Questions answered by the Experts
Q: Will you pay more tax in 2011/12?
A: Every year the income tax thresholds are revised in line with inflation in an attempt to reduce the UK's budget deficit. This year an estimated 700,000 UK tax payers are set to pay more income tax, is this going to be you?
The answer depends on the level of your income, and whether you are due to pay national insurance (see below). Although the rates of income tax due on earnings and profits will not change at start of the new tax year on 6 April 2011 (they remain at 20%, 40% and 50%), all national insurance (NI) rates will increase by 1%. The income thresholds where the different tax and NI rates start to apply, are also changing.
Most people aged under 65 will benefit from an £1,000 increase in their tax free personal allowance to £7,475, (certain non-doms don't qualify for this allowance). However, the income threshold where the 40% tax rate is imposed will be reduced by £2,400 to £35,000, which will draw more people into the 40% tax band.
Above average income
Say your only income is profits from your self-employed (http://twdaccounts.co.uk/services/sole-traders.html ) business of £50,000. In the tax year to 5 April 2011 (2010/11) you will pay tax on £43,535 (£50,000-£6,475), with £37,400 taxed at 20% and £6,125 taxed at 40%. This gives you a total income tax bill of £9,930.
In 2011/12, assuming your income remains constant at £50,000, you will pay tax on £42,525 (£50,000-£7,475), with £35,000 taxed at 20%, and £7,525 taxed at 40%. This means your total tax bill will increase by £80 to £10,010.
However, national insurance rates are also going up, so you need to take that increase into account. Everyone between 16 and the state pension age (65 for men, and just over 60 for women), must pay national insurance on their earnings or profits. National insurance is not payable on dividend income, rents, interest or capital gains.
In 2010/11 you currently pay class 4 NI at 8% on your profits from £5,715 up to £43,875 and 1% on the excess. On self-employed profits of £50,000 that gives you a class 4 NI bill of £3,114.05 plus £124.80 for the flat rate class 2 NI.
In 2011/12 the class 4 NI rate increases to 9%, but the range of profits it applies to is restricted; from £7,225 to £42,475. Profits over the higher threshold will be subject to NI at 2% (up from 1%). So on self-employed profits of £50,000 you will pay class 4 NI of £3,323 plus class 2 NI of £130.
That's an increase in your total NI bill of £214.15. In 2011/12, on profits of £50,000, you will have an increased tax and NI bill of £294.15 compared to the amount due for 2010/11.
vBelow average income
Where your income is closer to average annual earnings of £25,000 you may pay less tax and NI in 2011/12.
Say your only income is self-employed profits of £24,000. In 2010/11 you will pay tax on £17,525 (£24,000-£6,475) at 20%, being £3,505. In 2011/12 your tax bill will drop to £3,305 (£24,000 -£7,475) x 20%.
With profits of £24,000 in 2010/11 your class 4 NI bill is currently £1142.80 plus £124.80 for class 2. On the same profits in 2011/12 your class 4 NI bill will be £1149.75 plus £130 for class 2, which amounts to an increase of £12.15. So overall your tax and NI bill will drop by £187.85 in 2011/12.
The changes in tax rates and thresholds are generally good news for those on below average incomes of around £25,000, but the rest of us will pay a little more.
If you want to limit the additional tax or NI payable in 2011/12, you can do so with a little forward planning. Undertaking one or more of the following actions may reduce your tax bill, but the results will depend on your personal circumstances:
• Pay additional pension contributions.
• Make gift aid payments.
• Take your spouse or civil partner into partnership.
• Employ your spouse or other family member in your business.
• Take income from your business in a form that doesn't attract NI.
• Operate your business through a company, and take the majority of your income as dividends.
Please speak to us before acting on any of the above, as correct implementation is always key to any tax saving idea.
By Mike Parkes, TWD Accountants. 4th February, 2011.
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