Saving taxes at the student loan company the David Miliband way – with Ed Lester
HOW to save tax at the Student Loan Company… This does all look rather odd but I’m afraid that the investigation doesn’t actually understand the way that tax works.
The Treasury has asked Whitehall to review all the tax affairs of top civil servants after it emerged that the head of the Student Loans Company (SLC) is paid via a company without tax being deducted.
The SLC’s chief executive Ed Lester has his £182,000 salary paid gross to his private service company, potentially saving him tens of thousands of pounds in tax.
As I say, that’s an odd way to do it. But this is wrong:
The payment method allows Lester to pay corporation tax of 21%, rather than up to 50% income tax on his earnings.
No, it doesn’t.
If you get paid as salary then you pay income tax (at up to 50% and he just gets into that band), employee’s national insurance up to £40k or so, 2% employee’s NI on the rest and then the employer has to pay employer’s NI on nearly all of it at 13 or 14% or so.
If the money is paid into a service company then yes, the profits are taxed at that 21%. However, that’s not the end of it. If he takes some as salary then that’s taxed exactly the same way as if it was paid direct but of course the profit is reduced.
If he takes it as dividends then he’ll pay no income tax on the first £40k or so. Because that first 40k or so has already paid that corporation tax. If he takes more than this in dividends then he has to pay more income tax and it works out to be about the same rate as if he was being paid direct.
However, no national insurance will be paid on the dividends. So, one way of looking at it is that he’s saving that national insurance.
However, another way of looking at it is that it is the government which is saving money here. Or at least not losing any.
If his pay deal was “Here’s £180k a year old chap” then the government has to pay an extra £24,000 odd in employers’ national insurance on it. Which is paid straight back to the government of course.
If it goes through a service company then the government doesn’t have to pay £24,000 in employers’ NI: and also doesn’t get it back.
So the tax saving from doing it this way, the total loss to government revenues, is the £3,600 from the over £40k surcharge of 2% on employee’s national insurance.
Which may indeed be a bad idea but it’s hardly the sort of amount to get outraged about, is it?
Oh, and did you know that some of David Miliband’s income goes through exactly such a private service company?
Posted: 2nd, February 2012 | In: Money Comment | TrackBack | Permalink
