George Osborne will unveil a crackdown this week on a controversial loophole which allows thousands of civil servants, NHS contractors and BBC presenters to slash their tax bills by being paid “off the books”.
The Treasury estimates there are some 20,000 “disguised employees” in the public sector who avoid more than £3,500 a year each in income tax and National Insurance contributions by getting their wages funnelled into a “personal service company”. They then pay corporation tax at 20 per cent – rather than the 40 or 45 per cent higher rate of income tax.
Those taking advantage of the set-up can then pay themselves a lower “wage” while also taking dividends from the company. In this way it is possible to save tax and even keep some welfare payments – such as child benefits – which are means tested.
There was a public outcry in the last Parliament after it emerged that many BBC presenters – including Jeremy Paxman and Fiona Bruce – were taking advantage of the system.
Mr Osborne is expected to unveil measures in this week’s Budget to force those abusing the system to pay the same rates of tax as those individuals whose wages are paid normally.
The crackdown – which experts said could raise about £400m a year – will apply across the public sector, including government departments, police, local authorities and the NHS. It will also hit the BBC, Channel 4, Transport for London, the Bank of England and Network Rail.
A Government source said: “Personal service companies can be legitimate, but we estimate that 90 per cent of people who should comply with the rules, don’t. You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who’s taxed as an employee. That can’t be fair – either on the taxpayer or their fellow workers. We are going to put a stop to it.”
In February 2012 it was revealed that Ed Lester, the chief executive of the Student Loans Company, had been paid £182,000 through a private firm that he established, meaning there were no deductions for tax.
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