Taxing times

Dominic Thomas
Jan 2024  •  5 min read

Taxing times

Tax is perhaps one of the most divisive issues.  At the time of writing, just before the Christmas break 2023, the Scottish Government has announced that it is imposing the additional rate of income tax (45%) at a much lower level.  Unlike England and Wales, the Additional Rate will start at £75,000.

Here in England and Wales, the 45% rate starts at that “only a quango could come up with it” number of £125,140 for tax year 2023/24.  So someone earning more than £125,140 pays 45% income tax, but in Scotland the line is drawn much sooner.

By comparison, a Scottish resident earning £125,140 will pay an extra £2,507 on the same income. I doubt that the extra tax is enough to prompt thoughts about moving south, but it may well alter behaviour at the ballot box.

As a reminder, the tax rates for this tax year (2023/24) which comes to a close on 5th April 2024 are as follows:

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571-£50,270 20%
Higher Rate £50,271-£125,140 40%
Additional Rate Over £125,140 45%

These are the income tax rates on earned income, not dividends (which have lower tax rates).

If you are breathing a sigh of relief because you live in England or Wales, remember that this tax year saw the Government reduce the higher rate band so that Additional Rate begins at £125,140 rather than £150,000.

Most of us have been impacted by inflation, yet the personal allowance remained frozen as did the basic rate tax band. So more people pay more income tax. This is what the media and whoever is in opposition, like to call “stealth taxes” basically an increase in tax in real terms.

Additional Rate tax was introduced in the tax year 2010-11, and saw 236,000 people pay 45% raising £34.5billion. Ten years later, the HMRC 2020-21 data saw this number increase to 481,000. There is no doubt that whichever way one observes the data produced by HMRC, we all pay more tax.

There are of course some things that you can do about reducing tax or even obtaining tax reliefs, these are all part of a good financial plan. However what I often observe is how little attention is paid to good arrangement of financial ‘stuff’ so that you can minimise tax payments. How much and where from become really important when drawing money from your portfolio. It’s one thing to get tax relief or use an allowance, it’s another to draw money out so that you pay less than 20% tax.

I recently produced a White Paper that you may find of interest called ‘Understanding Adviser Fees’, which includes and explanation about the value that we bring. Whilst I firmly believe that every little helps, if you focus purely on costs and ignore taxes, you will quickly wonder why you bothered. You can find the paper (which is designed to be readable – feedback welcome) here.

Taxing times2024-02-01T09:21:01+00:00

The Autumn Statement – the Ghost of Christmas Past

Dominic Thomas
Nov 2023  •  2 min read

The Autumn Statement – the Ghost of Christmas Past

We are in the closing weeks of the year. Our thoughts turn to Christmas celebrations and perhaps looking ahead to the New Year. The familiarity of our traditions poses a challenge to attempts to change them, yet even the harshest of men, Mr Scrooge, managed to pay attention to what is important and change his behaviour.

I don’t think it is contentious to say that the Conservatives are a party of tax cutting and yet we currently have one of the highest rates of personal taxes in the main economies. Few of us enjoy paying taxes, perhaps because often it seems that our hard-earned money is wasted on expensive ideas and ‘kit’ that doesn’t work very well at all … anyone tried the NHS IT system or indeed any ‘converting to digital’ Governmental system, let alone the military’s ability to spend a fortune on malfunctioning weaponry to cite just a couple of examples. We all have opinions. (As an aside the Power of Attorney system is going digital in 2024, so I urge you to sort yours before they muck it up and make the backlog even longer).

The Conservatives came to power in May 2010, admittedly with the assistance of the LibDems, but then we have had an entire mess of Government ever since.

According to Jeremy Paxton in 2018, David Cameron was the worst Prime Minister since Eden:

“[He] got to the top of a tree in order to set it on fire and cleared off, put the interests of his party before the country and decided to have this referendum, believed one thing was the only right outcome for the country, didn’t campaign for it, got the opposite outcome and XXX off. It doesn’t seem like leadership to me”.

Given the PMs we have had since 2018, Cameron might actually look a lot better, the bar seems woefully low, anyway, for now Cameron is back, this time as Foreign Secretary.

