When a person is employed we are given by the UK tax office a PAYE (Pay as you earn) tax code.  It will often look like this ‘647L’.

How is it calculated? Well, most people can, during the year ended 5 April 2010 earn £6,475 tax free and they will not need to pay any tax on these earnings, lovely!

The tax man simply snips the last number of the tax free amount off, adds a letter and bingo, you have a tax code.

Next he chops the tax free amount of say £6,475 into 52 slices for those paid weekly or 12 slices for those paid monthly.  So you can earn say £539 in April 2009 from your employer and not pay any tax.

If your earnings exceed this amount then you will pay tax of 20% on the excess.  If however you are earning lots each year, once your monthly earnings go over £3,655 then the excess falls into the 40% band, ouch! 

And if you are a big fat cat, you can even pay the super duper rate of 50%, but that is for those earning over £150,000 and it doesn’t come in until next year anyway, so don’t worry too much!

A business will incur expenditure buying larger items, eg. equipment for use in its business.  If for example a business buys a new digger for say £10,000, then no doubt this will be used for possibly the next 5 years. 

The taxman realises than some larger items bought by a business will be used over the coming years, therefore he does not usually allow the full cost to be deducted in the first year.  Rather, a business can normally claim capital allowances, ie say 20% of the orignal cost each year against its profits. 

This is a fair system as you get some of the cost matched to the income earnt by using the asset each year.

These rules have over the past few years changed with every single budget.  For example, some years you can claim a first year allowance of say 50% of the cost in the first year, then a percentage of the residual cost for the remaining years.

So is this starting to sound a little confusing? Well don’t worry, since the recent rules have changed a business can currently claim 100% of the cost of a new equipment bought during the year up to a limit of £50,000 per year. 

The idea is to try to encourage smaller businesses to invest in new plant and equipment and help everyone to start spending again!

If you have any questions please feel free to leave a comment or question and I’ll try my best to reply.

Many people in business hold back from speaking to their accountant about additional matters for fear of incurring expensive fees.

Therefore, I have decided to write a number of useful articles based on the experience I have gained over the past 12 years working in Accountancy.

My name is Dave Walker and I am a qualified accountant and one of the directors of Sloane Walker Ltd www.sloanewalker.co.uk

Disclaimer:

The information contained on this site is for guidance only and no action should be taken on the information given without first speaking to a qualified accountant on your personal circumstances.