Income tax
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Income tax rises over the last three budgets have hit business owners hard and include the highest tax on National Insurance rates for at least 20 years. The most notable of these are the 50% tax on personal income over £150,000 and the phased withdrawal of the £7,475 personal allowance where income exceeds £100,000. This means there is a 60% effective tax rate on profits between £100,000 and £114,950. A partner in an operation will now pay 9% on their profit between £7,225 and £42,475, and 2% on all profit above this.
These punitive tax rates are paid on all profit, even if you do not draw it down from the business. Compare this to the reduction in company tax rates announced in the March 2011 budget. A company with profit under £300,000 will now pay only 20% on this profit. Larger companies have also seen a dramatic reduction in their rates with a 2% drop from 28% to 26% from 1 April 2011, coupled with a further 1% reduction every year for three years until it is 23%. The large disparity between corporate and personal tax rates means there has never been such a compelling case for incorporating a business.