The backdrop of a Covid enquiry which merely proves what most of us thought, that Mr Johnson is an unreliable character (I am being polite), we have the prospect of an election looming by the end of January 2025. The Labour party seems set on sabotage and the plethora of political open goals being squandered is lamentable. The traditional approach of appealing to the notion “everyone has their price” is in the hands of the Chancellor, who is being tempted to cut taxes now that inflation appears to be returning to a more comfortable figure (4.7% October 2023 ONS).

Which of us doesn’t want to pay less tax? In an environment of rising prices, seeing your net pay remain pitifully stagnant is irksome. Yet we also know that tax pays to keep society running in some vaguely civil way. We can all find things to disagree with, it’s almost a rite of passage into a fifth decade. It’s clear that ‘the system’ doesn’t work for all, and indeed seems to generally work best for the few. The sadness is that there seems to be so few alternatives to the binary choices we have here in the UK; stuck in traditions that don’t work for the good of the country. Creativity and visionary leadership remain sadly elusive.

There was a time when the economy was thought about as a way of serving society, yet here in 2023 we are evidently a society that is serving the economy. There is no good reason why this cannot change, and despite experience, I remain an optimist in a sufficient number of decent people.

For the record, I have no intention of offending your political beliefs, but I do think we all deserve rather better than we have had. On 22 November 2023 we shall get further notice …

The Autumn Statement – the Ghost of Christmas Past2023-12-01T12:12:26+00:00

Tax year ending

Dominic Thomas
Feb 2023  •  12 min read

Tax year ending!

There are not many weeks left of the 22/23 tax year, which ends on Wednesday 5th April. As a brief reminder of the key issues, I have done a quick summary … if you are not sure of what you have used or what you can use, please get in touch with us as soon as you can.

PENSIONS

  • Everyone under the age of 75 can contribute £2,880 into a pension and get basic rate tax relief, irrespective of any income. This is as close as it gets to ‘money for nothing’
  • The annual allowance of £40,000 applies to those with incomes of £3,600 – £240,000. You and an employer may contribute up to 100% of your earned income (capped at £40,000) between you
  • Those earning over £240,000 need to be careful; your allowance reduces by £1 for every £2 of income over £240,000 until it reaches £4,000 – which includes any employer payments

ISAs – INDIVIDUAL SAVINGS ACCOUNTS

  • Any adult can invest up to £20,000 over the course of the tax year into an ISA which grows free of income tax and capital gains tax
  • Those aged 18-40 can use a Lifetime ISA allowance of £4,000 if this is for a deposit on a first ever home. The Government will add £1,000

CAPITAL GAINS

  • If you are selling an asset / investment (which would include rebalancing them) this triggers capital gains. The 22/23 allowance is £12,300 of gains before you pay any tax, but this is falling in 23/24 to just £6,000 and then £3,000 the following tax year. So if you are going to do this anyway, I would encourage you to get on with it – perhaps you have some shares that you don’t really want …
  • Trusts also pay capital gains, but only have half of the personal allowance, so even more incentive to take profits and rebalance
  • You can delay payment of capital gains tax using some investments (ask/see below)

INCOME

  • If your income exceeds £100,000, you begin to have your personal allowance of £12,570 reduced by 50p for every £1 above £100,000. The personal allowance is the amount of income taxed at 0%. So it would be prudent to have bonuses paid into pensions for example
  • Dividends – the first £2,000 of dividends is tax-free in 22/23
  • Interest for non or basic rate taxpayers is 0% on the first £1,000 of interest (savings allowance) and £500 for higher rate taxpayers. Additional rate (45%) taxpayers don’t get the allowance. As some deposit accounts now pay 3% or 4%, you may be drawn into this (a higher rate taxpayer only needs £16,666 in savings earning 3% interest of £499. You need to declare all income to HMRC through self assessment
  • If you really must insist on a cash ISA (please only for ‘short-term parking’ of money) then this would ensure the interest is tax-free, but rates on cash ISAs are much lower than savings accounts now
  • If you are not using your full personal allowance and have investments that provide taxable income, this may be a sensible moment to trigger income that uses your allowance
  • If you rent a room in your home, there is a tax-free rent-a-room allowance of £7,500

ANNUAL GIVING

  • You can gift £3,000 to any individual without recourse to tax by the recipient or your estate. If you do any substantial giving please put a scan of a signed note of this on our portal
  • If you are feeling generous, you are also permitted to gift your newlywed children £5,000 or grandchildren £2,500

