Tag Archive | "economic growth"

More than 40% of annual earnings go to the state in taxes!

Contractor accountants and other UK workers spent an extra 3 days paying their tax bill this year, according to the Adam Smith Institute.

Tax Freedom Day this year was Monday the 27th of May. That means British workers spent the first 149 days of 2011 working for the state. The additional 3 days were mostly caused by the VAT increase at the beginning of the year.

It takes 39 days for the average British worker to earn enough to pay their annual income tax bill, a further 26 days to settle National Insurance liabilities and 29 days to pay VAT. Council tax takes up seven days of income and you need to complete a 5 day working week to pay the duty on alcohol and tobacco.

Sam Bowman, the think tank’s head of research, said it was no wonder that economic growth was so slow when we are slaves to the state for five months of the year.

Meanwhile, freelancers entering higher tax brackets could be tempted to increase the amount they pay into their pension fund.

The number of people paying higher rate 40% tax is expected to increase to 3.7 million this year, whilst 275,000 people will fall into the 50% bracket.

Bill Mackay, the marketing director of AJ Bell, pointed out that making pension contributions was one of the best ways to benefit from tax relief. His company witnessed a 179% year on year increase in the number of single contributions to two of its accounts in April.

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Business failures mean less demand for accountants for contractors

More businesses closed than started up in 2009, according to recently released statistics from the ONS.

Last year about 279,000 businesses closed their doors, the highest number since 2000 when the business demographic survey started.

As far as business births were concerned, the highest rate was in business administration and support services at 13.9%. 48,000 new businesses were created in professional, scientific and technical, representing a birth rate of 12.5%.

Over 44,000 construction companies died in 2009, whilst 42,000 professional, scientific and technical faded into oblivion. Business administration and support services had the highest death rate of all at 14.8%.

London had the highest birth and death rate, recording 12.6% of all new start-ups and 13.7% of business closures. Northern Ireland, on the other hand, recorded the lowest rate in both categories with 6.6% of new businesses and 9.2% of business deaths.

The CBI has now predicted that business growth next year will be slower than it had first thought. The employers group now predicts growth of only 0.2% in quarter one next year with a total growth for 2011 of 2.0%.

The first few months next year are expected to be especially sluggish due to the VAT rate hike, according to the CBI.

Ian McCafferty, the chief economic adviser to the CBI, said that economic growth had surpassed expectations in 2010 but this is not expected to continue as government austerity measures and VAT rises enter the economic equation.

The CBI has also predicted that economic growth will increase by 2.4% in 2012.

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What does 2011 hold for contractor accountants?

The Autumn Statement from the government showed a revised prediction for economic growth next year. Previously the coalition has predicted growth of 2.3%, but this figure has now been lowered to 2.1%.

However, the IoD disagrees with this, claiming that economic growth in 2011 will be much lower. It likened the recovery cycle to a square root sign which has witnessed a temporary spurt in 2010 but will level off next year.

The IoD commented that the Comprehensive Spending Review has caused too much doom and gloom and the UK needs to realise that there are also other weaknesses in the economy. Lower than expected growth could cause George Osborne to increase taxes, a move which would affect contractor accountants and other freelancers. In fact, if the government’s predictions for GDP are accurate, the chancellor will have to choose between tax increases or further spending cuts if the coalition is to meet its budget deficit targets.

In other related news – although the government has committed to reducing corporation tax, the IoD claims that the new moves still do not go far enough towards attracting more foreign invest in the UK.

The IoD’s head of taxation, Richard Baron, said that whilst the Institute welcomed the fact corporation tax is set to reduce to 24% that still leaves the UK in the bottom half of the list of countries with an attractive rate.

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What now for contractor accountants in depressed areas?

Vince Cable confirmed this week that 24 local enterprise partnerships have been given the go-ahead, a move welcomed by the Federation of Small Businesses.

Whilst the FPB is pleased by the announcement, it has called on the LEPs to make sure SMEs are put at the heart of local communities. The policy chairman at the FSB, Mike Cherry, said the Federation has always encouraged local businesses and local authorities to work in partnership and therefore the setting up of these LEPs is a logical step.

Cherry believes that small businesses must have a genuine involvement in decision making and business activity if the partnerships are going to be successful. LEPs will not work if civic leaders simply pay lip service to the SME sector, he added.

The Regional Growth Fund, which is designed to support private sector job creation in areas that currently depend on the public sector, was also declared open for business this week. The fund has a pot of £1.4bn and Vince Cable said he was delighted to see so many imaginative proposals to help drive economic growth in local communities.

David Frost from the BCC thinks these moves are a good start but explained that LEPs must concentrate on getting the basics right in order to give businesses greater confidence to invest and create new jobs.

However, not everybody is confident that the new initiatives will be successful. Mark Prisk, the business minister, believes that many LEPs lack focus and will fail to help economic growth. In a leaked letter to Vince Cable, Prisk said that the business community felt many LEPs do not have the ambition necessary to make an economic impact.

Shadow business secretary, John Denham, is also critical of the government’s plans saying that almost 800,000 businesses have been excluded. 60 local partnerships applied to become LEPs and because only 24 have been approved in the first wave, 21 million people will not be covered. Denham said the plan for growth is a shambles and leaves massive areas with no organisation to support economic development. He thinks that this proves the coalition has given up on growth.

More than 75% of inhabitants in the North-west and Yorkshire and Humberside will be covered by an LEP whilst only 26% of people in already depressed areas like the North-east will be in an LEP area.

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Choppy recovery but little risk of a further credit crunch

The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

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