I received an email from money.co.uk today suggesting that I use one of their posts on the site. Normally, I would politely say no. However, I thought that the post was interesting. So here it is....
Comedian Jimmy Carr has been at the centre of a media storm this week after it was reported that he pays tax at a rate of just 1%. So this begs the question; what can you learn about tax avoidance from the funny man?
Whether you earn £10,000 or £1,000,000 you can’t have missed this week’s headlines about Jimmy Carr’s tax affairs.
After having his picture plastered on the front page of The Times, it’s come to light that the popular Channel 4 comedian has been paying as little as 1% tax over the past few years – but the scandal is that he’s managed to do it without breaking any tax laws!
Here’s what you can learn about short-changing the taxman from the ‘funny man’ who’s done it legally:
How’s he done it?
Although not all the details of Jimmy Carr’s tax affairs have been released, what we do know is that he has been using an offshore company based in Jersey to reduce his tax liabilities.
Basically the scheme involves:
Resigning from employment in the UK
Establishing a company based overseas
Being hired by the offshore company on a minimal salary
Paying any earnings directly to the offshore company
Receiving large interest free loans
Declaring these interest free loans as tax liabilities to reduce Income Tax payable to HMRC
Can anyone do this?
In theory, anyone who is self employed and files a tax return could use this scheme to reduce their tax liabilities.
However, if you pay Income Tax through the PAYE system, something that’s highly likely if you are an employee of any large or small business, then you can’t pursue this scheme.
What can you do?
If the Jimmy Carr story has done anything positive, it has highlighted that sound financial management can leave you much better off, without breaking any rules or laws.
While setting up an offshore business and taking out interest free loans may be a step too far for most people working full time, there are several simple steps you can take to make sure your finances are as tax efficient as possible.
Take advantage of tax free benefits
Whether it’s childcare vouchers, retirement planning or even a buying a brand new bicycle there are lots of benefits you may be able to sign up for at work that could cut the amount of tax you pay.
Read our guide: Tax Free Perks You Can Get From Work for a breakdown of the different tax free benefits you could take advantage of.
Check your tax code
It’s actually very easy to end up paying more tax that you need too, especially if you have more than one job or have switched job roles in the last 12 months.
The quickest way to check you are paying the correct amount of tax is to double check your tax code; who knows, you could find that you owed hundreds of pounds by the taxman!
Read our guide: Are You Paying Too Much Tax? For help checking your code and to find out if you’re paying more than you need to.
Keep your savings tax free
Unless you have your savings tucked away in an ISA, any interest your nest egg earns will be taxed by the government.
That means making the most of your annual ISA allowance is a must if you want to keep HMRC’s mitts off your money.