SPOUSE ALLOWANCES

  • If you have a spouse who does not earn up to the personal allowance of £12,570, you can elect to have 10% of this (£1,257) added to your own allowance
  • Spouses also can benefit from sharing assets and effectively doubling exemptions and allowances

ALTERNATIVES & HIGH-RISK INVESTING

It is generally thought that VCTs, EIS and SEIS are really for more sophisticated investors, about 3% of the population. All are long term in nature – meaning 6-10 years. Unlike your portfolio elsewhere (which – if we are managing it – will be an enormous portfolio of global equities), these are very small by comparison. Do not do these on your own unless you know your Sharpe ratio from your Beta. Unlike the above, the investments below can experience permanent loss:

Venture Capital Trusts

  • Tax-free income from your investment
  • Tax-free capital gains
  • Tax relief of 30% on your initial investment (tax reducer)

Enterprise Investment Schemes

  • 30% tax relief on your investment
  • The ability to defer owed capital gains tax
  • Loss relief
  • Exempt from inheritance tax

Seed Enterprise Investment Schemes

  • 50% tax relief on your investment
  • Reduce your due capital gains tax bill by 50% immediately
  • Exempt from inheritance tax

DON’T FORGET

Income taxes are tiered. Each slice of your income is taxed at a different rate.

Band Taxable income Tax rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate over £150,000 45%

Please remember that HMRC will apply penalties for late payment and fines for non-payment which can result in the very worst of punitive measures – a custodial sentence.

As ever, be sure of two things – death and taxes. Neither are terribly welcome.

Tax year ending2023-12-01T12:12:37+00:00

Taxing your savings

Dominic Thomas
Feb 2023  •  10 min read

Prize – Back to winning ways? Or simply more tax on your savings?

Despite the cold weather and general sense of grey, there are some silver linings. On 24th January 2023 NS&I increased the interest rates on various accounts.

If you are one of the 870,000 or so people who hold NS&I’s Direct Saver, Income Bonds or Direct Cash ISA, you will now get a little more interest. The interest rate paid on Direct Saver and Income Bonds will increase from 2.30% to 2.60%, whilst the interest rate on Direct ISA will increase from 1.75% tax-free to 2.15% tax-free.

Those of you who like Premium Bonds and remain optimistic of jackpot winnings (less likely than being struck by lightning), the prize fund rate will also increase from 3.00% to 3.15%, effective from the February 2023 prize draw. This follows the rate increasing from 2.20% to 3.00% on New Year’s Day.

NS&I has also increased the interest rate that it pays on its Junior Cash ISA from 2.70% tax-free to 3.40% tax-free, meaning that 80,000 under 18s will benefit from extra interest on their savings, though why anyone would want to hold cash for 18 years is beyond me …

Media spin means that we can confidently say that “today’s changes mean that Income Bonds are now paying their highest rate of interest since 2008” which is of course since the infamous credit crunch.  The prize fund on premium bonds is also at its highest level since the great crunch.

The odds of each £1 Bond winning any prize will remain fixed at 24,000 to 1, with the changes meaning that the number of prizes worth £50 to £100,000 will increase from next month’s draw (February 2023). In short, if you have at least £24,000 in Premium Bonds you would be unlucky not to win at least £25 (the smallest but most common prize, paid out on over 2.6m Premium Bonds).

There are an estimated 119 billion premium bonds in issuance. The £1m jackpot is paid out on two bonds every month. So there is roughly a 1 in 59 billion chance of winning the jackpot in any month. It will not surprise you that I don’t believe that reliance on such odds is a good strategy for your future, but I certainly would acknowledge that it’s a little bit of fun.

