Income tax: the 'Livingstone loophole' remains open

There was one moment of excitement in the budget. The Daily Telegraph's Andrew Gilligan thought a new rule might have been brought in to stop the likes of Ken Livingstone avoiding tax by channelling their freelance income through companies. The relevant passage (paragraph 2.207) states that "the government will introduce a package of measures to tackle [tax] avoidance through the use of personal service companies. This will include requiring officeholders/controlling persons who are integral to the running of an organisation to have PAYE [income tax] and National Insurance (NI) contributions deducted at source by the organisation by which they are engaged."

Livingstone, as Gilligan points out, "has his six-figure income from the likes of LBC, Iran's Press TV and after-dinner speaking paid not to him directly but to a personal service company, Silveta, of which he and his wife are the sole directors and shareholders". He does this for pretty obvious reasons as do thousands of other freelancers. It allows him to pay corporation tax on his earnings at 20% and then to pay out income to himself and his wife as and when he likes in the form of dividends.

This has two benefits. First it avoids NI (which is not paid on dividend income). More importantly it allows him both to pay out some of the income to a lower-tax-rate-paying spouse (hence avoiding higher rates of income tax) and to "smooth" his own income he can pay himself just enough to keep himself under the 50% rate and hold any left over until a time at which he earns less. Note that lower-rate taxpayers have nothing extra to pay on dividends; 40% taxpayers pay 25%, and 50% payers pay 36%.

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So can he (and all the others doing the same thing) still get away with it? The answer appears to be yes. The new rules don't seem to be designed to hit those with multiple sources of income, but those who are effectively clearly an employee of one company but trying to pay tax as though they are not (the many high-level public-sector workers who now call themselves consultants and are paid via companies, for example). If you aren't an employee of any one firm, have many sources of income, and haven't got your own personal service company, might it be time to get one? Possibly. If you make £100,000 a year, pay yourself a salary of £7,228 (the amount you can earn before paying NICS), and then give yourself the rest as a dividend, your total tax saving will amount to over £5,000 a year. That's probably worth the extra accountancy fees. While it might mean you are avoiding some tax, like Livingstone, you won't actually be evading it.