“Well, That’s a Forty % increase in the corporation tax rates between £50,000 and £250,000!” I heard Jonathan mutter as he listened to the budget (well to be truthful it was a lot louder than that, but I need to be a little respectful, as I thought It was only a 6% increase from 19% to 25%).
I may only be a Labrador, but even I can work out that 6 of something is a lot smaller than 40 of something (especially if it’s biscuits).
Taking the Biscuit – the marginal rate
“Not so” said Jonathan “and let’s use your biscuit analogy as an example”.
“First up, you Lyra, have to appreciate that the tax rate on profits between £50,000 and £250,000 is going to be 26.5%”. I looked puzzled at this because I know 26.5% is more than the new proposed tax rate of 25%.
“26.5% is more than 25%” said Jonathan, “but you have to understand that HMRC are going to recover the tax on the first £50,000 of profits that were taxed at 19% (rather than 25%) from small businesses that have profits in the £50,000 to £250,00 band.
When you crank the maths, this means that every £1,000 of profit above £50,000 gets taxed at 26.5% so that, by the time profits are £250,000, a business will have a total tax liability of £62,500 (£50,000 at 19% and £200,000 at 26.5%)
I kind of get that the tax rates will increase from 19% to 26.5% for profits in the band, but that is only a 7.5% increase not 40%.
So Why The Forty % increase in biscuits and not 7.5%?
At this point Jonathan agreed he had lied (a little) as the actual increase is 39.47368% but he felt that 40% was close enough to describe the rise in tax rates.
Still puzzled, I said “so how did you get to a 39.47368% increase?”. With a little smile, he said:
“Lyra, if you have 19 biscuits and I give you 7.5 more, by what % has your biscuit pile increased before you eat any?”; and that’s when I realised it was almost a 40% increase!
So, I am off to eat the 40% increase in my biscuits before the tax man wants his share in two years’ time.
Thanks for reading all of this blog which is a fair bit to digest. Being a Labrador and although very knowledgeable in all subjects, canine-related, you might have more questions and need advice, so please contact the nice team here at Rowdens.
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