Current and new Premium Bonds prize fund rate and odds:

Current prize fund rate Current odds New prize fund rate (from February 2023) Odds from February 2023 (no change)
3.00% tax-free 24,000 to 1 3.15% tax-free 24,000 to 1

Number and value of Premium Bonds prizes:

Value of prizes in January 2023 Number of prizes in January 2023 Value of prizes in February 2023 (estimated) Number of prizes in February 2023 (estimated)
£1,000,000 2 £1,000,000 2
£100,000 56 £100,000 59
£50,000 111 £50,000 117
£25,000 224 £25,000 236
£10,000 559 £10,000 590
£5,000 1,116 £5,000 1,177
£1,000 11,968 £1,000 12,573
£500 35,904 £500 37,719
£100 1,159,432 £100 1,280,509
£50 1,159,432 £50 1,280,509
£25 2,617,902 £25 2,376,161
Total

£299,202,350

Total

4,986,706

Total

£314,347,875

Total

4,989,652

Variable rate savings products:

Product Previous interest rate Interest rate from today (24 January 2023)
Direct Saver 2.30% gross/AER 2.60% gross/AER
Income Bonds 2.30% gross/2.32% AER 2.60% gross/2.63% AER
Direct ISA 1.75% tax-free/AER 2.15% tax-free/AER
Junior ISA 2.70% tax-free/AER 3.40% tax-free/AER

Can you get better rates elsewhere? Of course you can! Remember that non-taxpayers and basic rate taxpayers have the personal savings allowance in 2022/23 of £1,000 of tax-free interest. At an interest rate of say 3%, you would need £33,333 on deposit before tax is triggered. Higher rate taxpayers only have £500 of the allowance, so at an interest rate of 3%, you would only need £16,660 on deposit before tax is triggered.  A year ago, you would have been hard pressed to be taxed on £100,000 of savings when interest rates were under 1%.

Taxing your savings2023-12-01T12:12:38+00:00

Tax deadline: 31 Jan 2023

Dominic Thomas
Jan 2023  •  8 min read

THE TAX DEADLINE – 31 JAN 2023

As I write the 31 January 2023 tax deadline is fast approaching. Hopefully if you are self employed or have some taxes to pay, you have set aside the funds to pay your dues to HMRC. Few of us like paying taxes, yet we all know how vital they are. Some people brag about how little tax they pay, even scoffing as they “stick it to the system” including the male that managed to convince Americans in the United States to elect him as President.

We have our own politicians with tax problems of course. This is nothing new. The complexity of international taxes and in particular offshore tax havens makes it all rather fuzzy, let alone some of the nefarious companies in which investments are held.

I suspect that you are affluent enough to be concerned about the custodial penalty if you fail to pay your taxes, not poor enough to dismiss it and not rich enough to presume you will be able to pay for the legal representation to keep you safely excluded.

Whether we like them or not, and I do appreciate that sometimes it feels as though we are simply working for HMRC, but tax pays for lots of our societal benefits. Roads to justice, welfare to pensions, care and healthcare, education and defence. Certainly there is a lot wasted and we seem set to remain locked in a battle of ideologies about how to make the system fairer and popular.

Our role is to ensure that you don’t pay tax unnecessarily. For example, consider wanting to withdraw £10,000 to spend from your investments.

Whilst we live in an imperfect world where Chancellors, Prime Ministers and Governments are quickly replaced, much like the rules and policies that they introduce we do our best to minimise taxes, which have an enormous impact on your investments.

Tax had a bigger impact on returns

Whilst journalists get very vexed by charges on investments, in the 2022/23 tax year there are lots of different rates of tax, these get altered regularly. Currently tax rates include 0%, 8.75%, 10%, 18%, 20%, 25%, 28%, 33.75%, 39.35%, 40%, 45%, 55% or 60% tax to draw money from your investment, this rather puts things into perspective. We attempt to minimise tax so that you do not pay it needlessly.

The table below shows the enormous difference in the amount you would actually have to withdraw in order to end up with £10,000 post taxes. Irrespective of how you vote, these are accurate tax rates for 2022/23.

TAX RATE GROSS WITHDRAWAL TAX PAID NET YOU KEEP
0% £10,000.00 £0 £10,000
8.75% £10,958.90 £958.90 £10,000
10% £11,111.11 £1,111.11 £10,000
18% £12,195.12 £2,195.12 £10,000
20% £12,500.00 £2,500.00 £10,000
25% £13,333.33 £3,333.33 £10,000
28% £13,888.89 £3,888.89 £10,000
33.75% £15,094.34 £5,094.34 £10,000
39.35% £16,488.05 £6,488.05 £10,000
40% £16,666.66 £6,666.66 £10,000
45% £18,181.82 £8,181.82 £10,000
55% £22,222.22 £12,222.22 £10,000
60% £25,000.00 £15,000.00 £10,000

The above table ought to indicate how important it is to have the right advice and a good understanding of the UK tax system of allowances, reliefs and exemptions. Sadly we cannot rely on Government to simplify taxes or even maintain levels predictably.

