Growing trend of high-level tax avoidance

 The case of a civil servant earning £140,000 but paying only 21% tax has highlighted the growing trend of high-level tax avoidance in the UK.  

 The head of the Student Loans Company, Ed Lester caused controversy when it was revealed that he had set himself up as a company to be paid, saving an estimated £40,000 a year tax by taking advantage of a tax loophole.

The case has led Chief Secretary to the Treasury Danny Alexander to ask the Treasury to review ‘the appropriateness of allowing public sector appointees to be paid through this mechanism.’

Lester was appointed interim chief executive of the Student Loans Company in May 2010 and was paid through the recruitment company Penna plc which placed him in the job.  The daily fee for his work went to a private company he owns, rather than personally to him, meaning that he was able to pay corporation tax of 21% instead of income tax of up to 50%. 

Despite being appointed on a two year contract in January 2011, Mr Lester was able to retain the terms of his temporary employment instead of being added to the payroll, enabling him to continue claiming the lower rate of tax.

Lester has now been added to the government payroll and will be subject to paying tax and National Insurance contributions.  The government have not indicated whether they expect him to repay the tax he has ‘avoided’, but it is possible that he could be subjected to further investigation by HM Revenue & Customs under Revenue IR35 enforcement.

Mr Lester’s case has highlighted a growing trend among highly-paid employees in the City who have, changed their tax structure to become contract workers, in order to avoid legally paying tax on high salaries.

This tax structure has always been popular in industries such as the oil and gas sector where many employers insist on it due to insurance liability issues, and the trend increased after the introduction of the 50% tax bracket in 2010.

If you are one of those considering making the move towards contract working, this is how it’s done;

  • Set up a limited company, registered with Companies House, making yourself the director
  • Negotiate a contract with your employer but legally, only after resigning from your ‘staff’ job.  It is safer to find a new employer and start from scratch.
  • The employer pays the company, which incurs corporate tax of 20%
  • Pay yourself a ‘salary’ equivalent to the tax-free allowance for individuals £8,105 for the tax year starting in April 2012 – and make your husband or wife a company director, if they have no other income, and pay them the same.
  • You can also pay yourself dividends, which are effectively tax-free (you’ve’ already paid 20% corporation tax), up to the higher rate tax band.  This means you can pay yourself another £31,000 in dividend payments a year without triggering an income tax bill.
  • The dividend payment means you also avoid paying National Insurance Contributions which are usually 12% on income between £5,500 and £42,500.
  • Costs – say mobile phones and computers – can be paid for by the business.
  • When you need to access the cash, typically after several years, wind up the company and take out the money.  NB - to return to the same line of work by setting up a company soon after could be regarded as tax evasion.

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