Dodge tax like a footballer

Can you score a massive tax saving like a top footballer, or would you end up facing a penalty shootout?

There are many reasons in life to be envious of a Premier League footballer, but top of most people's lists would not be their tax bill - after all, megabucks wages mean massive cheques to HM Revenue & Customs - right?

Apparently not. When you have large pots of cash, you can afford to pay the most scurrilous/gifted* tax advisers around to make sure you pay as little tax as possible, with footballers’ effective tax rates quoted in the Sunday papers as low as 2%.

So what exactly are the professionals doing to score such a low rate, and can you adopt the same formation without falling foul of the taxman?

Footballers aren’t paid enough

The idea behind footballer tax planning, or indeed any celebrity well-known enough to be offered things like sponsorship deals and endorsement packages, is the fact that their actual playing salary could be considered a small proportion of their total earnings.

The tax rules relating to employment income are very tight, and as the duties of employment (i.e. playing football) are normally performed in the UK, in the main, earnings from employment will be taxable in full. There are even special provisions that make sure foreign sportsmen get taxed on a proportion of their earnings if they appear in the UK at any time - on the grounds that if they get sponsorship to wear Adibok clothing, then anytime they appear wearing said clothing, they are earning.

Of course, there are exceptions to the rules, like the Champions League 2011 Final footballers, Olympic athletes and Tiger Woods and his Ryder Cup cronies, who have been given byes exempting them from these tax rules, on the basis that, if they were charged, they would not come.

Just so long as the tax system is fair and equitable…

Image rights companies and dual contracts

So how does the planning work? The first part of the planning involves the football club deciding how much the players are paid for playing, and how much they are going to pay the player in anticipation of the sums they will earn from image rights.

Hence it is common practice among footballers to have two contracts when they sign for a club- one which they pay tax on under PAYE same as every other employee, and another that they do the clever bits with.

Any payments made under the second contract are paid into a private (and possibly offshore) company - either a single entity wholly owned by the footballer in question or, in the case of team payments, a company where the players all own a stake.

In one swift pass, all that lovely employment income (subject to income tax at 50%) becomes income of a company, and liable to corporation tax at 20% (or possibly 28% in Rooney’s reported case).

Of course the income then belongs to the company, and if the players want to get their hands on the cash, they will still have to pay income tax on any salary or dividends paid from that company, right? Er, no.

You see, the company never pays them anything, it simply loans them some money interest-free. This is classed a benefit in kind – and is subject to a negligible levy of 2%, instead of the top income tax rate of 50%.

Not that it is much consolation, but do remember that if it is a UK company, it will be paying 20% corporation tax as well, bringing the total tax take on those earnings to 22%. Poor loves.

Can you dodge tax like a footballer?

There is certainly nothing to stop you from going to your employer and asking for them to draw up a separate contract for you, in order to pay your image rights income.

Related how-to guide

Cut your tax bill by thousands

Tax may be an inevitable fact of life, but there’s no reason to pay more than you have to!

See the guide

Unfortunately, unless you are rich, famous and good looking (and being the office dish is unlikely to be enough- unless people are always haranguing your employer for T-shirts emblazoned with your face), your image rights are likely to be worthless. Sorry.

HMRC has reportedly already obtained millions in underpaid tax from the bigger clubs in settlement of enquiries into ‘overestimated’ image rights payments.

OK so what can you do?

So assuming you are not rich enough to pay 2% tax, what can you do to dodge a tax hit?

Start with the basics- like equalising income between spouses to use as much 20% income tax band as possible and utilising annual exemptions and personal allowances. Also look into investing in ISAs, where you get tax free growth, or consider pension planning in order to obtain a tax uplift on amounts invested, tax free growth, and the possibility of a tax free lump sum at the end.

There are even things you can do that don’t involve you spending your hard earned cash - if you have children, take up any childcare vouchers offered by your employer and save income tax and national insurance. Rent a room to a lodger and earn up to £4,250 tax free. You could even consider the MPs favourite, and save capital gains tax by ‘flipping’ your home. Read our guide How to cut your tax bill by thousands for more help.

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