Clearly using investment products and solutions that prevent tax or enable you to minimise it through careful management makes a lot of sense.

As the new tax year 2023/23 approaches (6th April) many of us will likely find ourselves paying rather more tax.

UK HMRC Tax Receipts 2021-22

Tax deadline: 31 Jan 20232023-12-01T12:12:38+00:00

The mini budget – Sept 2022

The mini budget – September 2022

You may have gathered that I ended up pouring myself a stiff drink after I listened to the ‘mini budget’ last week. To say that it wasn’t quite as expected would be an understatement. Some would have us believe that we live in an age of being offended by any old opinion, the truth is quite different, but as ever these societal messages all have a purpose to serve, just usually not yours or mine. I felt the heading here ought to have a date, as there may be another one along any minute now … it’s a bit of a mini adventure!

Setting aside partisan politics, which is relatively easy to do these days, because no party looks anything like they should. I give you the budgie … I mean budget, a mini one, though probably one of those BMW minis on steroids that runs off a wall socket and can easily swallow a double bed.

TAX CUTS

We had tax cuts… well, more accurately, we have been promised tax cuts from April and National Insurance cuts from November. Anyone who has built up 35 tax years of NI payments since 16 will barely wake up to this marvellous news, the rest however have had an increase removed … or it will be. A saving of 1.25% within the NI threshold. As a well-known supermarket may say, every little helps … yes – if you believe that somehow your NI is not simply another tax, that for most of us is the price of membership to get a State Pension. Yes, it does provide a few other things.

A BRIMFUL OF ASHA ON THE 45… (YOU KNOW, OR YOU GOOGLE)

The big news is really the additional rate of tax being abolished. That’s the extra 5% tax that anyone with income over £150,000 must pay. Instead, they will simply continue to pay 40% on all income from the higher rate threshold. That also means that the additional rate is abolished on dividends and additional rate taxpayers can have back a £500 personal savings allowance (non-taxpayers and basic rate taxpayers have £1,000 allowance, higher rate taxpayers £500). That’s £500 of interest tax-free (all interest is taxable, it’s just that there is a personal savings allowance, which until the recent interest rate rises you’d need £50,000 to £100,000 on deposit to achieve).

For context, anyone earning £150,000 does not get a personal allowance of £12,570 which has a 0% tax rate … apparently, they don’t deserve it. Anyone earning over £240,000 a year (heaven forbid – it’s actually just about enough to get a mortgage to buy a 2up2down terraced house in Edna Road, SW20) can only contribute 10% of the £40,000 annual allowance towards a pension, meaning they are actually penalised from saving into pensions. If you are an NHS doctor in the pension scheme, you don’t even have to earn anything like these sums to get clobbered with tax on money you will not get until you retire, as you well know, but Joe Public seems oblivious to. These measures have not been altered, but the great injustice of the day is to allow them to retain an extra 5% of income above £150,000. That’s 5p in every £1 or £5,000 for every £100,000 (on which they still pay 40% or £40,000 in every £100,000).

STYLUS and STYLE LESS

What we deem fair depends on who you are and what you earn. However, one thing is clear, the Chancellor has failed to read the room, much like he did at a recent funeral. This is the age of appearances, in all but hairstyles (I write with no sense of envy at the naturally enforced lack of one).

What we have is messages that miss the target, appearing to help and appease the ‘wealthy’ which I would argue is never income, always capital when talking about money. When many will evidently struggle to pay for power and heating this winter (our little office in SW20 has had a tenfold increase, 10x good grief, I am definitely in the wrong industry!). The appearance and indeed the impact of the cuts is woefully poor messaging. Bankers’ bonuses being uncapped to most of us sounds insane, until you realise that the cap resulted in higher salaries (fixed costs) for poor performance and many that couldn’t keep the score they wanted decided to pay income tax in Paris, Frankfurt or the Caymans… scrap that last one. Anyway, keeping them here paying 40% of everything seems logical to me as opposed to nothing of nothing.

