Biggest Tax Mistake Explained
Whilst running your company and marketing your services may seem like second nature, financial processes and tax management is a source of anxiety for many business owners. The biggest worry people often have is that they are making tax mistakes. Whether it’s filling in forms incorrectly or recording their expenses poorly, there are many elements of accounting that need to be carried out carefully and thoughtfully. Often, these elements require some degree of prior knowledge, as this can be a major stressor for business owners.
Managing your tax obligations and correctly handling your money is a complicated process. Our chartered accountants at Incloud accounting had to train for years to become specialists in the industry, yet many SME owners are left to deal with things on their own, with little in the way of guidance or support.
Our chartered accounts have over 25 years’ experience managing the accounts of countless small business clients and know exactly what mistakes company owners are making. After all our experience, we’ve identified one of the biggest tax mistakes that almost every novice in the world of business financial management has made some point.
So, what is the biggest Tax mistake we see?
In British taxation, there exist tax bands. As of 2017, they are as follows:
- £11,500 — untaxed
- £11,500 to £45,000 — 20%
- £45,001 to £150,000 — 40%
- £150,000 or over — 45%
Depending on what you earn, you will be taxed a certain amount. It seems fairly clear cut in terms of what sort of tax bill you’ll have to pay. However, those with limited accountancy knowledge often miss one crucial detail.
The scenario often plays out like this.
The business owner is bringing in £145,000 per year. They have the ability to earn £155,000 per year, but they keep their wage below the additional tax threshold as to not pay the 45% rate. Instead, they maintain their current earnings and pay the 40% tax rate instead.
Smart move, right? Well, sadly, this is a tax mistake. This is not how tax bands work.
Tax bands rise with increased income, but the higher rates only apply to income over the previous bracket. For example. A small business owner earning that £45,000 will pay 20% on that tax. If they were to move up to £46,000, they would not pay 40% on their entire income, only on the £1000 that hits the additional tax rate.
These are the figures for take-home pay, as accurate in December 2017:
- £45,000 gross = £33,491 net
- £46,000 gross = £34,463.28 net
As you can see, despite hitting the higher tax bracket, the business owner takes home more cash. The basic principle of taxation is the more money you make, the more money you’ll take home. You’ll never be in a position where somebody earning £5000 less than you are actually taking home more because they are in a lower tax bracket.
Keep earning, keep growing and avoid this — one of the biggest tax mistakes our chartered accountants come across!