the rich and wealthy in terms of their income. They do not seem to be able to grasp that wealth and riches are a consequence of having capital. This takes me back to a web article I wrote in February 2006, comparing family A (zero income but huge capital) with family B (high income but no capital), with family A qualifying for all Brown’s welfare handouts. Anyway, back to Gordon. Gordon has an income of £200,000 a year and is reviled for being rich and wealthy. Gordon is self-employed, though. Out of his £200,000 a year (which he has only really been earning in the last year of so) he has to start funding for his retirement in around 10 years time.

To make up for lost time, Gordon is putting in £50,000 a year. It should give him a reasonable pension but nothing on the scale of an MP. Although Gordon has to pay tax on all of his earnings, the bulk of it at the current top rate of 40%, he has to retain at least £30,000 of post tax income in his business to help the continuing finance of its working capital. The alternative is to go to the Bank and become heavily geared.

Gordon is also having to finance his two children through university. They are in their first and second year respectively. It is expensive but Gordon doesn’t mind as he puts a premium on education and wants his children to graduate and have the best opportunity of securing a good job. Gordon lives in a reasonable four bedroomed house within commuting distance of London. It is very nice but far from a mansion. It was worth some £500,000 a year ago but Gordon thinks it might only be worth £425,000 now. He still has a mortgage of £150,000 on the property although he expects to clear this within the next 10 years. Nevertheless, it represents a significant monthly out going.

Gordon has always been strong on protection and having adequate insurance in place to safeguard his family and his house. That is another heavy out going. Gordon’s family run three modest cars and they do like to have one foreign holiday a year with possibly another in the UK. Gordon finds that all these commitments means that he does not have that much disposable cash left at the end of the year.

Gordon works 50 to 60 hours a week on average on his business and feels he needs the holidays to re-charge and refresh himself. Do you or I go and tell Gordon that he is rich and wealthy and that is why he is going to be paying three times as much tax as his struggling local MP?

All that glisters is not gold! More problems with the detail on the 10p band!

I should have known better.

 

When Mr Darling, in his Budget, announced the introduction of a 10% tax rate on the first £2,320 of savings income, I started to rub my hands.  OK the Chancellor was, illogically, ending the 10% starting rate of tax for income in general and this was just a sop to Cerberus but something we could exploit for our clients. 

 

I therefore penned a paper on how our clients could create a director’s loan account balance of £23,000 and then charge interest to the company at 10%.  For a husband and wife company this could be nearly £500 per annum of tax saved.

 

Unfortunately, I failed to heed a favourite dictum of mine, “the devil is in the detail”.

 

The watchful guardians in our tax department, Chris and Gill, intervened.  “It is not quite as you may think.  The reality is that your earnings are taken into account in priority to your savings income in establishing whether you qualify for the 10% tax rate on savings income”. 

 

If your earnings are at least £7,755, these will be set against your personal allowance (£5,435) with the balance (£2,320) set against the 10% savings band of £2,320. As the balance of earnings has used up the £2,320 band savings income will be taxed at 20%.

 

Let us take another example.  You have a salary of £20,000 per annum and you have savings income of £2,000.  I imagine your first thought might be that your savings income will be taxed at 10% as it is below £2,320.  No.  Your salary soaks up your 10% band and you will be taxed at 20% on your investment income.

 

The 10% savings rate will be helpful to some people, possibly those who are at home and do not work or those whose wages are below £7,775 per annum.  Given that one’s personal allowance will be set against taxable income first and that tax credits on dividends are not recoverable in any event, it looks like the measure is not going to cost too much in tax.  I wonder how many people have no earned income but savings income between £5,500 and £8,000, given how much capital one might need to generate that level of savings income, I would warrant not an awful lot.

 

It seems to me that this 10% savings rate measure was just there as a headline to take some of the publicity away from the removal of the 10% lower rate band.

How to choose an Accountant

Choosing an Accountant. How should one go about it? For my first blog I’ve set out 20 points below which may be of help.

 

1.      1. Take advice from any member or friend who is in business about whom they use or have used.  They may have had a bad experience with a particular accountant which you can avoid because of their experience.

 

2.      If you have a professional adviser such as a solicitor or banker, find out whom they rate and recommend.

 

3.      Make sure the accountant has the resources and the structure to deal with your size of business and the issues which will confront you.  An accountant working from home in the evenings may be  inexpensive but may not be the right choice for you.  Equally, one of the multi-national firms may not be appropriate either. 