But facts don’t make for good news or even bluff and thunder. Equally neither does the promise to pay for it all at some point in the future. This is the age-old problem of Government printing money (Bonds) as an IOU and hoping enough of us buy them and believe that, as previously there will be enough tax revenues to enable them to keep paying the coupons (interest) and ultimately return the capital at redemption date.

THE GREAT RECKONING OR REDEMPTION?

Redemption is perhaps the right word – can Liz Truss salvage the car crash of politics that Mr Johnson left. Johnson has had many forgive him, at least three wives have done so at times. Whether this is a gamble that Truss has the hand or nerve to match remains to be seen. I am hopeful; but deeply sceptical. As she clearly can drive a tank, I won’t suggest we watch to see if she can parallel park a mini.

WHEN LESS IS LESS (YES REALLY)

Side note. Lower basic rate tax at 19% means on the first £37,700 (after the personal allowance) you will pay income tax of £7,173 rather than £7,540 a saving of £377 a year or £31.42 a month … the milky bars are on me! (I jest at the price of confectionary and anyone old enough will recall the advert).

Additional side note, that means your basic rate tax relief on pensions will also reduce from 20% to 19%. In maths we can relate to, £81 invested by you sees £19 added by HMRC rather than £80 and £20. So for those paying say £300 gross a month into a pension (as I advise many people to do even if retired and under 75) that means you will now pay £243 a month rather than £240 (from 6th April). Yes it costs a little more…. it’s the classic giveth and taketh away (all Chancellors do this).

I imagine you may have questions, some are being answered by the markets (which seem to be calling this a game of bluff and double-bluff). Some will appear in your newspapers, though I suspect they will be full of rather more conjecture and opinion than fact. If you wish to genuinely understand the impact of reduced taxes on your wealth, get in touch or hold fast until your next review. We are all playing the long game here, but none of us know how long.

No politicians were hurt in the writing of this article.

According to the ONS in 2020/21 the average disposable (after tax and NI) income is £37,622 but the median (the mid-point if you lined up everyone) is £31,385. If you separate out the non-retired and retired, the former has an average of £39,349 and mean of £32,934. Retirees see this considerably lower at £29,408 and £25,405. It is generally true that retirees have no mortgage payments and unless they are our clients, apparently never have any fun either (joke!).

Government Sanctioned information here

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

The mini budget – Sept 20222023-12-01T12:12:43+00:00

TAX TRUTHS – A PARTY OF TAX CUTTING?

TODAY’S BLOG

NEW TAXES CLAIM £50BN AHEAD OF NI RISES

I’m going to assume that you are old enough to know that what a political party says and what it does are not the same thing at all. Here in the UK we tend to vote for the “least bad” option, at least, thats the only way I make sense of it.

New levies imposed on businesses over the last decade have raked in more than £50bn for the Treasury, as the UK’s tax burden rises to its highest level since the 1950s. The bank levy, apprenticeship levy, soft drinks tax and a range of other charges have all contributed to the public purse, according to analysis by Thomson Reuters.

It comes as National Insurance is set to rise in April 2022, adding 1.25 percentage points to the tax levied on employers and on their workers’ pay packets. These new taxes have proven themselves to be a successful way to bring in billions of pounds in a relatively short space of time. The new National Insurance surcharge is sure to be a success from a public purse perspective, but will add considerable financial and compliance stresses to both businesses and individuals.

The extra National Insurance fee, which will be known as the health and social care levy from 2023-24, is set to raise around £17bn per year, outweighing even the largest of the previous new taxes.

Here is a link to NI rates for 2022/23

SOFT DRINKS TAX

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The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

TAX TRUTHS – A PARTY OF TAX CUTTING?2023-12-01T12:12:52+00:00

STATE PENSION INCREASE

TODAY’S BLOG

STATE PENSION INFLATION INCREASE

You will have noticed the impact of inflation on various goods and services that you have bought lately. Inflation always hits those on a fixed income harder. That mainly means those that are drawing their pensions.

The ONS publish data about inflation every month, but I suspect your actual lived experience of inflation may differ from the general averages for the entire country. There has been much coverage of this in the news, in particular the real inflation on supermarket products.

