“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.