Ken Livingstone has released his personal income details in an attempt to stop criticism over tax avoidance.
Now, I don’t think there’s anything wrong in law in doing what he does. It looks legit, though there are aspects relating to his employees which need answering.
For starters, I don’t think they meet the requirement of being incurred wholly and exclusively for the purpose of the trade. And he says he needs a company because he has employees. Which is just plain bullshit.
But that’s besides the point of this post.
My real issue is the hypocrisy of criticizing tax avoidance by others whilst doing it himself.
There are two reasons why Ken’s disclosure doesn’t answer the criticism against him on this count.
1. It’s irrelevant what his income is, because the issue is income diversion. If anything, less income is indicative of more avoidance.
2. The breakdown of his income is also indicative of tax avoidance.
The first point is self-explanatory.
But, note that following the introduction of the personal allowance abatement, his income dips beneath the £100,000 mark where it applies.
This is normally the second threshold (after the higher rate threshold) where you would start to consider shifting further income to your spouse.
The second point relates to the fact that Ken takes a minuscule salary, maybe not even from his company (it doesn’t say), and takes significant dividends.
Despite accounting for the corporation tax paid on the dividends, which is a subjective estimate, the total paid will be less than paying salary.
The amount of dividends falling in his basic rate band (about £10-15k in 2009/10 and 2010/11) doesn’t suffer any further tax. This being the same as the basic income tax rate, you might think “so what?”
But it avoids paying employer’s Class 1 NICs. These are still payable by an employer when the employee is over 65.
He points out the corporation tax paid on “his income” through the company. I agree with this as a fair calculation principle. But…
Corporation tax has been calculated at 21% of the net dividend apparently. Exactly 21%. Which suggests that they are assuming that the income either relates to earlier accounting periods of the company (indicating deferred income on a first-in-first-out basis) or that they have used a flat rate estimate.
Incidentally, although a deduction has been given for corporation tax, they have used the gross dividend figure, inclusive of the tax credit that is representative of the corporation tax paid.
This means that there is an element of double-counting when using the figures to provide a total tax paid amount in comparison to income. There is a notional tax credit included in the income. Anyway…
No mention of benefits in kind either. Presumably this has been included in salary or there are none.
Nothing is incorrect as such. But the way the numbers are intended to be used, it is misleading, to say the least.
And the numbers show that Ken has definitely saved money with his company structure.
Now, in 2010/11, Ken paid higher rate tax on dividends is about £12,000, being £(((63,333 – 10,000) x 32.5%) – 10%x(63,333-10,000) . Corporation tax of £11,970.
So, from available funds of £((63,333 x 0.9) + 11,970)=£68,970, Ken received £((63,333 x 0.9) – 12,000 = £45,000. That’s an effective rate of tax of about 35%.
But, take that £68,970 and pay it out as salary? Well, that’s salary of about £61,450 after a conservative £7,520 of employer’s NICs (still payable after 65).
Which, would pay £22,580 in income tax (no employee’s NICs after 65). So he’s take home £38,870. Effective rate of tax here would be about 44% taking into account the company.
The figures show he’s avoided about £7k of tax (specifically employer’s NICs) in 2010/11 without taking into account:
- income diverted to his wife
Income retained in the company and paid out in future years
So, this disclosure might shut the papers up and get him out of the frying pan. But he should be landing in the shit.
twuntman 