Tax lessons from Tony Blair

We look at the tax arrangements of a company linked to Tony Blair and what lessons we can learn from this arrangement.

Tony Blair certainly hasn't put his feet up since he ceased to be Prime Minister in 2007. He's done charity work, been a peace envoy in the Middle East and made a lot of money from speechmaking and consultancy work.

As part of that new career, the former Prime Minister set up a company called Windrush Ventures, which generated revenue of £12 million over the last financial year, but only paid £315,000 in tax.

Blair Inc.

Windrush Ventures is part of a dense corporate web unofficially known as Blair Inc. This complicated network of companies allows the full extent of the former PM’s income to remain hidden.

As I said, Windrush generated income of £12 million last year. However, almost £11 million of that income was written off as ‘administrative expenses’ and hence classed as tax allowable. This brought total profits for the company down to just over £1 million. Corporation tax was levied on this at 28%, resulting in a bill of just £315,000.

In fairness, I should add that Mr Blair has paid top-rate 50% income tax on his personal income, but City accountants have nonetheless been scratching their heads at Windrush's large expenses figure. The accounts show that Mr Blair paid £2.3 million in wages to 26 staff in the last tax year. A further £300,000 went on office equipment, while £550,000 was spent on rent for Mr Blair’s Mayfair business base.

However this leaves almost £8 million of expenses completely unaccounted for. Much of this figure may have gone towards footing the frequent overseas trips made by Mr Blair and his business entourage. Analysis by The Sunday Telegraph this week revealed that in just 12 months, the former PM made 61 trips abroad – totalling almost 224,000 miles of travel.

Administrative expenses

Work-related expenses are the key advantage of setting up your own business or declaring yourself self-employed, although there are some important differences between the two tax statuses.

Tax-allowable expenses include premises costs, stock costs, travel expenses, repairs and – importantly – staffing costs (including your own salary). However a nimble accountant will pick out every legally-legitimate loophole going in order to minimise your tax bill.

How to do it...

Practically, setting up your own business will garner the largest tax advantages if your earnings are high enough to push you into the upper income tax brackets (as Mr Blair’s do).

All business profits are subject to Corporation Tax. This is charged at 20% for profits under £300,000. A marginal (inclining) rate is charged if profits are between £300,000 and £1.5 million and the full rate of 26% (25% in the 2012/13 tax year) is levied on profits exceeding £1.5 million. However these profit boundaries apply after tax allowable expenses – including your own salary – have been deducted.

The idea is to take a salary out of these takings that is taxed at the 20% income tax rate.

An example...

Say your business took £300,000 of income in the 2011/12 tax year. The first job is to write off any allowable expenses. For this example let’s peg this figure at £100,000 – made up of a £35,000 salary for yourself and £65,000 for other admin costs.

These expenses can then be written off immediately, leaving profits of £200,000. Corporation tax at 20% is due on this, giving a bill of £40,000.

Meanwhile your £35,000 salary is subject to 20% basic rate income tax, after you’ve had your personal allowance, which stands at £7,475 this year. So £27,525 of your salary is subject to a 20% levy, giving an income tax bill of £5,505 and a net pay packet for the year of £29,495, minus National Insurance of course.

So your total tax bill for the year – with salary – would come to £45,505. That’s 15.16% of your original £300,000 income. And even when you take expenses out of the equation, you’re still not paying any more than 20% tax – equivalent to a basic rate earner – on any of your profits.

In context, if you had earned £300,000 from a full time or self-employed job (after expenses), income tax at 50% would be levied.

In addition, the remaining £160,000 sitting in the business account can be used to fund your pension (tax free), pay out dividends or finance director’s loans: three extremely tax-advantageous ways to make the most of your company cash. Have a read of What we can learn from Wayne Rooney’s tax return for some more information.

Going self-employed

As I mentioned earlier, the tax perks of starting your own business only really start to take hold in the upper echelons of income levels.

For example, a tennis coach with an income of £25,000 will most likely be a sole trader, in other words: self-employed.

All income will go into the business account and any cash our coach needs for living expenses will be taken out as and when. At the end of the tax year, all allowable expenses (transport, admin, repairs etc. but not the personal cash drawn out across the year) will be deducted from the total income amount. Income tax and NI will then be levied on the remaining profits, taking into account personal tax-free allowances.

Tax deadline closing in

One thing that self-employed workers and business directors do have in common is that they are both required to file a self-assessment tax return. The deadline for submitting paper returns has already passed. However taxpayers can still file online up to the end of January.

Take a look at How to get your online self-assessment tax return right for some tips on coughing up this year and avoiding HMRC’s lofty late-fees.

Your take

What’s your take on Tony Blair’s post-Downing Street career?

Have your say using the comment box below.

This article was modified on 25 January 2012. The Office of Tony Blair would like to make clear that Mr Blair is a top-rate 50% taxpayer on his personal income. All his businesses pay full UK Corporation Tax. He also uses some of his income to support the charities he has established as well as making other donations.