- This topic has 5 replies, 2 voices, and was last updated 3 weeks ago by
.
-
Posts
-
26.5% calculation was a way to show us how we can relieve the losses in group companies so that we can get rid of the marginal rate.
I had a question.
If there was an exam question just similar to this, what would be the best option to choose to relieve our losses so as to avoid falling at the marginal rate?Would it be better to relieve £75000, because it’s falling in the marginal rate rather than 390000 and 320000 as they are both taxed at 25%?
Thank you.
The objective is to relieve losses at the highest possible rate, so the preference would be:
– profits in the marginal band at 26.5%
– profits taxed at the higher rate of 25%
– profits taxed at the lower rate of 19%As a CY claim is all or nothing, with a loss of £120,000, the full £75,000 total profits would be wiped out, which would save tax in the current year as follows:
£75,000 x 25% = £18,750, less marginal relief of 3/200 (250,000 – 75,000) = £2,625, so a total of £18,750 – 2,625) = £16,125, or to look at it another way:
£(75,000 – 50,000) = £25,000 profits in the marginal band taxed at 26.5% = £6,625 and £50,000 profits taxed at 19% = £9,500, so a total of £(6,625 + 9,500) = £16,125.
This would leave £45,000 of the loss to carry forward which would save tax at 26.5% = £11,925, so a total tax saving of £(16,125 + 11,925) = £28,050. (SEE CORRECTION BELOW, THE SAVING WOULD BE AT 25% NOT 26.5% AND SO 25% x £45,000 = £11,250 (NOT £11,925)
So tax is being saved at 19% x £50,000 and 26.5% on £(25,000 + 45,000) = £70,000 over the two years. (SEE CORRECTION BELOW, THE SAVING WOULD BE 19% x £50,000, 26.5% x £25,000 AND 25% x £45,000, SO A TOTAL OF £27,375 OVER THE TWO YEARS.
Carrying forward as per the illustration saves tax at £70,000 at 25% and £50,000 at 26.5% as follows:
£(320,000 – 250,000) = £70,000 taxed at the higher rate of 25% = £17,500 and the balance of the loss (£(120,000 – 70,000) = £50,000 in the marginal band taxed at the marginal rate of 26.5% = £13,250, giving a total of £30,750 which is £2,700 less and is clearly preferable! (SEE CORRCTION BELOW, IT’S £3,375 LESS).
Note, this difference can be calculated as follows:
£50,000 x (26.5% – 19%) = £3,750 and
£70,000 x (26.5% – 25%) = £(1,050)So a total of £(3,750 – 1,050) = £2,700 tax saved.
SEE CORRECTION BELOW:
£50,000 x (26.5% – 19%) = £3,750 and
£25,000 x (26.5% – 25%) = £(3,75) and
£45,000 x (25% – 25%) = 0So a total of £(3,750 – 375) = £3,375 tax saved.
Can’t thank you enough. You’re such an amazing teacher. I’ve understood the calculations.
About 45000 being carried forward, is that supposed to be multiplied by 25% since it’ll be relieved against 320000?
Then the tax would be saved by
25%*45000=11250And that would make a total of 16,125+11,250=27,375?
Yes, you are right and I was wrong!
Carrying forward £45,000 would reduce the profits from £320,000 to (£320,000 – 45,000) = £275,000 and would therefore save tax at 25% as you rightly said.
Thank you for the correction! It really shows good understanding when you can spot my mistakes!
So the difference would be £(30,750 – 27,375) = £3,375.
£50,000 x (26.5% – 19%) = £3,750 and
£25,000 x (26.5% – 25%) = £(375) and
£45,000 x (25% – 25%) = 0Just wanted to say that because of you I’ve reached this far in Tax. You’re a great teacher. Otherwise things were too tricky in Tax subject.
Thank you so much.
- The topic ‘Marginal rate Chapter 20 Illustration 1’ is closed to new replies.