The Guardian treats us to a report about how HMRC is going after footballers. Well, OK, fair enough. The background here is that it is becoming more usual to split payments to those oafs who play the gentlemans’ game. Some amount of the total payment is paid in wages, through the normal club and PAYE system. Then some other portion is paid for “image rights” which goes off into a company – a personal services company as they are known – for the benefit of the same footballer.
This is all the same shouting match as the stuff about IR 35 for contractors, the BBC presenters given lovely, lovely, large tax bills an all that. HMRC is thinking that while image rights for, say, Mo Salah are indeed worthy of separate consideration the bloke paying reserve left back for Hartlepool might not warrant such. So, we’ll have a look.
Fine, fair, sensible and so on. But if we’re to have a national newspaper commenting upon taxation it would help if they actually understood the subject they’re attempting to comment upon:
While a player’s wage, in the Premier League and Championship, will be levied with a 45% income tax charge, image rights are taxed at the 19% corporation tax rate, making it a far more lucrative mode of payment for the player.
Sure, so the image rights money goes into the little company, that pays the corporation tax rate on the profits. But if the money’s paid out – and it has to be paid out at some date for it to be of any use to our footballer – as wages then it pays the same national insurance and income tax as if it had been straight wages from the club in the first place. So it isn’t paid out as wages. Instead it’s paid out as dividends. Which at this level will attract a 38.1% income tax rate. This being deliberately designed to make sure that dividend income pays about the same income tax rate as income. There’s the 19% corporation tax rate, then the dividend tax on the sum after that, it does about work out.
So, if there’s no income tax saving why is it being done?
Because it saves on national insurance. As I pointed out in The Times about the BBC brouhaha.
The combination of those two tax rates, upon company and dividend, is by design close to the rate which would have been paid on simple wage income. It isn’t, by and large, income tax that’s being legally avoided by such a scheme.
It’s also not employees’ NI. These schemes work best for those with significant incomes and the employees’ rate drops to only 2 per cent on earnings over about £42,000: not a figure that generates corporate structures to avoid it. However, employers’ NI is charged at 13.8 per cent on all wages. That is a significant sum when an individual’s income is £160,000 a year and more.
It’s the employer, the football club, that avoids the 13.8% national insurance. As it was the BBC managing to miss having to pay their amounts.
Personal services companies don’t aid, or at least only trivially, in avoiding income tax. They’re an absolute blinder for avoiding national insurance though. And it really is time The Guardian caught up with this. Otherwise, how can we take anything else they say on the subject of tax seriously?