 

4.      Consider the geographical convenience.  It may suit you to have an accountant in the same town, because you will need to drop in records frequently.  If face to face contact may not be that frequent then you can choose from further afield.  Modern technology does have a significant impact here.  For some people considerations such as ease of access and car parking facilities, can be an important factor.

 

5.      If you are in a specific sector check and make sure the firm has the expertise in this area to be able to advise you.  If you are a dentist, for example, you might want to choose an accountant who deals with a number of dentists and is well versed in the peculiarities of your profession.

 

6.       If your business has a national or international flavour, you might want to check that your accountant has the nationwide and international connections to advise your business.  Many accountancy firms will be members of a national grouping and quite possibly an international group and able to enhance their corporate strength.

 

7.      Indeed, you need to check that the accountant can provide the range of skills which you might need.  Your company might be sufficiently large to require an audit.  An audit is no longer mandatory and with the decline in audit work, many accountants no longer provide this service.  You will need to check to see that the firm are registered auditors.

 

8.      You will want to see that the firm has the range of tax expertise in corporation tax, VAT and other areas such as IHT.  You may need a payroll bureau service, corporate finance skills to raise funds.  You may, importantly, want help with IT and setting up your accounting systems.  Make sure the accountant and his team tick the boxes you need them to. 

   

9.       Every firm worth their salt should have an informative web site for you to get background information on the movers and shakers.  Many of the above points can be largely covered by a detailed review of the web site.  Assess the web site and its ease of navigation.  Does it suggest a dynamic and innovative firm who will provide a pro-active “can do” service for you?

 

10.  Telephone the accountant and assess the response.  Does the receptionist sound clued in and efficient?  When you are put through to someone, do they sound knowledgeable and genuinely interested?  Did you feel they were keen to act for you or was your telephone conversation an imposition and a distraction for them?

 

11.  Always visit the premises.  Assess whether it looks professional?  Assess the waiting area.  Were any reading materials such as papers and magazines up to date?  If the reading material is out of date, then this may say something about the firm.  Look out for publications produced by the firm.  Were brochures or business cards on display?  These can also say something about the firm. 

 

12.  Look for evidence that the firm harnesses technology.

 

13.  If you are taken into a room, what is your impression of the room?  Is it someone’s room?  If so, are there client files lying around?  That may not be a glowing testimony to client confidentiality.  Does the desk look ordered and the product of an organised individual?  If there is a bookcase, check to see whether there are out of date text books there.

 

14.  Assess the individual talking to you.  Does he or she give you confidence and impress you with the technical knowledge and grasp of your business?

 

15.  Has the individual clearly researched you and your business beforehand so that they are informed and can cut to the quick or do they seem ill prepared for you and your business issues?

 

16.  Check out the business qualifications.  Get a business card to see what is on there.  Make sure you recognise the qualifications and that they are from properly accredited accountancy bodies.  Make sure that the person handling your business’s accounting and tax affairs is appropriately qualified.  All too often people presume they are dealing with a qualified accountant when they are not.  I have also come across a situation when someone thought they had appointed a qualified accountant.  In fact, the letters after the name related to a statistical qualification.

 

17.  Ask for a detailed fee quotation so that you know what you are paying for and what you are getting for that.  If you are comparing quotes, do make sure you are comparing like with like.  As in everything else, you tend to get what you pay for.  The cheapest quote may not necessarily be the best.  A good accountant may well save you far more than the fee.  The quotation may not allow for any meeting time with you.  I often take on cases where the business person has had accounts simply posted through to them to sign without any commentary or explanation or any invitation for a meeting to discuss them.  Many firms will support the accounts production with brochures and statistics, often presented in a graphic format, to enhance the figures.

 

18.  Assess the post meeting follow up.  If information is sent, is it professionally presented and detailed?  Does it look as though some time and effort has been spent on preparing the proposition for you?  In other words, do they want you?

 

19.  It is important that you feel that you can get on with and be comfortable with the accountant you choose.  Do you feel that he would be on your side and would be sitting on the same side of the table as you, as you drive you business forward.  You also want someone who will be prepared to give you tough advice, if that is what is needed.

 

20.  Finally, expect them to ask for the work. So give me a ring on 01376 326266 or email me on paul.short@lambert-chapman.co.uk. so that we can discuss it further!