You can check the official current rate of inflation here (click here)…. Or you could look at your utility bills.

Retirees in Britain face the worst disparity in their state pension payments when set against inflation since the triple lock was introduced over a decade ago, findings warn. In April 2022, state pension pay-outs will rise by 3.1%, and be based on Consumer Price Index figure from last September. But earlier in the month, new official figures revealed that inflation was running at 5.5% in the year to January.

Pensioners would currently see a real term loss of 2.4% in the amount of state pension income they receive from the Government, and the problem could worsen with forecasts of inflation peaking at around 7.25% in April, according to experts at Quilter.

The basic state pension will rise by £4.25 to £141.85 per week, or around £7,370 a year, in April. The full flat rate will rise by £5.55 to £185.15 per week, or around £9,630 a year. Since the triple lock was launched in 2010, there have only been 22 months when inflation stood above the uprating of the state pension for the previous April and five of those months were in 2021, says analysis by Quilter. The previous biggest disparity was 0.6% back in November 2017, when inflation ran higher than the state pension uprating for 11 months, but only on average creating a disparity of 0.4% over the period.

I have no wish to get political, but I would add that this is a difficult situation for any Government. The number of people claiming the State pension is rising and there are fewer “working” people (paying NI) to cover the cost. This is, to be blunt a timebomb. The State Pension is a political punchbag, in theory paid for by the combined employer/employee or self employed National Insurance contributions.

See the links below (for those not yet drawing a State Pension).

Remember that the State Pension is income and taxable, it is simply that for most people it is within the personal allowance for the tax year (the 0% allowance). The personal allowance for 2022/23 remains at £12,570.

STATE PENSION INCREASE

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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

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STATE PENSION INCREASE2023-12-01T12:12:53+00:00

SELF EMPLOYED V LTD CO.

TODAY’S BLOG

SELF EMPLOYED v LTD COMPANY

Those of you that run a small business or provide a professional service are typically either self-employed or operate a small Limited company. The main legal advantage of a Limited company is that any liability is limited to the company and the Director cannot be harassed for funds owed to creditors should the business fail. The company is a legal entity in it own right.

The Chancellor’s plan to increase the main corporation tax rate from 19% to 25% in April 2023 has once again brought into focus the question of whether it makes sense to incorporate your business if you are currently self-employed. Although tax alone should not be the determinant, it can be a major factor in many instances.

CRUNCHING THE NUMBERS

The first point to note is that the 25% rate will generally only apply for companies with profits of at least £250,000. Up to £50,000 of profits, the current corporation tax rate of 19% will continue, albeit labelled a small companies’ rate. In between those limits, the tax rate will be 19% on the first £50,000 of profits and 26.5% on the excess. This can mean that if you incorporate when your profits are modest, you may regret the move if your business starts to make more money.

How you draw income from your company will determine your overall tax bill. In the examples below, we have assumed:

  •  All of the profits will be drawn. This makes the picture consistent with the self-employed alternative under which all profits are taxed.
  • You draw a salary of £8,840 a year from your company. At this level neither you nor your company will have any National Insurance Contributions (NICs) to pay.
  • All your profit, after deducting your salary, is taxed at corporation tax rates and then paid to you as a dividend.
  • The first £2,000 of your dividend is free of tax thanks to the dividend allowance, but still counts as part of your total income for tax purposes.

SELF EMPLOYED LTD CO 2021 LTD CO 2023
Gross Profit £75,000 £75,000 £75,000
less salary <£8,840> <£8,840>
Taxable profit £75,000 £66,160 £66,160
less corporation tax <£12,570> <£13,782>
net profit = dividends £53,590 £52,378
less National Insurance <£4,316>
less Income Tax <£17,432> <£6,629> <£6,235>
Net Income £53,252 £55,801 £52,378
Gain/loss if incorporated +£2,549 +£1,731

COPORATION TAX RATES

So, let’s consider the same scenario, but with larger numbers, double at revenue of £150,000…

SELF EMPLOYED LTD COMPANY 2021 LTD COMPANY 2023
£ £ £
Gross Profit £150,000 £150,000 £150,000
Less Salary £8,840 £8,840
Taxable Profit £150,000 £141,160 £141,160
Less Corporation Tax <£26,820> <£33,657>
Net Profit – dividends £114,340 £107,503
Less National Insurance <£5,816>
Less Income Tax <£52,460> <£30,616> <£27,362>
Net Income £91,724 £92,564 £88,981
Gain/loss from incorporation +£840 -£2,743

The higher profit level highlights the impact of the corporation tax change: at £75,000 the corporation tax bill increases between 2021 and 2023 by 9.6%, but at £150,000 the bill jumps by 25.5%.

