Tax doesn’t have to be taxing!

Please note that this blog post does not constitute legal or tax advice. Please speak to a qualified tax specialist if you require advice on your financial affairs. 

The truth is nobody wants to pay tax. This is because we work hard, and we may feel that we should be able to keep everything we earn, without having to ‘share’ those earnings with anyone.  However, we all have to pay tax. The old saying has it that death and taxes are the only things in life we cannot escape.

But sometimes there is good news! When the Government increases the personal allowance and thresholds of different tax bands, we find ourselves paying less and less tax while earning the same amount every year. It may feel like a slow process, but looking at the data from previous years, we may come to realise how much more stays in our wallets.

For example, in the 2009/2010 tax year, the personal allowance was £6,475, meaning anything earned after that would be taxed. As a comparison, personal allowance for next year (2015/2016) will be £10,600. That is over £4,000 of our earnings that are not taxed!

How much do we save?

Let’s look at how much tax a person earning £35,000 p/a would pay in the 2009/2010 tax year compared to someone earning the same amount during the 2015/2016 tax year.

2009/2010 – £5,705 paid in tax

2015/2016 – £4,880 paid in tax.

As we can see, that same person would save a whopping £825 per year, without even doing anything. Interestingly, the government plans to increase the personal allowance to £12,500 by 2020, meaning that, as the years go by, more and more money should be staying in our wallets.

Who benefits?

This is not only advantageous to people who are employed – it’s also of interest to those looking to set up their own business.

Many business owners like the security of having a company. A company is a separate legal entity. This means that it is the company that enters into contracts and incurs debts.  If you are a sole trader, you don’t have this separation. With a sole trader business, if the business has debts then they are your debts.

However, as the personal allowance increases, being a sole trader may become a more attractive option compared to setting up a company. As sole traders pay income tax, larger portions of their profits can be tax-free.  It will be interesting to look back in a few years’ time and see if changes to the personal allowance has had an effect on the type of business vehicle people choose.

This blog post was written by Dawid Stramski. Dawid is currently studying the MLaw degree at Northumbria University and is working in a business & commercial law firm within its Student Law Office. In the future he aspires to work as a commercial lawyer in a law firm or in-house to be able to further develop his commercial interests.