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The true cost of purchasing for those who are working.

Consider the cost of a £4.00 coffee. 

This price does not reflect the taxpayer's actual expenditure, where the cost of the coffee can be in excess of £6.00 in gross earnings. This is because taxpayers pay income tax and NIC's on their earnings.

Using the UK tax rates the below provides an approximation of take-home pay after tax and National Insurance contributions:

• 0% tax: From £12,750 take-home pay is £12,570

• Basic rate tax payer: 20% income tax: From £50,270 take-home pay is £39,715

• Higher rate: 40% income tax: From £125,140 take-home pay is £78,111

• Additional rate: 45% income tax: From £200,000 take-home pay is £117,787

For example:

• Nil rate tax payers pay £4.00 for a coffee, which is £4.00 to the barista and £0.00 in income taxes.

• Basic rate tax payers pay £5.06 for a coffee, which is £4.00 to the barista and £1.06 in income taxes.

• Higher rate tax payers pay £6.15 for a coffee, which is £4.00 to the barista and £2.15 in income taxes.

• Additional rate tax payers pay £6.17 for a coffee, which is £4.00 to the barista and £2.17 in income taxes.

* These calculations do not include 20% VAT.

Now what if that same coffee is a legitimate business expense.

The key difference are:

• The company pays £4.00 and this is deductible from corporation tax.

• There is no personal tax.

• There is no National Insurance.

• VAT can be reclaimed via company VAT returns (when VAT is paid and the company is VAT registered).

• There is no incentive to earn more just to remain stagnant.

  
  

This example is about understanding how money flows, where tax silently erodes effort and why structuring is more effective than brute-force earning.

I have used buying coffee as an example as it's something many of us do. However, the same principle can be applied to other legitimate business expenses.