What we can learn from Wayne Rooney's tax return!

by Robert Powell on 25 August 2011  |  32 comments
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Here's an important financial lesson we can glean from the Manchester United forward...

Wayne Rooney pays 2% tax on some earnings.

That’s the headline that got the Sunday Times into a spot of bother with the Manchester United forward earlier this year. The footballer complained to the press watchdog stating that the story was not accurate and lacked any reply.

But the Press Complaints Commission (PCC) ruled in favour of the Sunday paper, stating that the headline was explained within the article.

So how exactly does Rooney get away with paying 2% tax?

How Rooney does it...

When is Wayne Rooney not Wayne Rooney?

When he’s ‘Wayne Rooney Ltd’ of course. Yes, ‘the Rooster’ manages to pay just 2% tax on some of earnings because he doesn’t actually earn it – his limited company does.

Let me explain.

Many premiership footballers will now funnel off-pitch earnings (mainly from image-rights) through their very own company. So when Wayne Rooney is paid for his latest cringe-worthy advert or tacky TV series, the fee will not go to the man himself but to his company.

As this is a UK company, all profits will be subject to corporation tax – previously 28% if over £1.5m and now 26% as of April 2011.

From here Rooney is able to take a loan from the company and legally only pay 2% in tax as the loan is classed as a benefit, not as income. The Sunday Times reported that Rooney did this a number of times over a two-year period, ‘borrowing’ £1.6m in total and saving nearly £600,000 in tax.

Now, obviously the footballer’s issue with the story was that in total he did not pay 2% tax. As 28% corporation tax had already been deducted from the earnings before he took any loans. However this is still a good deal lower than the 50% tax rate that Rooney would have had to pay if he had taken the earnings as regular income.

Rooney also stated that these directors’ loans were actually paid back the following year. A point The Sunday Times article failed to mention.

So what can we all learn from Rooney’s completely legal tax dodging antics?

How you can do it...

Almost anyone can set up their own limited company and appoint themselves as director.

If you do, from a tax perspective, like Rooney your business’ profits will be liable for corporation tax. This is levied at 20% if profits do not exceed £300,000 per year. On a simple level, you would then pay yourself a salary out of this business account and be taxed at the appropriate rate of income tax. And as you are an employee of the company this salary can be written off before you pay corporation tax. So if you take a wage below the basic rate range and business profits stay below £300,000, you'll only pay 20% on your personal wage and 20% on your business profits.

However there are several other tax perks to running your own company. For example, as it’s likely that you will be the total share holder in the company, you could supplement your salaried income by paying yourself dividends. These would initially be taxed at basic rate, however could attract a higher rate if – when combined with your salary – they push you over a certain income level.

In addition, you would be able to fund your pension using your business profits in much the same way a regular employer would pay out for an employee’s pension. These payments would be tax free.

Work-related expenses funded by your business account are another advantage as they will be tax allowable and hence written off before you pay corporation tax (employee wages, including yours, form part of these expenses). However there are strict guidelines laid down by HMRC as to what you can and cannot claim as a business expense. And if you step over this line, you could end up with a knock on the door from the police.

This is why it’s highly advisable to use an accountant when deciding whether setting up your own company. As not only will they make sure you stay within the law, they will also be able to dig out any further legal loopholes that could help you save money on your tax bill (as Rooney’s accountant has so cunningly done for him).

As one such accountant said to a friend of mine upon setting up his own business; “welcome to the world of permanent basic rate tax”.

But still, setting up your own business is a big decision and should never been entered into lightly. Although that doesn’t mean that we can’t all learn a few things from Rooney’s tax dodging behaviour...

Check your income tax code

While receiving a hefty tax refund is always a nice surprise, remember it does also mean that you have effectively been loaning the government money every month. And while this might be very much in the spirit of the ‘big society’ it’s not a great idea if you are struggling to make ends meet – as many people currently are. This is why it is vital that you consistently check that you’re on the correct tax code.

Income tax codes are made up of a few numbers and a letter. The numbers represent your personal allowance; that’s the amount you’re allowed to earn before you get taxed. Most people will see a 747 tax code on their pay slip. This indicates that you will receive a personal allowance of £7,475.

The most common letter to see is L – indicating that you are eligible for the basic level of personal allowance.

You can find a full explanation of every tax code by heading over the HMRC website.

Use your partner

A further way to slash your tax bill it is to ensure that you and your partner are completely using both of your personal allowances. For example, if you’re a taxpayer but your partner isn’t, transferring any income producing assets to his/her name will enable you to shell out to the taxman at a lower rate by utilising your partner’s unused allowance.

As I mentioned earlier the basic personal allowance currently stands at £7,475. This increases to £9,940 for those aged 65-74 and £10,090 if you are over 75.

Get an ISA

ISAs should be the first port of call for all savers as they do not charge income tax on the interest earned. However there are limits to how much you can squirrel away in one of these taxman-beating accounts. This currently stands at £10,680. You can invest all of part of this in a stocks and shares ISA or £5,340 of the allowance in a cash ISA.

Cash ISAs basically work like regular savings bonds – with the exception that they are tax free of course. You can get a rundown of the current top accounts by taking a look around our ISA centre.

Stocks and shares ISAs are slightly more complicated and can vary in form more substantially; head over to Savers turn to stocks and shares ISAs to find out more.

And finally, for seven more cunning ways to beat the taxman read Ten legal ways to dodge tax.

Should footballers be forced to shell out?

Is it fair for players like Rooney to dodge large amounts of tax?

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