What are the two biggest mistakes people make about tax?

March 3, 2012

This may seem obvious to you or may not, but I do believe it is important to clarify a couple of things. These are probably the two biggest mistakes that people get wrong about tax.

Point number one….

Spending money to save tax is never a good thing

What I mean is…..don’t ever spend on something just to save tax. For example, it is coming up to the year-end and there are some tax advantages of buying equipment before the year-end rather than after it. That’s fine if you actually want the equipment. If you don’t really want it, don’t buy it just for tax purposes. Here’s why…..

(I’m using limited company tax rates here)

You pay for a piece of equipment and it costs £1,000. You ‘write this off’ against your income. What has happened here, is that your corporation tax has gone down by £200 (20% of the total) meaning that the piece of equipment has actually cost you £800. So its good, but only if you want the piece of equipment.

It has been said to me that if you spend £1,000 on the equipment, you get the full £1,000 back in tax. Nope. If that was the case, potentially you could go out and buy anything. You only get 20% back in tax.

Point number two…..

Earning more money is always a good thing even if you may pay a higher tax

I’m not going to into a philosophical, moral, religious or even business case that earning more money is good (that’s another blog and maybe another blogger), what I mean by this is….sometimes people say that ‘you don’t want to earn more money because you will have to pay more in tax’.

That is simply never true. Even at the highest tax rate – 60% (on incomes between £100,000 and £114,950), you will still earn more money by going into this tax band, even if HM Revenue & Customs will take 60% of it.

This is because you are taxed at 60% on the amount over and above £100,000 not on the entire amount of your earnings.

So that’s the two mistakes, if you have made both of these you have at the same time, spent money you shouldn’t have and limited your earning potential which is an unfortunate double whammy!

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