MORE IS MORE

If the corporation tax increase goes ahead – and there are voices suggesting it might be tweaked nearer the time – then on tax grounds the case for incorporation will be weakened, particularly at higher profit levels. However, as mentioned above, tax is not the only consideration.

ACTION

The numbers above are for two specific profit levels. Comparative calculations are complicated by the phasing out of the personal allowance, so there is no straight line between the £75,000 and £150,000 results.

The corporation tax move is another step on the slow path to rationalising the taxation of earnings between employees, the self-employed and owner directors. For a review of your personal situation and the tax saving opportunities available now, please talk to us.

For what its worth (nothing) if I were Chancellor, I’d have standard rates of tax irrespective of where the income is derived. This would make tax much more transparent, straight-forward and easier for everyone to understand. The problem lies in the will of Government.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

SELF EMPLOYED V LTD CO.2023-12-01T12:13:00+00:00

ARE YOU MISUSING YOUR CASH ISA?

TODAY’S BLOG

ARE YOU MISUSING YOUR CASH ISA?

You may have gathered that I am not a fan of the Cash ISA. If you really must have one, then you need to be clear that you are getting a top rate of interest (less than 1% at the moment) and that you are not locked in for too long. If you expect rates to rise, why on earth would you lock in to one?

We all have a personal savings allowance. That’s £1000, £500 or nothing depending on your highest rate of tax. Basic rate (20%) taxpayers have a £1000 savings allowance (interest from savings) and those that are higher rate (40%) have a £500 allowance. Therefore, majority of people will have at least £500 of interest that they can earn tax free. Today that means holding around £50,000 of cash, which is a little under twice the average national income. According to ONS data to the end of the 2019/20 tax year, that’s £29,900 (median household income).

As I have said before, I am a great believer in holding cash. It provides for projects and emergency. Good planning – which is something that you already do better than most because you are here today, means getting a realistic estimate for something you intend to do and setting that aside prior to starting the project. This is therefore based on your research, quotes, and prudence to allow a sensible margin for error, or builder maths.

Wheat and Chaff

CASH FOR EMERGENCIES

Then there is your emergency fund. This is entirely subjective. It is an amount that enables you to sleep at night knowing that if something disastrous happened by the time you woke, you and your family would be able to cope financially. Things like loss of your job, the boiler breaking down, your car being vandalised or stolen, perhaps even a quick getaway fund from an abusive relationship. You might relate this number to how much you normally spend each month and hold a multiple of that.

RISKS CHANGE AS YOU AGE

Those that have a guaranteed income (people that are retired and living on State Pensions, annuities, or final salary pension benefits) arguably don’t need to worry about the loss of a job or their income. Its more likely that, if that’s you, you think of the extra income sources – from your investments or perhaps a holiday home that is let during a pandemic.

Most people will probably not need more than £50,000 (in 2021) but I did say it was subjective and personal to you. Cash doesn’t really work for you; it works for a bank who lend your money out at a rate that makes them rather more than they offer you to “store” it with them. If this drags on for months and years, you will undoubtedly see the spending power of your money reduce due to inflation. It needs to do some heavy lifting, which means investment. This comes at the price of market volatility in the short term, but if done properly, will deliver greater yields.

PARABLES ABOUT BARNS AND GRAIN

To my mind, it’s like an arable farmer keeping all their seed (cash crop) in a barn and not sowing enough. At some point, the barn will run out as its consumed or rots, missing out on all that multiplication and future harvests.

Anyway, given that most people don’t need to hold much more that £50,000 and would get the interest on it tax free anyway, there is no point using your valuable ISA allowance to give you something you already have.

Of course, this is what a plan will help determine and why understanding what the money is for and the reasons for your anxieties about money. Do get in touch.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

ARE YOU MISUSING YOUR CASH ISA?2023-12-01T12:13:02+00:00
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